A “Lady Bird Deed” is a way to transfer property to someone else outside of probate while retaining a life estate in the property. This type of deed got its nickname when President Lyndon B. Johnson used it to convey the property to his wife, Lady Bird Johnson. In Massachusetts, it is more commonly known as an Enhanced Life Estate Deed.
What are the benefits of a Lady Bird Deed:
- Helps to bypass probate of the property
- May provide Medicaid eligibility (5-year look-back)
- Allows the grantor to sell the property and benefit from it during his or her lifetime
- May avoid a gift subject to federal gift tax
What is a Life Estate?
A Life Estate is the retaining of certain property rights, even though the deed to the property is transferred to someone else. In other words, the Deed says “I am transferring title to the property to someone else, BUT I am reserving certain rights and powers to myself.”
The person transferring the deed is called the Grantor. The recipient of the deed is called the Remainderman. Retaining these rights and powers allows the grantor the power to control the property, and do things like sell or mortgage the property, while also retaining their rights to capital gains tax credits and real estate tax abatements. These rights stay with the grantor during his or her lifetime, and at the death of the grantor, title passes to the Remainderman. One of the purposes of this type of life estate deed is to avoid probate. That’s because the title passes to the remainderman outside of probate and with no involvement from the probate court.
Is a Lady Bird or Life Estate Deed the best solution for you?
When used in combination with other planning tools, the Life Estate Deed can be the perfect way to go. But when used by itself, no, the Life Estate is generally NOT the best solution.
Can’t I just Deed my property to my kids, and reserve the Life Estate for myself and my spouse?
A Life Estate should be used in conjunction with other planning tools, and not by itself.
Why? Because you are adding someone else to your title. Now they are a joint owner with you, and their liabilities become your liabilities. Once someone is added to the title, you have made the property available to their creditors and their liabilities. So, if they go through a divorce, or owe income taxes to the IRS, or even have liability for a car accident, the property could be subject to liens and attachments. Now, their liabilities are attaching to your home.
How can you use a Life Estate as part of your overall estate plan?
Instead of Deeding the property to a remainderman, you instead transfer the property to a Trust. You reserve the Life Estate rights, but the Trust is the property owner, as opposed to a remainderman. There is a Trustee named for the Trust, who can sign documents, but the trustee has no personal ownership of the property. What’s the difference? Well, the remainderman isn’t on the title, so their liabilities cannot attach to the property. At the same time, you still avoid probate, because the property will still pass to the beneficiaries of the Trust outside of probate. Further, the use of the Trust can decrease your taxable estate for estate taxes.
This type of life estate deed is often used when planning for Medicaid and in conjunction with a Medicaid Trust.
Under Medicaid regulations, the life estate deed is considered a gift, and the gift penalty rules apply. But the advantage of this type of deed is that after five years the look-back period for Medicaid expires and the value of the life estate will not be considered an asset for Medicaid eligibility purposes.
Medicaid benefits for long-term care are administered in Massachusetts through MassHealth. MassHealth has a five-year look-back, meaning that they will review any transfers made within the five years preceding the application for benefits. That’s why it is key that the transfer to Trust happens five years before benefits are needed.
If we do that, we can completely isolate the house and render it non-countable and non-alienable by Medicaid / MassHealth. An added bonus is that the beneficiaries of the Trust get a step-up in tax basis for the property, which can eliminate capital gains taxes if the property is sold.
If we use the Medicaid Trust, do we still need the Life Estate?
We recommend it in most cases. Why?
- The Life Estate gives the Grantor peace of mind, knowing that they can never be evicted from the property, they still control the property, and their signature is still required for a sale or a mortgage
- The Grantors aren’t dependent on the remainderman’s or the Trustee’s signature.
- The Grantor can collect rental income from the property
- The Grantor retains the right to any real estate tax abatements, such as veteran’s abatements
- The Grantor retains the right to their capital gains tax exclusion if the property is sold
While the Life Estate Deed can carry many benefits, there are several pitfalls when used either by itself or used incorrectly. But when used along with a Medicaid Trust, it can be the perfect solution and a great planning tool.
To learn more about Medicaid Trusts used in conjunction with Life Estate Deeds, download our free report