A “Lady Bird Deed” is another name for an enhanced life estate deed, which allows a property owner to transfer property at death without the necessity of probate. People call it a “Lady Bird Deed” because, according to legend, President Lyndon B. Johnson conveyed some land to his wife using this type of deed, although there is no evidence that actually happened.
How Does It Work?
A Lady Bird Deed allows a property owner to transfer a remainder interest in real estate to beneficiaries, but reserve a life estate (a right to occupy and use the property during his or her lifetime) and the right to sell or mortgage the property, or change the remainder beneficiaries, at any time. If the owner dies without revoking the deed, the property passes outright to the beneficiaries without probate.
How is an Lady Bird Deed Different Than a Traditional Life Estate Deed?
A property owner can transfer a remainder interest in the property to the beneficiaries, but retain a life estate using both a Lady Bird Deed and the traditional life estate deed. However, a traditional life estate deed does not reserve the right to sell or give away the property without the consent of the remainder beneficiaries. A Lady Bird Deed allows the property owner to reserve those rights.
Benefits of Lady Bird Deeds
Lady Bird Deeds offer many advantages over traditional life estate deeds. They
- Provide the property owner the flexibility to change the remainder beneficiaries at any time.
- Allow the property owner to sell or mortgage the property without the consent of the remainder beneficiaries.
- Protect the property from the creditors of the remainder beneficiaries during the property owner’s lifetime.
- Will not count as a gift for federal gift tax purposes. That’s because the owner of the property retains the right to take back the property during his or her lifetime.
- Preserve the property owner’s ability to immediately qualify for Medicaid benefits. Transfers of assets within a “look-back” period may disqualify applicants from immediately qualifying for benefits. However, executing a Lady Bird Deed does not constitute a transfer for Medicaid purposes. That’s because the owner retains the right to sell the property or revoke the deed.
Beneficiaries Receive a Stepped-Up Basis
Because property will remain a part of the property owner’s estate, the cost basis of a property transferred using a Lady Bird Deed will receive a “step-up” in basis to the value of the property on the date of death. This may significantly reduce the amount of capital gains taxes due when the beneficiaries sell the property.
Potential Problems With Using Lady Bird Deeds to Transfer Property
I worked with a client whose mother had executed a Lady Bird Deed that transferred a remainder interest in her property to her children. The property still had a mortgage. So after their mother’s death, the children contacted the mortgage company, a large bank, to assume the mortgage.
Due on Sale Clause
Employees of the assumption department, located overseas, were not familiar with Lady Bird Deeds. Therefore, they suggested that the conveyance had triggered the mortgage’s due-on-sale clause. I was able to point them to the federal law that prohibits mortgage companies from enforcing due-on-sale clauses when the property is transferred to the borrower’s children or spouse. Eventually, someone from their legal department took over and the matter was resolved in my client’s favor.
I’m sharing this experience because if there is an outstanding mortgage on the property, and the beneficiary will be someone other than a spouse or child, there is a chance that the mortgage company will claim that the conveyance triggered a due-on-sale clause. Due-on-sale clauses allow the lender to declare the entire balance is due immediately if ownership of the property changes. Violation of the contract may be grounds for foreclosure.
Would it have mattered if the beneficiary of the property had been someone other than a spouse or children? I don’t think so. Federal law prohibits lenders from exercising a due-on-sale clause when someone inherits a piece of property. The mortgage company may argue that there was a change in ownership when the homeowner signed the deed. However, since the homeowner can amend or even completely revoke a Lady Bird Deed, there is a good argument that the beneficiary’s interest does not vest until after the property owner dies. Nevertheless, to avoid any problems, you should check with your lender, and confirm in writing that they will not invoke the due-on-sale clause if you plan to to transfer the property to anyone other than a spouse or child.
Additionally, some title companies, which are not familiar Lady Bird Deeds, may be reluctant to insure a title during the property owner’s life without the remainder beneficiary joining in the transaction, or after the property owner’s death when the remainder beneficiaries wish to sell the property. However, not all title companies will refuse, especially as more people use these deeds.
Always talk to a lawyer about whether a Lady Bird Deed will accomplish your goals.
This article was originally posted on March 17, 2014 and updated on October 15, 2020.