Ever since the concept of individual land ownership emerged, passing real estate at death has existed in one form or another. Different states have different property laws that directly affect how real property passes at death. Although named after “Lady Bird” Johnson, Lyndon B. Johnson never actually used such a deed to transfer property to his wife. She was the fictional donee in a fact pattern that made this type of “Enhanced Life Estate Deed” popular. Moreover, this type of deed is not legal in New York. A lady bird deed is only used in Florida, Texas, Michigan, Vermont, and West Virginia. Many of our snowbird clients ask about his type of deed relation to their Florida vacation homes.
A Lady Bird Deed is a simplified method for passing on property that is akin to New York’s “life estate” deed in that it avoids the probate process. A property owner transfers property to a beneficiary but reserves the right to live there for the rest of their life. Upon the owner’s death, the beneficiary can immediately sell the property, take possession or sell it without court involvement. The life tenant continues to pay all the bills and mortgage, if any. Since the owner retained a life estate, the beneficiaries get a stepped-up basis in the property to fair market value – no capital gains tax due if sold. Moreover, the property owner can still qualify for any property tax exemptions, such as the star exemption.
The biggest drawback to a New York State life estate deed is that it does not protect the property from the beneficiary’s creditors or divorce. Additionally, the transfer is not an exempt transfer for Medicaid long term care purposes. This can render the life tenant ineligible if the property was transferred within the look back period. This is so even though a residence is not a countable resource for Medicaid eligibility in NYS if the equity value is less than $955,000. Moreover, the life tenant cannot mortgage or sell their home without beneficiary approval. This effectively gives the beneficiaries a present interest in the property – even allowing them to sue the life tenant if they are not adequately caring for the property.
A lady bird deed has more protections than a regular transfer on death deed, which is why it is popular in the five states where it exists. For example, Florida’s lady bird deeds are not considered a transfer that must be disclosed to Medicaid. With a lady bird deed, the beneficiary has no rights related to the home during the transferor’s lifetime. The life tenant can cancel the deed and mortgage or sell the home without beneficiary consent.
It is important to consult with an experienced estate planning attorney to determine if a simple life estate deed is preferable to a Will or Trust. Remember that New York’s life estate deed is does not provide the same protections as a lady bird deed. Although simple solutions exist, there are enough drawbacks to a life estate deed that estate planning attorneys discourage its use except in limited circumstances.