What is a Lady Bird Deed?
A Lady Bird Deed (also known as an "enhanced life estate deed") is an alternative way to transfer ownership of property. Instead of transferring ownership/control of the real estate to the property owner’s beneficiaries, a lady bird deed allows the property owner to give themselves a life estate (also referred to as a life tenancy) and provides a remainder interest (usually in an heir, but it could be anyone the homeowner so desires) after the homeowner dies. But, unlike ordinary life-estate deed or an outright transfer of property: (a) the life tenant has a right to sell or mortgage the entire property without joinder by the remainderman and retain all profits (can divest the remainderman of his/her interest); and (b) the life tenant can commit waste to the detriment to the remainderman.
Advantages of Using a Lady Bird Deed
The Lady Bird Deed is utilized to maintain control of the property, retaining the benefits of homestead (if applicable), and is used to avoid probate. It also has the advantage of allowing a homestead to retain its protected status from creditors.
If the deeded property is homestead, there will be no loss of homestead tax exemption and the county will not reassess the property to raise taxes. There are other tax advantages in utilizing a Lady Bird Deed, such as no additional documentary stamp taxes, but the other tax advantages are beyond the scope of this article.
Advantages of Lady Bird Deed in a Medicaid Planning Context
Lady Bird Deeds do not assist in qualifying an applicant for Medicaid. But it does assist with minimizing Medicaid’s right to estate recovery after the Medicaid recipient passes away. In a Medicaid planning context, the Lady Bird Deed is a useful tool because it allows the real estate to avoid probate. Lets look at how real estate is handled in two contexts:
(1) Lady Bird Deed for Homestead
A home that is also deemed a Florida homestead property is (with few limitations related to specific debts that encumber the home) protected from creditors while the owner is alive and similarly protected from attachment by creditors after they die. Medicaid is treated as a general creditor. So for a home that qualifies as an exempt homestead asset for medicaid eligibility purposes (click link to read more about when the home is not a countable asset for Medicaid purposes), the primary benefit of using an enhanced life estate deed is primarily estate planning - i.e. get the home into the hands of your chosen beneficiary without them having to go through probate.
Florida Uniform Title Standard 6.12 discusses how remainderman are dealt with in homestead property (further discussed in my follow up article on Florida Lady Bird Deeds). If the life tenant has all lady bird reservations, the remainderman acquires fee simple title upon the death of the life tenant ONLY when not in violation of constitutional restriction on devise of homestead (i.e. invalid if surviving spouse or minor child, except outright devise to spouse is valid if no minor child).
If so, then the remainderman should record an affidavit that upon the life estate holder's passing, they were not survived by a spouse or minor child (if true, of course).
If the lady bird deed was recorded in error (i.e. in violation of Florida homestead constitutional restrictions, the homestead will pass to the surviving spouse giving that surviving spouse a life estate interet in the property with remainder to the decedent's lineal descendants (including any minor children). Under F.S. 732.7025 a spouse can waive his or her rights as spouse with respect to the constitutional restrictions on homestead transfers if the deed has appropriate waiver language.
(2) Lady Bird Deed for Non-Homestead Properties
Second homes or income-producing properties are not protected by homestead in Florida. They may or may not be protected for medicaid purposes (talk to your elder law attorney to discuss strategies to ensure that they are). We know that rental properties are protected (from being included as a Medicaid countable asset), but regardless, non-homestead properties are not protected from Medicaid Estate Recovery the way homestead properties are. Meaning, after the medicaid recipient passes away, second homes or rental properties are likely accessible to Medicaid estate recovery. However, a lady bird deed can protect against this. Lady Bird Deeds let the non-homestead properties pass outside of probate. Since Medicaid estate recovery only applies to assets in the probatable estate, a huge problem is therefore solved.
One might question why not just put the non-homestead property in the name of a revocable living trust to avoid probate? Non-homestead property in a revocable trust is fair game for creditors who can force a probate proceeding if they have knowledge of the non-homestead protected property. The revocable trust itself will instruct the trustee to notify creditors and make good on any debts. Lady Bird Deeds are not a gift because the remainderman’s right to the property can be taken away at any time (similar to how the owner of a life insurance contract can add, change or remove beneficiaries to life-insurance proceeds at any time). It has the additional benefit of transferring to the remainderman nearly immediately upon the life estate holder's death.
In fact, the Florida Medicaid manual specifically addresses ladybird deeds (as enhanced life estate deeds) and tells the caseworker that they are legitimate and not to be considered a transfer of assets.
A Risk with Lady Bird Deeds
A risk with lady bird deeds is that if the remainder dies before the life tenant, the home will need to be probated as part of the remainderman’s estate since the lady bird deed does convey an interest to the remainderman. If more than one remainderman, need to see if the interest was (i) conveyed to them as joint tenants with right of survivorship (in which case, would not need to probate, because interest would just automatically transfer to the survivor). If interest was conveyed to the remaindermen as (ii) tenants in common (more likely because the life tenant is usually a parent who wants to convey property to kids, and if one kid dies to that child’s children, as opposed to excluding that familial line entirely), then probate will be necessary.