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Lady Bird Deed, Anyone?

Lady birdMost people's most important asset is their home, and protecting it is always a priority. In your retirement, though, the threat of huge, unexpected medical bills is always present, and expenses like long-term care — which Medicare and other regular health insurance plans typically don't cover — can quickly wipe out your assets. To protect your home, some elder law attorneys recommend using what's known as a life estate deed or even better, a life estate deed with enhanced powers known as Lady Bird deed.

Motley Fool’s recent article, titled “What a Life Estate Is And How It Could Save Your Home,” tells us about life estates.

A life estate gives an individual the right to a home or other real property throughout that person's life. The life estate holder can live in the home, rent it out and keep the proceeds. The life estate holder has to pay the ordinary costs of maintaining the home, like property taxes, insurance and home repairs. When the life estate holder dies, the property goes to the holder of the remainder interest, known as the "remainderman", who automatically receives full legal title and possession of the property circumventing the probate process.

The article explains that to create a life estate, the owner of the property can execute a deed that retains a life estate interest but gives the remainder interest to another person or group. Many use a life estate to safeguard the family home from creditors, especially Medicaid. In Virginia, in order to qualify for Medicaid, you must list the home for sale after a 6 month period of exemption has elapsed (unless there is a spouse occupying the home).  Once sold, the proceeds from the sale must be 'spend-down' on long term care expenses. If the property has not sold during the Medicaid recipient's lifetime, at their death, Medicaid files a lien on the home to recoup all expenses paid. Because the gift to of the remainder interest is subject to penalty period imposed before the life estate holder will be eligible for Medicaid, it is best if you create the life estate at least five years before you need to qualify so that Medicaid's anti-transfer rules wouldn't apply.

However, life estates do present some challenges especially if the parties need to sell the home during the lifetime of the life estate holder.  Therefore, a Lady Bird deed is the preferred planning in Virginia.  With a Lady Bird deed, the life estate holder retains the power to sell the house and keep all the proceeds from the sale.  This is an important consideration if a sale must take place because without this retained power, the remainderman is paying capital gains on their ownership interest whereas the life estate holder has a $250,000 capital gains exempt on any home they occupy. You would also have the life estate holder retain the power to change the remainderman.  By retaining this right, the remainder interest is an incomplete gift and allows the inheritance to receive a full step up in basis to the fair market value of the house as of the date of the life estate holder's death. That produces a better tax result for your remainderman. 

Legal concepts like life estates can be difficult to understand. Talk to an estate planning attorney about this way to preserve a family home. A life estate may not make sense for everyone, but they can be useful in the right situations for those who understand all of the factors involved.

You can learn more about this topic as well as other strategies on our website under the tab entitled: elder law planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning.  However, proper estate planning is not a do-it-yourself project.  Why not call us for a complimentary consultation at 757-259-0707.

Reference: Motley Fool (June 8, 2015) “What a Life Estate Is And How It Could Save Your Home”

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