Ladybird Deeds are sometimes referred to as Enhanced Life Estate Deeds. A Ladybird Deed conveys a remainder interest which can be revoked during the property owner’s lifetime. This allows the owner to sell, convey, mortgage and otherwise dispose of the property without sharing the proceeds with the person or persons designated to receive the remainder interest.
Advantages. Perhaps the biggest advantage is probate avoidance. Because the deed transfers ownership without the need for probate, it is an attractive tool. Other advantages include:
- Low Cost – The cost for a Ladybird Deed is much less than the cost of a trust. Because of the unique features of this type of deed, it may cost more to prepare than an ordinary deed.
- No Immediate Doc Stamps – Documentary stamp taxes are not due on the recording of a Ladybird Deed, even for property encumbered by a mortgage, because there is no immediate transfer of ownership. However, documentary stamps are due upon the death of the person holding the life estate.
- Medicaid Planning – Because the transfer is not a completed transfer of ownership, it is not considered to be a gift that would affect eligibility for public assistance. If the home has homestead status, the property will not be a “countable” asset when calculating Medicaid eligibility. Further, the ownership passes at the moment of death, avoiding the Florida Medicaid estate recovery rules. (Other states have statutes allowing for the recovery of Medicaid benefits against property owned by the Medicaid recipient, even ownership that passes through survivorship rights, including Ladybird deeds.)
- Continued Homestead Exemption – The creation of a remainder interest does not change the present ownership and the owner remains eligible for the homestead exemption.
- Stepped-up Basis for Determining Capital Gains Taxes –The persons who become the owners upon the current owner’s death will receive the benefit of a “stepped-up basis” for purposes of calculating their capital gains taxes. This means that, like other inherited property, their tax basis is the value on the date of the owner’s death, not the tax basis of the owner, which is usually much lower.
Disadvantages. A Ladybird Deed is not without its drawbacks, including:
- Confusion – Banks and title companies may not understand the non-vested nature of the remainder interest and require that the remaindermen join in a conveyance or a mortgage.
- A creditor’s lien can attach to a remainder interest, creating a cloud on the title for the life tenant. For example, the IRS has indicated that a tax lien filed against a remainder interest does attach. (See The Fund Concept, Volume 39, July 2007, p. 77.) This means that if the life tenant sells the property, the lien against the remainder person must be paid.
- It also unclear whether the owner’s creditors can still make a claim against the property after the owner of the life estate dies.
- Without probate, creditor claims against a deceased owner may not be cleared until at least two years after the date of death.
- Homestead Devise Restrictions – This type of deed should not be used by an owner with a spouse or minor child. If the owner is married and has no minor children, the deed could provide that the remainder interest in their homestead passes to their spouse in accordance with Article X, Section 4 of the Florida Constitution. The Constitution gives the surviving spouse and minor children rights in the home. A property owner who marries or has a minor child after creating the remainder interest must review their circumstances with their attorney to avoid unexpected results when they die.
- Unanticipated Circumstances – Generally, the remaindermen are named, but it is difficult to provide for alternative distributions in the event a remaindermen predeceases the life tenant. A will or trust can be a better tool for planning for unexpected contingencies.
- Estate Taxes – Tax clearances must still be obtained when a life tenant dies. An estate tax return may be required.
- For owners who pass away during 2013, there is an estate tax exemption of $5.25 million for S. citizens and permanent residents. The exemption is only $60,000 for nonresident aliens.
- For noncitizens, the laws of other countries may impose a tax when there is a change in ownership, similar to our capital gains tax. Noncitizens should consult with a tax advisor in their home country before considering a Ladybird deed. In some cases, there are tax treaties that reduce or eliminate the taxes on S. property.
- Changes – Where the owners later change their minds, special care should be taken, and some title insurance underwriters might require that the remaindermen quitclaim their interest. That means contacting the remaindermen to sign new deeds.
- Title Insurance – Standard title insurance policies cover beneficiaries under a will or trust but typically do not cover persons who receive a gift of real property. It is likely that the remaindermen will not have the benefit of the existing title insurance policy.
- Additional Work – The use of a Ladybird Deed requires additional work if the property is sold or mortgaged and additional work upon the death of the owner. Probate may be avoided, but legal work is still required.