In Florida, and few other states, the law provides for what is legally known as an Enhanced Life Estate Deed, but most know it by its street name: The Lady Bird Deed.
Life Estates
For starters, a Life Estate is an interest creating a special form of ownership interest in property. The person with the Life Estate, is known as the life estate holder or life tenant. This life estate holder is typically subject to many limitations. For example, the life estate holder cannot sell or encumber the property with a mortgage without approval from the remainderman. Remainderman is a legal term for the person who will receive the property upon the death of the life estate holder.
Enhanced Life Estates aka Lady Bird Deeds
It is said that the Enhanced Life Estate Deed received its nickname, Lady Bird Deed, when President Lyndon B. Johnsons used this type of deed to convey his property to his wife, Lady Bird Johnson.
The Enhanced Life Estate is “enhanced” because although the property will pass to a remainderman upon the death of the life estate holder, the life estate holder can sell, mortgage, dispose of, and convey the property. The Life Estate holder in this scenario is the owner of the property.
Essentially, the life estate holder in an Enhanced Life Estate owns the property outright, and can do whatever they want with the property during their lifetime. The remainderman’s interest is contingent and terminable, meaning the life estate holder can re-deed the property, change the deed, sell the property, etc. without any approval required by the remainderman.
For this reason, among a few others which can be discussed if you are currently interested in consulting whether or not this is the right type of thing for you or a loved one to do with their property.
Benefits of using an Enhanced Life Estate Deed
There are several benefits to using an Enhanced Life Estate Deed.
1. Avoid Probate
Generally, a property conveyed via an Enhanced Life Estate Deed will avoid probate because the ownership interest transfers automatically upon the death of the Life Estate holder. This is a major advantage and is often advisable as part of an estate plan, depending on the facts and circumstances.
The heir will only need to present a Death Certificate to the county clerk where the property is located to show proof that the property ownership has been transferred.
2. Set up in basis (tax)
When property is inherited, via Will, Trust, Enhanced Life Estate Deed, etc., the heir will receive a ‘step-up’ in tax basis. This means that their Capital Gain tax basis in the property will be the fair market value on the date of the death of the Life Estate Holder.
When a person sells property, they will have to pay an income tax on the gains made as part of the sale. Meaning, if you purchase property for $100,000.00 and sell it for $150,000.00, there will be income tax liability as the $50,000.00 of gains made in the sale. If you add a family member to a deed, and they later sell the home, they will also be liable for those same gains on the property. Their ‘tax basis’ is the same as the purchaser of the property.
On the other hand, where a person inherits property, they generally inherit the property at a “stepped up” tax basis. What this means is that if you inherit property at the value on the date of death of the property owner. And if the property is sold, the only realized gain will be the amount of the sale less the date of the death value of the property
3. Preserve Homestead Protections
The use of an Enhanced Life Estate Deed does not cause you to lose your homestead exemption for tax purposes, so long as the grantor retains a beneficial interest in the property and remains the possessor of the property for his or her lifetime.
4. Retain Total Control
One of the most important aspects of using an Enhanced Life Estate Deed is that the grantor retains 100% ownership of the property, if drafted properly. The purpose of the Enhanced Life Estate Deed is that the owner can sell, convey, mortgage, lease, etc., the property without the approval or consent of the heirs (remainderman); as opposed to a Quit Claim Deed where in the other parties become owners of the property, which can cause all sorts of problems. See more on Quit Claim Deeds here.
In Conclusion
As can be understood from this article, Enhanced Life Estate Deeds have many advantages over Quit Claim Deeds in estate planning. While there are several benefits to using an Enhanced Life Estate Deed, I do not recommend that you prepare these types of deeds without reviewing the circumstances with a qualified attorney who has an understanding of the rights and responsibilities that can be affected by the preparation of any deed. As always, do not handle legal matters alone!
SEEK ADVICE!
If you are reading this post because you having issues relating to any of the above, contact our office at 305.224.8900 for a free consultation and let one of our attorneys review the matter at hand in order to protect your property rights.
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein. All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.