Enhanced Life Estate Deeds, T.O.D. Deeds and Lady Bird Deeds in Florida
Over the last twenty years or so, enhanced life estates have become an increasingly popular estate-planning tool in Florida. Created by the memorably named “Lady Bird deed” (or the less catchy “TOD deed”), the surge in popularity has mostly arisen from two helpful features. First and foremost, Lady Bird deeds allow real estate to transfer outside of probate, even if the original owner retains possession for life. And, as a consequence, an enhanced life estate, or Lady Bird Deed in Florida provides significant advantages in Florida Medicaid planning.
It’s important to remember, though, that, while Lady Bird deeds can be exceptionally useful under the appropriate circumstances, they are a complex legal tool and also have some drawbacks. This article will take a look at some of the features of Lady Bird deeds, their pros and cons, and their history and current trends. But, before deciding if an enhanced life estate is right for your estate plan in Florida (or your home state), you should consult with an experienced estate-planning attorney in Florida or wherever you are located.
What is an Enhanced Life Estate in Florida
A “life estate” is an interest in real estate which the owner (or “life tenant”) retains until his or her death, at which point title automatically transfers to a successor designated in the deed (the “remainderman”). For the life tenant to transfer or mortgage the property during life, the remainderman must provide consent. Therefore, a life estate is a limited ownership interest. When the deed is recorded, the remainderman receives an immediately effective ownership interest in the property. Title to the real property in Florida doesn’t transfer to the remainderman until later, but the right to receive title in the future vests now.
A life estate becomes “enhanced” when it is not limited by the need for the remainderman’s consent. A Lady Bird deed does this by expressly reserving the life tenant’s right to transfer, mortgage, or otherwise use the property as he or she wishes, regardless of the remainderman’s future interest. Unlike with a traditional life estate, the owner of an enhanced life estate has no risk of liability to the remainderman for any transfer or waste of the property.
Enhanced life estates have been around for a long time and, in modern usage, are most commonly associated with Florida, along with Michigan and Texas to a lesser extent. The name “Lady Bird deed” derives from a hypothetical used by a Florida law professor to explain how enhanced life estates work. In the professor’s example, the parties were designated as “Lyndon” and “Ladybird” – a reference to President and First Lady Lyndon Baines and Ladybird Johnson.
How Enhanced Life Estates Work in Florida
In practice, an enhanced life estate works similarly to a bank account with a POD (“payable on death”) designation or a retirement account designated as TOD (“transfer on death”) in Florida. The life tenant retains complete, unfettered control over the property during life, including the right to change the remainderman (which the holder of a traditional life estate cannot do absent consent). Then, upon the life tenant’s death, title automatically vests in the remainderman, without any need for probate in Florida.
Notably, a Lady Bird deed becomes effective immediately upon its recording in the county land records. But the transfer to the remainderman does not become effective until the occurrence of a future event (i.e., the life tenant’s death). By way of comparison, a traditional life estate is a current transfer of a future interest – rather than a future transfer, as with an enhanced life estate. It’s a subtle distinction, but it has considerable implications.
Why Florida Lady Bird Deeds Are Useful
During life, a Lady Bird deed keeps the life tenant in control of the property. So, if things change and the life tenant needs to sell or mortgage the real estate, he or she doesn’t need the remainderman’s blessing. Or if for some reason a life tenant decides that someone else should ultimately inherit the property, the remainderman can be changed.
Upon a life tenant’s death, an enhanced life estate avoids the need for probate. Avoiding probate in Florida and elsewhere is advantageous in and of itself because it circumvents the considerable time and transaction costs associated with probate court. It can sometimes take months, or even years, before a successor formally takes title through probate, but a Lady Bird deed allows title to pass automatically.
For Medicaid beneficiaries, keeping a property out of probate becomes even more valuable. In general, Medicaid is empowered to act as a creditor of a recipient’s estate, allowing the Florida Medicaid Estate Recovery Program to seek reimbursement by filing a claim against estate assets. A Florida recipient’s primary residence is exempt from Medicaid reimbursement, but non-homestead real estate in Florida (such as, for instance, a rental property) can be subject to Medicaid liens. However, Medicaid only seeks reimbursement from assets within the estate. A property held as an enhanced life estate, though, is not within the estate because it already automatically transferred to the remainderman upon death. Thus, using a Lady Bird deed can allow heirs to inherit a property that might otherwise have been sold to pay a Medicaid reimbursement claim.
Within the context of Florida Medicaid-planning and real estate, an enhanced life estate is considered in the Medicaid asset test like other real estate. If a property qualifies as a homestead in Florida, it won’t be included as a countable asset. For purposes of the five-year lookback period (Florida Medicaid counts certain assets transferred within five years of application toward the asset test), a property subject to a Lady Bird deed is not counted as a transfer – and is therefore not a countable asset. Thus, because the life tenant retains control over the property and the remainderman’s interest is essentially voidable, a future interest granted via a Lady Bird deed within five years of a Medicaid application won’t hinder the grantor’s eligibility. That is generally not the case with a traditional life estate.
Lady Bird deeds also offer some valuable tax and asset-protection advantages in Florida. Eligible Florida homesteads are protected from both creditor attachment and real estate tax increases resulting from a higher assessed value. A property subject to an enhanced life estate retains both homestead protections. A property transferred to a trust or to a third party might not.
Moreover, because a remainderman’s interest is revocable, transfer of the future interest via a Lady Bird deed does not count as a “gift” for federal gift tax purposes. For the same reason, a remainderman’s creditors cannot attach the property as long as the life tenant retains control. On the other hand, a vested remainder interest derived from a traditional life estate potentially qualifies as a “gift” and is potentially attachable by creditors.
Drawbacks to Enhanced Life Estates in Florida
No estate-planning strategy is without some disadvantage, and enhanced life estates are no exception. Florida’s constitutional homestead protections include rights reserved to spouses and minor children. Real estate transfers that infringe on any of these rights – including transfers made via Lady Bird deeds – are void. So, property owners with spouses or minor children need to take special care when executing a Lady Bird deed – or might not be able to use an enhanced life estate at all.
Another potential risk is that, if a remainderman passes away prior to the life tenant, the remainder interest may have to pass through probate. Fortunately, though, there are clever strategies for avoiding this problem in most cases.
A property subject to an enhanced life estate may also be more difficult to sell than a property held in fee simple or in a Florida revocable living trust. Although the life tenant has the legal right to sell the property, a prospective purchaser (or, perhaps more realistically, the title insurance company) may require a disclaimer or quit claim deed from the remainderman to ensure clear title is transferred. For this and other reasons, it is vital that a Lady Bird deed unmistakably, unambiguously reserve all of the relevant rights. Scrivener’s error could invalidate the deed, defeating the entire purpose. So, if you’re going to use a Lady Bird deed, it’s very important to have it prepared by a qualified attorney with Florida property law experience.
Enhanced Life Estate Trends in Florida and Nationally
Enhanced life estates originally arose under the common law and were only recognized in a few states – notably including Florida. Beginning in the 1990’s, more states started recognizing TOD deeds by statute as their usefulness in estate and Medicaid planning became increasingly apparent. States with statutory frameworks have tended to favor the term “TOD deed,” rather than “Lady Bird deed,” which more commonly refers to deeds relying on the common law, such as in Florida.
In 2009, the Uniform Law Commission proposed the Uniform Real Property Transfer on Death Act, a model statute aimed at achieving jurisdictional conformity within states recognizing enhanced life estates. Notwithstanding the proposed uniform law, the various state statutes addressing TOD deeds are not always consistent, and a sizeable minority of jurisdictions still do not recognize enhanced life estates. However, most states that haven’t already are likely to recognize TOD deeds in the future, as citizens of states without enhanced life estates are at a disadvantage in Medicaid planning.
The law relating to Lady Bird deeds is not as developed as other areas of property law, and improperly used or carelessly prepared deeds are likely to lead to unforeseen consequences. Medicaid and estate planning in Florida are complicated areas of the law, so it is a good idea to consult with an experienced attorney before attempting an enhanced life estate or other estate-planning strategy.
Steve Gibbs, Esq.