You may have heard the term “Lady Bird deed” tossed around, especially if you are in the financial, real estate or estate planning fields, but what are Lady Bird deeds and how do they work?
“Lady Bird” deeds got their name because Lady Bird Johnson was commonly used as a fictional subject when these types of deeds were discussed in an academic setting. Lady Bird deeds are also known as enhanced life estate deeds, and Florida is one of only a handful of U.S. states that allows them. When employed correctly, they can be powerful estate planning tools.
Traditional life estates, which differ from enhanced life estates granted via Lady Bird deed, date back to old English common law, which, as you may know, provides the foundation for U.S. property law. Life estate deeds allow an owner of real property (a grantor) to grant a life estate to someone else (a grantee), meaning the grantee could live in the property for the grantee’s lifetime. Upon the grantee’s death, the property would then transfer back to the grantor or to another party or parties, such as the grantor’s children (a.k.a. remaindermen).
A life estate could be a useful tool for the grantor because it could allow her to give a property to a relative in need for their life while also preserving an estate for her children or other heirs. For the grantee, owning a life estate was also a pretty good deal as the grantee did not have to worry about being kicked out of the property during their lifetime. That said, the grantee would not truly own the property, instead they simply owned a right to live in the property.
The grantee could not mortgage, sell or bequeath the property and was liable for what is called “wasting,” meaning the original owner or the remaindermen could sue the owner of the life estate if they let the property go into disrepair.
Traditional life estates were always allowed in Florida. However, in the early 1900s, a clever Florida attorney was drafting a life estate deed for an owner of a property who wanted to grant himself a life estate in his own property. The attorney decided to write language into the life estate deed allowing the owner to reserve the right to re-convey the property to someone else without liability to the remaindermen. This provision was not allowed in many states, but Florida in the case Oglesby v. Lee 73 So. 840 (Fla. 1917) decided to let the provision stand and the Florida Lady Bird deed was born.
Some later legal rulings allowed the grantor, using a Lady Bird deed, to retain her homestead exemption and avoid paying documentary stamp taxes, which would normally be owed upon a transfer of real property between owners. These rulings effectively added a number of benefits to Lady Bird deeds.
In essence, a Lady Bird deeds allows you to grant yourself a life estate while maintaining the power to sell or mortgage the property; protect your homestead tax status; avoid paying any sort of tax on the transaction; and maintain full autonomy over the property, essentially as if you owned it in fee simple ownership. Yet, most importantly, the Lady Bird deed allows an owner of a property to transfer property to heirs by operation of law and thereby avoid the probate process.
Lady Bird deeds also allow you to convey the property to your remaindermen as joint tenants or tenants-in-common, or even name a revocable trust as your remainderman.
Why is this so important? The majority of estate planning clients I deal with are married or perhaps recently widowed, they own their primary residence, they usually have one or more savings, checking or retirement accounts and may own a vehicle or two.
In this situation, the financial accounts can be transferred upon death to another party through joint titling or by adding payable on death designations to transfer financial accounts to a third-party upon the death of the owner.
Florida law allows for two vehicles to pass outside of probate. The sticking point for most people in this scenario is that upon their death, their home still ends up in probate, which is a long, expensive process that can expose the estate to creditor claims.
If the owner of the home executed a Lady Bird deed leaving the home to their child or children, the house could pass outside of probate. All the child or children (remainderman) need to do is file the life tenant’s death certificate with the clerk of the court in the county where the property is located. The life estate is then terminated and the property is able to be transferred to the remainder beneficiaries outside of the probate process, potentially saving thousands of dollars.
While the Lady Bird deed offers a number of advantages, there are some downsides to using them and some important issues to consider. Here are a few:
- First, minor children cannot be remaindermen. If you have minor children, you may need to consider a revocable living trust rather than a Lady Bird deed.
- Also, if you are married, you can have a joint life estate where the life estate owners hold the property jointly, meaning if husband and wife have the life estate and the wife dies, the husband would still have a life estate for his life, but the wife cannot transfer the property directly to her remaindermen if she is survived by a spouse.
- If the named remaindermen in a Lady Bird deed predecease the life estate owners, the property will likely end up in probate if the deed is not amended. If you end up in this situation, make sure to contact an attorney as soon as possible.
If you have any questions about Lady Bird deeds and whether they may benefit your estate, call Bedy Law for a free consultation.