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.
Lady Bird Deeds in Florida
Lady Bird Deed is also known as a “transfer on death deed.” Lady Bird Deeds are also known as “Enhanced Life Estate Deeds.” All three terms refer to the same type of deed. It is important to note that Lady Bird Deeds are not utilized nationwide. However, they are specifically used regularly in Florida.
The basic idea is that the Lady Bird Deed in Florida allows the property to pass outside of probate after the initial owner passes away. It also provides the initial owner (that we’ll call the life estate holder or life tenant) can (a) change their mind as to who should receive the property before their passing and (b) do whatever they want with their property without having to consult or get the permission of the listed remainderman, even if it means eliminating their eventual ownership interest.
Importantly, the remainderman has a vested interest (subject to being divested). So, if the remainderman predeceases the life tenant holder, then upon the life-estate holders’ death, the deceased’s remainderman’s portion of the property should go to their estate.
In other words, if two remaindermen were to inherit 50/50 upon the life estate holder’s death; should one remainderman pass away first, the surviving remainderman still only gets his/her 50%. The other 50% would have to go through probate.
Lady Bird Deed vs. Traditional Life Estate Deed
Quickly, I want to explain the main difference between an Enhanced Life Estate Deed and a Regular or Traditional Life Estate Deed: In a regular / non-lady-bird deed, you’ll find language that essentially says:
“Sam Jones for his life, with remainder to his daughter Lisa Jones.” In this example, Sam is the life-estate holder (a.k.a. life tenant) and Lisa is the remainderman.”
Because this is a traditional life estate deed (and not an enhanced life estate deed, or Lady Bird Deed), Sam would be unable to sell his property or take out a mortgage, without joinder by Lisa (i.e. Lisa has to sign and agree to do these things involving Sam’s property).
By contrast, an enhanced life estate deed says that the life tenant has full power and authority to mortgage, rent, sell, etc… without joinder of the remainderman. This is assuming that the Florida lady bird deed has been properly drafted to state(1) what powers the life tenant has (e.g. convey, mortgage, rent, etc..) and (2) must also include words to the effect of: “the life tenant has full power and authority to do X, Y, and Z in fee simple without joinder of the remainderman.”
How an Enhanced Life Estate Tenant Makes a Conveyance or takes a Mortgage in a Lady Bird Deed
The Florida legislature has not had much to say about lady bird deeds. However, three new Florida Uniform Title Standards were published by the Real Property, Probate, and Trust Law Section of the Florida Bar in June 2019. They passed these standards that address, and provide direction, on enhanced life estate deeds.
When a Lady Bird Deed Life Tenant Wants to Convey or Mortgage their Property
The Florida Uniform Title Standard 6.10 and 6.11 states that the holder of a life estate in non-homestead or homestead property, if the ladybird deed specifies that they have the power to sell, convey, mortgage, and otherwise manage fee-simple estate MAY convey or encumber/mortgage the fee simple estate during the lifetime of the holder of the life estate without joinder by the remainderman.
In a homestead situation, if the life estate holder is married, then the spouse must sign all documents (but still not the remainderman) if the life estate holder wishes to sell or mortgage.
If doing a quit-claim deed, the grantor should specifically state it is a fee simple conveyance by the life tenant (because otherwise it would be ambiguous, i.e. only conveying their present interest -without clarification- could be interpreted as the life estate holder only transferring or encumbering their life estate…. unlike with a warranty deed.
How Are Judgments and Liens Handled with Lady Bird Deeds in Florida
What if an enhanced life estate deed holder has a creditor with a lien or judgment?
If the lien or judgment is attached to the property, a title insurance company would require proof of a release or satisfaction of judgment vis-a-vis the life estate holder for the life estate holder to transfer title in fee simple during his or her life.
However, if the life tenant died without making a conveyance, and the creditor failed to levy or execute on their judgment, no release or satisfaction of lien would be necessary. The remainderman would inherit the property subject to the lady bird deed free and clear of the unpaid debt. See Aetna Ins. Co. v. La Gasse, 223 So. 2d 727 (Fla. 1969); and Ogelsby v. Lee, 73 So. 840 (Fla. 1917). F.S. 733.706 and 733.702(4)(a).
What if there are judgments or liens against remainderman listed on a ladybird deed?
The life tenant of a lady bird deed may convey or mortgage the fee simple title regardless of any judgments against the remainderman. This is because the remainderman’s interest can be divested by the life estate holder at any time. So, the remainderman’s debts/creditors would not impede the transfer or encumbrance wishes of the life estate holder.
An exception to this rule may be a federal IRS tax lien. Most title companies will treat IRS liens, even if only pertaining to the remainderman, differently.
How the enhanced life estate deed life tenant should substitute remainderman
In the first lady bird deed recorded, the Florida elder law attorney should specifically state that the life tenant retains the right to divest or change remainderman. Then if a subsequent deed is recorded effectuating a change in remainderman, adding remainderman, or removing remainderman from the enhanced life estate deed, it would be clear that this would not be a problem.
If the enhanced life estate deed does not specifically mention this right, some title insurance companies might have an issue. As a result, appropriate language should be included in the first enhanced life estate deed that is recorded.
Then, if the life estate holder wishes to change remainderman, he or she can record a second lady bird deed, deeding the property to themselves with a new remainderman, or to themselves in fee simple, or to a third party.
Do I need a Lady Bird Deed to qualify for Medicaid?
The question is also sometimes asked in the following manner: If I own real estate, is a lady bird deed needed to obtain Medicaid? The answer is, quite simply, no.
Of course, a lady bird deed strategy (also referred to as an “enhanced life estate deed”) can be important in the Medicaid planning process. But, strictly speaking, lady bird deeds are not going to help someone become eligible for Medicaid in Florida (or anywhere else for that matter).
While enhanced life estate deeds will not help qualify you for Medicaid, it may help reduce the amount Medicaid is paid back as a result of their estate recovery efforts.
Remember, as an Elder Law / Medicaid Lawyer, I’m trying to take a holistic approach to the Medicaid planning process. While my primary concern is protecting your assets from immense long-term care costs while you are alive (which we will do using any number of elder law Medicaid qualification methods) - I also aim to legally reduce (or eliminate when possible) the amount of money your estate will need to pay back to Medicaid after a Medicaid recipient passes away.
So How is a Lady Bird Deed used in Medicaid Planning?
It is in this vein that the lady bird deed is useful - i.e. reducing or eliminating what Medicaid is entitled to after the Medicaid recipient passes away. This is known as a Medicaid lien or “Medicaid estate recovery.” After a Medicaid recipient passes, Medicaid has an automatic lien on the estate that the individual leaves behind, subject to certain exceptions. In other words, Medicaid becomes a creditor - but only when the Medicaid recipient passes away (assuming they were over age 55).
So, will I lose my house to Medicaid? No. In, Florida, one of those exceptions is the homestead. Because of its treasured position in Florida, the legislature affords the homestead multiple layers of protection against creditors, including Medicaid. So, you don’t even need an enhanced life estate deed to protect the homestead! However, you may still want one as a probate avoidance tool. But before we get into that, let's briefly discuss other types of real estate (i.e. non-homestead real property) and how they are easily within reach of Medicaid.
Lady Bird Deeds and Non-Homestead Real Estate
Have a second home, vacation house, rental, or other income-producing property? All non-homestead real estate is subject to Medicaid estate recovery. When a Medicaid recipient passes away, their real estate becomes part of their estate and therefore comes within reach of creditors, of which Medicaid is usually the largest. Your elder law attorney will need to use other Medicaid planning techniques to get someone with other real-property holdings qualified for Medicaid - but the Lady Bird Deed is perhaps the easiest way to let your heirs enjoy the real estate after the Medicaid recipient is gone.
Lady Bird Deed as a Probate Avoidance Tool
By keeping real property outside of probate, you keep it out of Medicaid’s reach. This is because the lady bird deed dictates who owns the real estate by operation of law after the Medicaid recipient passes away. It essentially never becomes part of the estate of the deceased - it automatically (after recording the short-form death certificate) passes to whoever is listed as “remainderman,” which is similar to choosing a beneficiary.
DCF does not deem lady bird deed’s a transfer of assets subject to a Medicaid penalty period. This is because the remainderman can be changed or removed at any time. In addition, the property owner need not get written permission to sell the real property, from the remainderman, in an enhanced life estate deed (which is not the case with regular life estate deeds).
As a result, the deed is an incomplete gift, not subject to Medicaid transfer-of-asset penalties.
Avoiding probate is often a worthwhile goal in and of itself. Probating an estate means that heirs must wait longer, and incur additional expenses to gain access to what could be their’s in short order. Think of a lady-bird deed as similar to a “pay on death” designation on a bank account (which is how you would have that bank account avoid having to go through the probate process.
So, while a lady bird deed isn’t necessary to qualify for Medicaid in the first place, it is certainly a worthy strategy to discuss with your elder care lawyer when discussing Medicaid planning.
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 a 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 the 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 the constitutional restriction on the device 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 interest 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 a spouse concerning 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 know 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.
Florida Lady Bird Deed Risks and Disadvantages
I get into the basics of Florida lady bird deeds and when to use a lady bird deed in the linked article. Very quickly, a lady bird deed (also known as an enhanced life estate deed) can be used as an effective estate planning tool to allow a homeowner to live in their home for the rest of their lives and, if no changes are made to the deed, pass ownership onto whoever is designated in the recorded lady bird deed after the life estate holder passes away. Because the remainderman has no interest while the life-estate holder is alive, lady bird deeds are useful in Florida long-term care Medicaid planning, as well as estate-planning, context.
Think of a Florida lady bird deed as the real estate equivalent of a pay-on-death designation on a bank account. No probate is needed for either asset to pass to intended heirs. Other advantages include no-doc stamps when recording the deed, lower costs (compared to trust planning and probate), keeping homestead exemption intact, and tax advantages.
Lady Bird Deed - Disadvantages and Warnings
This article is essentially a lady bird deed warning label - most of the time lady bird deeds work great, but there are the occasional drawbacks and side effects.
The risk to Your Estate Plan
Typically a parent becomes the life estate holder and they list their children as remainderman (the remainderman are the person(s) who will inherit the real estate after the life-estate holder passes away). What happens if there is only one child and that child passes away first?
If a life estate holder has two children and one of those children passes away, should the deceased child’s half go to the surviving child or should it go elsewhere? Generally, if one of the remaindermen has passed away first, probate will likely be required (unless the remainderman are to own the property as joint tenants with rights of survivorship, which would be atypical for an enhanced life estate deed) or a specific contingency is built into the deed (e.g. “remainder to my daughter Susan Jones, if she survives me, and if not, to my son, Sam Jones.”)
Also, if multiple people become co-owners as remainderman after the grantor of the enhanced life estate deed passes away, they have to agree on what to do with the property. If they disagree or are unfriendly, it can cause disagreements and even lawsuits.
Furthermore, what if the grantor of an enhanced life estate deed wishes to leave part of the real estate to a minor?
To honor the life-estate holder’s intent, with specificity as to what should happen in these situations, it would be better to deed the house into a revocable trust instead of utilizing a ladybird deed. A revocable living trust is almost infinitely flexible, it can account for any number of contingencies and is controlled by the trustee.
Not all Title Insurance Companies Treat Lady Bird Deeds Equally
While lady bird deeds all say that the life estate holder retains the right to sell, rent, or even change their mind (i.e. remove or replace remainderman), not all title insurance companies will honor this request and may require remainderman to sign off on any real estate transfer to avoid the potential for litigation.
The good news is that it seems the largest and most widely used title insurance companies seem to honor lady bird deeds. However, some will still be hesitant to write title insurance in certain situations.
For example, The Fund (one of the most popular title insurance companies with real estate attorneys) will require that judgments recorded against the life-tenant in the county where the property is located, will have to be cleared before they will insure title (if the lawsuit is filed before the creation of the lady bird deed). If the judgment involves a federal IRS tax lien against the remainderman, the lien must be cleared (and a release letter provided by the IRS) before they will insure title.
Lady Bird Deeds and Florida Homestead
It is a benefit that the life-estate holder will maintain his/her Florida homestead status when utilizing a lady bird deed.
But care must be given to make sure that they are not intentionally or unintentionally transferring their home to a 3rd party when a spouse or minor child remains living on the property in question. In such a situation (when the life tenant is survived by a spouse or minor child) the homestead cannot go elsewhere regardless of what is written in the enhanced life estate deed.
Florida Lady Bird Deed Resources
Life Estate Deed Income Tax Issues
Clients come to us with a variety of real estate issues in a Medicaid-planning context: How to handle a homestead with equity over $552,000? How to plan so that a vacation home avoids Medicaid estate recovery and more. The real estate in question, may be titled in fee simple, have multiple owners with rights of survivorship, or be subject to a life estate. I have never recommended a regular life estate for Medicaid or estate planning purposes, instead, I see significantly more benefits and fewer drawbacks to utilizing an enhanced life estate deed (also known as a “lady bird deed”).
What is a life estate?
The life estate tenant conveys their property but retains a life-time right to use and occupy the property. Upon the death of the life tenant, full ownership transfers to the individual(s) who have the remainder interest (also called remainderman). Medicaid treats this conveyance as a transfer for value (and thus, if done within 5 years) will subject the life tenant/Medicaid applicant to a penalty period. Another disadvantage is that the life tenant must obtain permission from the remainderman to convey the property(these disadvantages are non-issues with lady-bird deeds). To determine the value of the interest conveyance one must know the value of the property and the age of the life tenant.
Determining Value Attributable to the Life Tenant and Remainder man
The older the life tenant, the shorter their life expectancy. The shorter the life expectancy, the shorter period of time the life tenant is expected to be able to use and enjoy the property. This equates to a lower value to the life tenant and higher valued interest attributable to the remainderman (thus increasing the divestment subject to penalty). The value of the life estate is found by going to the Life Estate and Remainder Interest Table here.
The value of the life estate is found by taking the value of the property and multiplying it by the life estate factor (a.k.a. life estate rate). The value of the remainder is found by taking the resulting life estate value and deducting it from the value of the property (or multiplying the value of the property by the remainder rate). Again, it is the remainder rate value that determines the divestment subject to penalty.
For example, if a home is valued at $200,000, and the life tenant is 85 years old, (per the life estate and remainder interest table, there is a life estate factor of .35359 and a remainder factor of .64641. That means the value of the life estate to the life tenant is: $70,718 and the value to the remainderman is: $129,282 (you’ll notice the value of both numbers adds up to$200K). If Medicaid was needed within 5 years of recording the life estate deed, this would result in $129,282 transfer penalty. If this is done outside of the five-year look-back period, then, of course, there would be no penalty.
But recently, someone came to me who was a remainderman on a previously-executed ordinary life estate deed and wanted to know the tax consequences to selling the home prior to the life tenant passing away and the impact it would have should the life tenant require Medicaid ICP in the future.
- DISCLAIMER: My initial reaction to the tax-consequences portion of the question was, “I don’t know, let me look into it.” I am not too proud to admit when I need to speak to a colleague to answer someone’s question. I am not a CPA nor do I have an LLM in tax. I do not render tax advice and always tell my clients that they need to confirm any tax consequences for any planning we do with their CPA or tax attorney. I spoke to a CPA friend of mine who gave me information that sounds accurate but I was provided with very general information and cannot confirm its accuracy. Do not rely on this blog article (or any blog article) when making planning decisions. Meet with a tax professional!
Facts: The home was purchased for $100,000 many years ago and would probably sell for about $200,000 now. The life estate was recorded over five years ago (this is a good fact because an ordinary life estate would result in a gift-penalty subject to the Medicaid five-year lookback period). Similar to the above, let’s assume the life tenant is 85 years old.
What are the income tax consequences on the sale of real property subject to a life estate?
First, it should be noted that if the life tenant passed away, upon filing the death certificate, the title would pass to the remainderman with a “step-up in tax basis,” which means that upon sale of the house the capital gains tax would be significantly lower. If the property was bought for $100,000 but worth$200,000 at the time of life estate tenant’s death and it sold for $205,000, capital gains taxes are only paid on the $5,000 excess after the "step up."
But when a home is sold before the death of the owner, there is no “step-up in basis” and capital gains taxes are paid on the original purchase price value of the home. However, the IRS provides an exemption amount (currently$250,000 for single and $500,000 for married owners of real property). This personal residency tax exemption is available if the owner(s) have lived in the subject real property for 2 of the last 5 years. It essentially means that no capital gains is paid on the first $250,000 of gains for a property owned by a single individual.
But, only the life tenant (original owners) get the value of the exemption. The value of the life tenant’s personal capital gains tax exemption, if the property is sold during their lifetime, is proportional to their ownership interest per the life estate and remainder interest tables on the date of the sale (see above). This exemption is not a benefit enjoyed by the remainderman – they get no tax exemption upon the sale of the property during the life tenant’s life. So any capital gains taxes due would likely come from the remainder owner’s proportionate share of proceeds.
However, since financial responsibility for taking care of a sick parent is usually born by their children (who are also likely the remainderman in an ordinary life estate) the capital gains taxes would likely be more than offset by the savings of being able to shelter the proceeds and allowing Medicaid to pay for the parent's long-term care.
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