You may not know the name Claudia Alta Taylor, but her list of accomplishments is impressive. Claudia was born in 1912 in Karnak, Texas. After college, she began building a broadcast empire that turned a $41,000 investment into $150 million. She served on the board of regents for the University of Texas System and on the National Park Service Advisory Board. She dedicated herself to beautifying American highways and she received the Presidential Medal of Freedom. No, you may not know the name Caludia Alta Taylor, but you may recognize her married name—Lady Bird Johnson, the 36th First Lady of the United States.
There is one other thing the first lady’s nickname is attached to. It’s an estate planning tool called the Lady Bird deed.
The first Lady Bird deed was drafted by Florida attorney Jerome Ira Solkoff around 1982. In his elder law book and lecture materials, Solkoff used a fictitious cast of characters to explain this new type of deed:
Lyndon and Lady Bird, his wife, grantors, to Lyndon and Lady Bird, his wife, grantees, a life estate, without any liability for waste, with full power and authority in them to sell, convey, mortgage, lease and otherwise dispose of the property described below in fee simple, with or without consideration and without joinder by the remaindermen, and to keep absolutely any and all proceeds derived therefrom. Further, the grantors reserve the right to change remaindermen at any time without consent of the remaindermen. Upon death of the life tenants, title shall be in Lucy and Lynda, joint tenant with rights of survivorship.
Even though the Johnsons never used this type of deed, the name stuck and the Lady Bird Deed was born.
What is a Lady Bird Deed
Today, a Lady Bird deed is commonly referred to as Enhanced Life Estates. It gives a property owner complete control over their property for their entire lifetime. The owner has the right to sell, gift, mortgage, or lease the property during their lifetime. Then at the owner’s death, ownership automatically transfers to the beneficiaries, sidestepping the lengthy and potentially expensive probate process.
Advantages of a Lady Bird Deed
- Avoid probate.Lady bird deeds remove the property from the owner’s estate, making it no longer subject to probate when the owner dies.
- Retain rights to use, sell and profit from the property during your lifetime. A lady bird deed can be changed at any time without the permission of the beneficiaries. They can only make decisions about the property after the original owner is deceased.
- Maintain Medicaid eligibility. If you transfer property to someone else in the five years before applying for Medicaid, Medicaid might still count that property as your asset and you may not qualify for full benefits. Lady bird deeds aren’t considered a transfer for Medicaid purposes and thus won’t affect your eligibility.
- Prevent property from being used to repay Medicaid benefit costs.U.S. federal law allows states to claim a person’s assets after their death to recover Medicaid costs for long-term care. In states where lady bird deeds are available, the property doesn’t count as part of your estate and isn’t subject to the Medicaid estate recovery plan, or MERP.
- Avoid federal gift tax. When you give property to someone else, such as your adult child, it may count as a gift and you may have to file a gift tax return with the IRS (in some cases you may also have to pay a gift tax). Lady bird deeds don’t transfer the property until your death, which helps avoid gift tax rules.
- Avoid property taxes. Some states where the lady bird deed is available cap the degree to which property tax assessors can increase a property’s taxable value. However, this cap may reset if the property transfers (such as through a sale), so setting up a lady bird deed that transfers property upon your death can keep you from losing this tax benefit.
- Minimize capital gains taxes. Upon the property owner’s death, the property’s value for tax purposes can receive a “stepped-up basis” to its fair market value. This means that if the property is sold shortly after the owner’s passing, the capital gains tax may be reduced, as the basis for calculating gains will be reset to the property’s value at the time of the owner’s death.
Disadvantages of a Lady Bird Deed
- This is an unfamiliar type of deed, and some title insurance companies have problems understanding how to handle them.
- Large financial institutions have refused to offer a loan or line of credit against a property with a Lady Bird deed.
- A Lady Bird deed is less flexible than a revocable living trust (but also less expensive).
- If you have more than one named beneficiary, they must work together. Disagreements about keeping or selling the property could wind up in court.
- In some states, if the default beneficiary named in the Lady Bird deed is not a close relative, a property tax cap doesn’t apply upon the donor’s death. If the property has appreciated considerably over time, that could be significant.
- Potential title issues. While designed to avoid probate, Lady Bird deeds might create complications with the property’s title. There’s a possibility that title insurance companies or future buyers might be hesitant to accept or trust the validity of a Lady Bird deed, and this could cause challenges in property transactions or sales.
- Uncertain future legal interpretation. The legal enforceability and interpretation of Lady Bird deeds may be subject to change. Legislation, court rulings, or challenges could alter how these deeds are viewed and implemented in the future, potentially affecting their effectiveness or validity in estate planning.
Creating a Lady Bird Deed
Creating a Lady Bird deed varies from state to state, but in general you must include:
- A legal description of the property
- The names of the grantor and the beneficiaries
- Reservation of lifetime rights to sell the property
- Notarization by a notary
- Registration and filing with your country registrar of deeds.
Only five state recognize Lady Bird Deeds—Florida, Michigan, Texas, Vermont and West Virginia. But 30 states recognize Transfer on Death deeds, sometimes known as Beneficiary deeds. Just like the Lady Bird deed, the TOD deed takes affect when you die and it bypasses probate.
Because a Lady Bird deed is such a unique legal arrangement, it’s recommended that you work with a qualified estate attorney to create the document and ensure that it meets all legal requirements.
Disclaimer
This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors, all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investment Partners at 1-888-777-0970 or email us at info@alhambrapartners.com.
