Reed: Pros of Lady Bird and Transfer on Death deeds

What is a Lady Bird Deed?

In a Lady Bird Deed (LDB) — often referred to as an enhanced life estate deed — the owner transfers a property to another person while retaining a right to control the property, including the right to sell the property, during the owner’s life.

What is a Transfer on Death Deed?

In a Transfer on Death Deed (TODD), the owner retains control over the property during his or her lifetime while transferring the property to someone else upon death.

What are the Reasons to Use these Deeds?

LBDs and TODDs are used for various, and often simultaneous, reasons. Both deeds transfer the property without having to put it through probate. Since the property will not go into the decedent’s estate, they prevent reimbursement for Medicaid payments advanced on behalf of the transferring person who received Medicaid benefits. Although property transferred into a trust doesn’t go through probate, LBDs and TODDs are less expensive than trusts.

If a homestead is placed in a trust, it is converted from a non-countable asset to a countable one for purposes of qualifying for Medicaid. When a homestead is placed in a trust, Medicaid deems the transfer one made to reduce asset that could have been used to pay for care.

Therefore, the transfer is subject to the five-year “look back” period which will delay qualification for benefits.

What are the Tax Advantages of a LBD and a TODD?

• Homestead Exemptions are Preserved

Homestead exemptions and others for those 65 or disabled are preserved with both LBDs and TODDs.

• Stepped-Up Basis is Retained

Since the owner retains control of the property during lifetime, the IRS considers the transfer is not complete until the transferor dies, so the stepped-up basis, which reduces capital gains tax is retained.

• Appreciation Exemption Remains Intact

Both LBDs and TODDs permit the sale of the property before death. If the transferor lived in the property for two years of the past 5 years prior to the sale, the individual owner pays  no capital gains tax up to $250,000 of profit and the married owner pays no capital gains tax up to $500,000 of profit.

• No Gift Tax Applies

Because the transferor retains control of the property during his or her lifetime, the IRS

doesn’t consider it a gift, so no gift tax will be due on the transfer.

Sandra W. Reed practices Elder Law in Somervell County, handling probating of estates, drafting of wills, trusts, powers of attorney and deeds as well as estate and Medicaid planning.  She lives on beautiful Chalk Mountain and can be reached at 254.797.0211; 817.946.2809 or at sreed@kbzlaw.com.