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What Is a Lady Bird Deed? Medicaid & Tax Benefits

Lady bird deeds automatically transfer your property to your beneficiaries without going through probate, but they're available in only five states.

A lady bird deed, also called an enhanced life estate deed, lets you pass your property passes down without going through probate. Lady bird can also keep property in the family without sacrificing Medicaid eligibility or subjecting the asset to state efforts to recover Medicaid costs after you die.

However, this type of deed is available in only five states: Florida, Texas, Michigan, Vermont and West Virginia. It’s a popular transfer method in these states, though, because you can revoke or change a lady bird deed at any time, unlike a standard life estate deed.

How a lady bird deed works

Lady bird deeds divide the ownership of your home into two parts: during your life and after your death.

  • Control during life:

    You, the life tenant of the property, do what you wish with the home. Unlike standard life estate deeds, you can change your mind anytime, including selling or mortgaging the property, without needing permission from your beneficiaries.

  • Automatic transfer at death:

    The beneficiary or beneficiaries you named in the deed, who can be a person or a trust, inherit the property automatically. They may be called remainder beneficiaries.

Pros and cons of a lady bird deed

Advantages

Avoid probate

.Lady bird deeds remove the property from the owner’s estate, making it no longer subject to probate when the owner dies. Probate can be an expensive, time-consuming process in some cases.

Avoid property taxes.

Some states where the lady bird deed is available cap the degree to which property tax assessors can increase a property’s taxable value. However, this cap may reset if the property transfers (such as through a sale), so setting up a lady bird deed that transfers property upon your death can keep you from losing this tax benefit.

Avoid federal gift tax.

When you give property to someone else, such as your adult child, it may count as a gift and you may have to file a gift tax return with the IRS (in some cases you may also have to pay a gift tax). Lady bird deeds don’t transfer the property until your death, which helps avoid gift tax rules.

Drawbacks

Available in only five states.

Lady bird deeds are currently used only in Florida, Texas, Michigan, Vermont and West Virginia. Insurance companies in other states won’t insure property that passes through a lady bird deed.

Property taxes may be higher for the beneficiary.

States may increase the taxable value of a property when it transfers to your beneficiary when you die. Thus, the beneficiary of a lady bird deed might be hit with higher property taxes once they inherit the property. Some trusts may help avoid this.

Lady bird deed Medicaid benefits

Lady bird deeds can help the owner

maintain Medicaid eligibility.

If you transfer property to someone else in the five years before applying for Medicaid, Medicaid might still count that property as your asset and you may not qualify for full benefits. Lady bird deeds aren't considered a transfer for Medicaid purposes and thus won’t affect your eligibility.

Prevent property from being used to repay Medicaid benefit costs.

U.S. federal law allows states to claim a person’s assets after their death to recover Medicaid costs for long-term care. In states where lady bird deeds are available, the property doesn’t count as part of your estate and isn’t subject to the Medicaid estate recovery plan, or MERP.

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How do you set up a lady bird deed?

You can create a lady bird deed yourself with a state-specific template or hire an attorney for extra assistance. Lady bird deeds are fairly inexpensive to establish, especially compared to other tools such as a revocable trust.

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Proper setup for a lady bird deed varies depending on the state. Typically, you’ll include a legal description of the property, the grantor’s and beneficiary’s names, and confirm that the grantor reserves lifetime rights to sell the property.

You may need to get the document notarized, then registered and filed with your county registrar of deeds.

Alternatives to a lady bird deed

If you don't live in one of the five states where lady bird deeds are available, you’ll need a different method to transfer your property. Here are a few options:

  • Transfer-upon-death, or TOD, deeds

    are available in 29 states and work similarly to lady bird deeds. Unlike lady bird deeds, they allow contingent beneficiaries.

  • Revocable living trusts

    can be a little more complex and expensive to set up than a lady bird deed, but they can still help your estate bypass probate while retaining control over the asset during your life.

  • Life estate deeds

    are more widely available than lady bird deeds and still bypass probate, but they require your beneficiaries’ permission to make any changes.

  • Wills

    can include property transfers, but they may have to undergo probate after your death.

  • Quitclaim deeds

    are also a fairly simple property transfer method, but they don’t guarantee property ownership, and they transfer property while the owner is still alive.