When it comes to estate planning for your real estate assets, you may live in a state where a lady bird deed is an option. If that’s the case, you might be wondering whether a lady bird deed is a better option to transfer real property, such as your primary residence, than a revocable living trust. This article will help you better understand some of the benefits and drawbacks to each so you can make a decision based on your individual needs.
DISCLAIMER: This article is not intended to provide legal advice, nor was it written by a licensed attorney. If you need specific advice for your situation, please consult an elder law attorney licensed to practice in your state.
What is a lady bird deed?
A lady bird deed, also known as a ladybird deed or enhanced life estate deed, is a type of deed that can help an estate avoid probate at death. The nickname comes from President Lyndon Johnson’s wife, nicknamed Lady Bird Johnson.
What’s the difference between a lady bird deed and a traditional life estate deed?
Both types of deeds are designed to avoid probate upon the owner’s death. With a traditional life estate deed, the property owner maintains the right to use the property over their life, but may not change any of the transfer terms. On the other hand, a lady bird deed does allow the owner to maintain control over the property.
Where are lady bird deeds allowed?
There are only a handful of states that recognize lady bird deeds:
- West Virginia
What is a revocable living trust?
A revocable trust is another way for property owners to transfer property upon death while bypassing the probate process. A person (or company), known as the grantor, typically establishes the revocable trust and manages it for as long as the grantor lives.
Upon death of the grantor, and the grantor’s surviving spouse, the trust assets are distributed according to the terms of the trust. By using a revocable living trust, the grantor maintains complete control of the property until death.
What are the advantages of a lady bird deed?
The benefits of a lady bird deed include:
Complete control over your property during your lifetime
Quick and efficient transfer of property
Upon death, the property is transferred very quickly.
Keeps property out of the probate estate
Ownership of property transfers according to the terms of the deed, and stays out of probate court.
May be less expensive than a trust
Depending on where you live, you may find that it’s cheaper to use a lady bird deed than to create a revocable trust. This might be particularly true if the primary home is the only significant asset that cannot be transferred via beneficiary designation.
Might aid in Medicaid planning
In Florida, a lady bird deed does not violate the five year look-back period for Medicaid eligibility purposes because it is an incomplete gift. This might be of benefit for a Medicaid applicant who is worried about being able to qualify.
Medicaid benefits and eligibility rules may differ based upon state law, so you should discuss your situation with an experienced estate planning attorney in your state.
No tax consequences
Because this is not considered a completed gift, the owner maintains ownership of your property. Upon death, the tax basis of the property gets a step up to the fair market value at the time of death. If sold, the beneficiaries would pay very little, if any, income taxes on capital gains.
Additionally, the deceased owner maintains the homestead exemption for their life.
What are the advantages of a revocable living trust?
A revocable living trust has its own advantages, including:
Much like a lady bird deed, a revocable trust keeps trust assets out of the owner’s probate estate.
Maintaining control of property in complex situations
A revocable trust can be used to hold a variety of assets, including:
- Financial assets, including investment accounts or checking accounts
- Real property
- Business interests
While a lady bird deed only applies to the piece of property that it covers, a revocable trust can hold multiple properties. Additionally, a revocable living trust has much more flexibility than a lady bird deed.
Asset protection from conservatorships
Because a revocable trust already has a trustee, it might provide additional protection in the case of a lawsuit.
Because a revocable trust keeps assets out of a probate estate, many owners appreciate the privacy this affords. Ownership of the property in question can be transferred quickly according to the terms of the trust, while maintaining privacy for family members.
What are the draw backs of a lady bird deed?
There are quite a few drawbacks to using a lady bird deed:
Limited number of states
As mentioned, lady bird deeds are only available in 5 states. Basically, 90% of the states in the U.S. do not have lady bird deeds available as a form of asset transfer.
Lack of clarity
Because lady bird deeds are not widely available, they are not widely understood. This might pose a problem for family members who might have power of attorney over the current owner’s affairs, but trying to conduct transactions with businesses, like banks or title companies, who don’t understand how lady bird deeds work.
Might be hard to process in some situations
There are a lot of hypothetical situations where state law might not be clear. In Florida, there are a lot of cases that might not have been heard in state court. Texas law might be different in how certain situations are handled.
Creditor protection concerns
Depending on how the lady bird deed is drafted, there may be concerns if a creditor goes after a remainder beneficiary for debts. These concerns can most likely be resolved by addressing them with an experienced attorney.
What are the drawbacks of a revocable living trust?
Revocable trusts have their own drawbacks.
Establishing a trust takes more money up front than a basic “I love you will” and power of attorney. This is why many people avoid establishing a trust.
No tax benefits
There are no real tax benefits to the grantor during their lifetime. After death, most revocable trusts become irrevocable. There may be tax consequences depending on what happens to the trust after the owner passes away.
Assets that go into a trust have to be retitled in the name of the trust. This might be more work than a lot of people wish to pursue.
Trusts can be contested longer
Depending on state law, there may be a longer period during which a trust can be contested.
When might you decide to go with a lady bird deed?
A lady bird deed might be appropriate for someone who:
- Doesn’t have a lot of complexity in their financial situation
- Would like to transfer property without probate
- Is concerned about Medicaid planning
- Would like their beneficiary to receive a step up in basis upon death
When might you decide to choose a revocable living trust?
A revocable living trust might be appropriate for someone who:
- Has different types of assets that might not be protected by beneficiary designation, and might otherwise be subject to probate
- Doesn’t live in a state where lady bird deeds are available
- Plans to have a trustee maintain control over assets should competency become a concern
I hope you enjoyed reading this article about lady bird deeds and revocable living trusts. If you’re interested in reading more about estate planning, please check out our Estate Planning archives!
After retiring from a 24-year career as a Naval officer in 2017, Forrest became a financial planner to help people achieve success in managing their personal finances. In 2022, he sold his partnership stake in his financial planning firm to focus on helping people full-time through his writing.
Featured in: Forrest’s writing has been featured in the following publications: Forbes, Military.com, NerdWallet, Yahoo Finance, The Military Guide, The Military Wallet, Christian Science Monitor, and many other publications.
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