What Is an Enhanced Life Estate Deed?
Avoid probate with an enhanced life estate deed in these three states
An enhanced life estate deed is a special type of deed recognized by common law in five states: Florida, Michigan, Texas, Vermont, and West Virginia. Also sometimes called "Lady Bird" deeds, they can be used to transfer ownership of real estate outside of probate to beneficiaries named in the deed.
The Florida lawyer who created the enhanced life estate deed arbitrarily named it after President Johnson's wife. There's no evidence that the President ever transferred property to Lady Bird Johnson in this way.
"Regular" Life Estate Deeds
A life estate deed effectively gives property away—and unilateral control of that property—during the owner's lifetime. The owner of the real estate makes a gift of the home to beneficiaries who are called remaindermen or remainder beneficiaries.
The owner can't mortgage or sell the home without the permission and "joinder" of the remaindermen. Joinder means that they're parties to the mortgage or sale. The deed effectively gives them the property in the present time, but the owner retains that "life estate"—the right to remain living there until death.
"Enhanced" Life Estate Deeds
The owner of the real estate, referred to as the "life tenant," retains complete control over the property while alive with an "enhanced" life estate. The life tenant has the right to mortgage or sell the real estate without the consent of his beneficiaries or the remaindermen named in the deed because he hasn't actually given the home to them yet. The real estate doesn't actually transfer until his death.
The deed must nonetheless be prepared, signed, and recorded in the county land records office just like any other deed.
Enhanced Life Estate Deeds and Medicaid
Lady Bird deeds avoid probate because the property is passing directly to beneficiaries by operation of law, but there's more to them than that. They can be helpful when Medicaid is an issue as well.
The government imposes a five-year "look back" period on Medicaid eligibility if a time should come when you require long-term care and 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 so Medicaid will pay more.
Medicaid basically 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 five-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 always the case with beneficiary 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.
Speak with a local attorney to find out where you stand according to the rules in your particular state.
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 $11.4 million are subject to the federal estate tax as of 2019.
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.
Beneficiary or "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.
Beneficiary and transfer-on-death deeds function in a manner very similar to an enhanced life estate deed in that they don't take effect and transfer property to beneficiaries until after death. The language in the deed must specifically state this, however.
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.
A property transferred by any of these deeds would require probate if your remainder beneficiaries should predecease you.
More than half of all states recognize beneficiary deeds or transfer-on-death deeds in their statutes as of 2019. They are:
- California (as of January 2016)
- District of Columbia
- New Mexico
- North Dakota
- South Dakota
- West Virginia
You can revoke a transfer-on-death deed, unlike a regular deed which would require a new deed to supersede the first one and transfer the property back again.
Consider asking an estate planning attorney to draft the deed if you're considering using any type of deed as part of your estate plan. You might inadvertently create a "regular" life estate deed instead of an "enhanced" life estate deed if you make a mistake and you live in a state that recognizes both.
NOTE: State laws change frequently and this information may not reflect the most recent changes in the laws. For current legal advice, please consult with an attorney. The information contained in this article is not legal advice and is not a substitute for legal advice.