For individuals with complex estate plans involving multiple assets and specific distribution instructions, a Revocable Living Trust might be the most suitable option. This legal arrangement allows for greater control over asset management and distribution post-mortem.
However, for individuals with uncomplicated estate plans, primarily focused on Florida real estate ownership aiming to bypass probate while maximizing tax benefits, a Lady Bird Deed is a simpler and more streamlined approach. The Lady Bird Deed a/k/a Enhanced Life Estate Deed is particularly effective for individuals with one or a few properties and straightforward estate distribution goals.
Advantages Shared by Trusts and Lady Bird Deeds: Both avoid probate and provide control during your life. With a Lady Bird Deed, you can mortgage or sell your property just like if you had a warranty deed to the property.
Big Disadvantage of the Revocable Living Trust: A home placed in a revocable living trust remains part of the grantor’s estate because the grantor (homeowner) retains control over the trust assets during their lifetime. When the grantor passes away, the home is considered part of their estate, making it subject to Medicaid estate recovery.
Lady Bird Deed: Tax-Advantages
- Protection From Medicaid Estate Recovery: If your eldery parent receives long-term care services, such as those provided in a nursing home payable by Medicaid (a state program), then Medicaid has lien rights to recover from the estate. However, the Lady Bird deed automatically transfers the property to the beneficiaries, thus never becoming part of the estate.
- No Capital Gains Taxes: This is particularly beneficial for owners of real estate that has appreciated significantly in value. The key benefit lies in the "step-up in basis" provision. This means that when the property owner dies, the property's tax basis becomes its fair market value at the time of death. Consequently, any capital gains accrued during the owner's lifetime are eliminated.
- No Documentary Stamp Tax: Lady bird deeds do not result in any documentary stamp taxes when you execute the deed. This is a huge benefit and in contrast to a trust, if a property has a mortgage on it. In Florida, you are required to pay documentary stamp taxes on the transfer of real estate for any consideration, including the amount of any mortgage on the property. However, because the lady bird deed does not create any present transfer of an interest, it creates no documentary stamp tax obligation (except for the minimum 70 cent obligation due on every transaction) until after you pass away.
- Preserved Homestead Exemption: Using a Lady Bird Deed doesn’t affect your eligibility for the Florida Homestead Exemption and it will not change your taxable fair market value at the time of the transfer into a Lady Bird Deed.
- No Estate Tax Implications: While a Lady Bird Deed doesn’t remove the property from your estate for estate tax purposes, the high estate tax exemption threshold means most people won’t owe estate taxes.
- No Gift Tax: Unlike outright gifts of property, a Lady Bird Deed doesn’t trigger gift tax implications. This is because the property transfer occurs at the owner’s death, not upon deed execution.
Additional advantages of a Lady Bird Deed:
- Simplicity:Compared to a trust, a Lady Bird Deed is generally easier to create and understand.
- Cost-Effective:The costs associated with creating and recording a Lady Bird Deed are typically lower than those for a trust.
Only a handful of states recognize Lady Bird Deeds:
- Florida
- Texas
- Michigan
- Vermont
- West Virginia
Fun Fact: The term "Lady Bird Deed" is actually a misnomer. While often associated with former First Lady Lady Bird Johnson, the name is more a marketing creation than a historical fact. Specifically, President Johnson was married to Claudia Alta “Lady Bird” Johnson. In the 1980s, a Florida lawyer named Jerome Ira Solkoff, illustrated the concepts of the Lady Bird Deed in his educational materials. He used President Johnson’s wife, Claudia Alta “Lady Bird” Johnson, as a fictional character in his fact pattern to illustrate how the deed functioned and since then the name has stuck. In Florida, a formal name for the Lady Bird Deed is Enhanced Life Estate Deed.
