What Is an Enhanced Life Estate Deed?
Definition and Examples of an Enhanced Life Estate Deed
An enhanced life estate deed transfers ownership of real property to beneficiaries outside of probate. It effectively gives the property away during the owner's lifetime. The owner of the property makes a gift of it to their beneficiaries, who are referred to as remaindermen or remainder beneficiaries, but can continue living in the home until the time of their death.
This type of deed is recognized in just five states: Florida, Michigan, Texas, Vermont, and West Virginia.
What Is an Enhanced Life Estate Deed?
An enhanced life estate deed is an estate-planning instrument. It transfers real estate to one or more beneficiaries during the owner's lifetime without the necessity for probate at the time of the owner's death.
An enhanced life estate deed shouldn't be confused with a standard life estate deed, which has some significantly different implications.
An enhanced life estate deed is sometimes called a Lady Bird deed. The Florida lawyer who created this type of deed in the 1980s arbitrarily named it after former President Lyndon B. Johnson's wife. There's no evidence that the President ever transferred property to Lady Bird Johnson in this way.
How Does an Enhanced Life Estate Deed Work?
The owner of the real estate, referred to as the "life tenant," retains control over the property while alive with an enhanced life estate deed. The life tenant has the right to mortgage or sell the real estate without the consent of their beneficiaries or the remaindermen named in the deed because they haven't actually given the home to them yet. The real estate doesn't actually transfer until the life tenant's death.
Life Estate vs. Enhanced Life Estate Deed
A standard life estate deed also transfers ownership of a property prior to death, but the owner can't mortgage or sell the home without the permission and "joinder" of the remaindermen. The deed effectively gives the remaindermen the property in the present time, and the owner retains a "life estate"—the right to remain living there until death.
"Joinder" means that these individuals are parties to any mortgage or sale.
The deed must nonetheless be prepared, signed, and recorded in the county land records office just like any other deed. A property transferred by either of these deeds would require probate if the remainder beneficiaries should predecease the life tenant.
|Life Estate Deed||Enhanced Life Estate Deed|
|Owner can continue living there.||Owner can continue living there.|
|Owner cannot sell or mortgage the property without permission of the beneficiaries.||Owner can sell or mortgage the property without the consent of the beneficiaries.|
Consider asking an estate planning attorney to draft the deed if you're considering using one as part of your estate plan. You might inadvertently create a standard life estate deed instead of an enhanced life estate deed if you make a mistake and if you live in a state that recognizes both.
Life Estate vs. Transfer-on-Death Deeds
You might want to consult with an attorney to consider another estate-planning mechanism if you don't live in one of the five states that recognize Lady Bird deeds. Transfer-on-death deeds function in a manner similar to an enhanced life estate deed in that they don't take effect and transfer property to beneficiaries until after death, but the language in the deed must specifically state this.
The property doesn't require probate and it doesn't become part of the decedent's probate estate because a mechanism—the deed—is already in place to transfer ownership from the deceased owner to one or more living beneficiaries. More than half of all states recognize transfer-on-death deeds in their statutes as of 2020:
- District of Columbia
- New Mexico
- North Dakota
- South Dakota
- West Virginia
|Enhanced Life Estate Deed||Transfer-on-Death Deed|
|Recognized in five states||Recognized in 27 states|
|Transfers property after death and avoids probate||Transfers property after death and avoids probate|
|Owner retains control while alive||Owner retains control while alive|
|Not subject to Medicaid "look back" rules||Property can be seized at death to repay Medicaid|
You can revoke a transfer-on-death deed to transfer the property back. A conventional deed would require that a new deed be created to supersede the first one.
The Effect on Medicaid
The government imposes a five-year "look back" period on Medicaid eligibility if a time should come when you require long-term care and you therefore apply for benefits. This means that you can't transfer ownership of assets within five years of making the application in an effort to "spend down" your assets in order to become eligible for Medicaid assistance.
Medicaid requires that you use your own assets to pay for care first before you can become eligible for benefits. It's not uncommon for homeowners to attempt to transfer their property to their children to avoid this, thus the "look back" rule.
The extent of Medicaid eligibility depends on the value of assets you own at the time you apply. Less is more, and many people erroneously believe they can simply give property away before applying, but assets given away during this 5-year time period can be "pulled back" into the value of your estate for qualifying purposes.
An enhanced life estate deed technically doesn't count as a transfer because you retain control over the property—that control doesn't transfer until your death. This isn't generally the case with transfer-on-death deeds, but it can depend on state law.
Your home might still be considered available to pay back your Medicaid benefits after death, however. Federal law mandates that all states have an "estate recovery program" in place to recoup benefits, but some will only take from probate estates. Your property would be spared in this case if you transfer it by Lady Bird deed. Otherwise, your remainder beneficiaries might be forced to sell the home.
Do I Need to Pay an Estate Tax?
A home transferred via a Lady Bird deed contributes to the value of the homeowner's estate for estate tax purposes. The property is considered to be an inheritance granted to your remainder beneficiaries, but only estates with values in excess of $11.58 million are subject to the federal estate tax as of the 2020 tax year.
Several states also have estate taxes, however, and some of their exemption thresholds are much lower.
You won't incur a gift tax for transferring property this way because you're granting the home at your death, not during your lifetime.
Your beneficiaries will receive a "stepped up" basis for purposes of any capital gains tax that might come due if they sell the real estate. Their basis in the property is its value at the time of your death, not its value at the time you originally acquired it, which would be the case if it were transferred to them during your lifetime. This can make a considerable difference.
- An enhanced life estate deed transfers ownership of property after the owner’s death without the necessity for probate.
- Unlike standard life estate deeds, the owner retains control of the property after the deed is in place and during the owner’s lifetime.
- Enhanced life estate deeds are recognized by only five states as of 2020.
- An enhanced life estate deed isn’t considered a transfer of property that would be subject to Medicaid's five-year look-back period because the property is still in the owner’s control.
American Council on Aging. "How Lady Bird Deeds Protect a Medicaid Recipient’s Home for Their Loved Ones." Accessed Sept. 3, 2020.
Michigan Bar Journal. "Ladybird Deeds," Pages 30-31. Accessed Sept. 3, 2020.
The American College of Trust and Estate Counsel. "Transfer on Death Deeds Survey." Accessed Sept. 3, 2020.
U.S. Centers for Medicare & Medicaid Services. "Eligibility." Accessed Sept. 3, 2020.
U.S. Centers for Medicare & Medicaid Services. "Important Facts for State Policymakers Deficit Reduction Act," Page 1. Accessed Sept. 2, 2020.
U.S. Centers for Medicare & Medicaid Services. "Estate Recovery." Accessed Sept. 3, 2020.
IRS. "Estate Tax." Accessed Sept. 3, 2020.
U.S. Department of the Treasury. "Tax Expenditure for Exclusion of Capital Gains at Death," Page 1. Accessed Sept. 3, 2020.