What Is an Enhanced Life Estate Deed?

Your beneficiaries can receive ownership of real property without going through the probate process if you use an improved life estate deed. However, you will continue to have use of the property even after it has been effectively donated during your lifetime.

Explanation of What an Enhanced Life Estate Deed Is, Along with an Example

An extended life estate deed is a document used for estate planning that distributes ownership of the real property to one or more beneficiaries during the lifetime of the property's owner. This eliminates the need for the estate to go through the probate process after the owner passes away. In your older years, you can consider using this method to leave your house to one of your grown children with the understanding that you will continue to live there. You have the ability to continue living there and exercising authority over the property until the day you pass away. It is important to note the distinction between a conventional life estate deed and an enhanced life estate deed. It has certain substantial ramifications that differ from others. The phrase "Lady Bird deed" is sometimes used to refer to an improved life estate deed. This kind of deed was invented in Florida in the 1980s by a lawyer, and he named it arbitrary after Lady Bird Johnson, who was married to President Lyndon B. Johnson. There is not a shred of evidence to suggest that President Johnson ever gave Lady Bird Johnson any property in this manner. As of the year 2022, this particular kind of deed is recognized in the following five states: Florida, Michigan, Texas, Vermont, and West Virginia.

The Enhanced Life Estate Deed: What Is It and How Does It Work?

The initial owner of the real estate, often known as the "life tenant," keeps authority over the property for as long as they live. This arrangement is common in real estate transactions. Without the permission of their beneficiaries or the remaindermen mentioned in the deed, the life tenant maintains the right to sell or mortgage the property they are occupying during their lifetime. They haven't handed over the keys to the house to them just yet. The actual transfer of the property doesn't take place until after the life tenant has passed away.

Which Is Better: a Life Estate or an Enhanced Life Estate Deed?

The ownership of a property can also be transferred prior to the owner's death using a conventional life estate deed; however, the owner is not permitted to sell or mortgage the property without the permission and "joinder" of their remaindermen. The remaindermen are practically given ownership of the property at the present moment when this sort of deed is used. A "life estate," or the right to continue living in the property until death, is all that the owner keeps after selling it. The term "joinder" indicates that these people are involved in the mortgage or sale in some capacity. However, the deed, just like any other deed, needs to be produced, signed, and then recorded at the office that maintains land records for the county. If the remainder beneficiaries pass away before the life tenant, the property that was transferred via either of these types of deeds will need to go through the probate process.

Comparing Transfer-on-Death Deeds with Life Estate

If you don't live in one of the five states that recognize Lady Bird's deeds, you might wish to discuss the possibility of using another estate-planning technique with a lawyer. Deeds that transfer ownership upon death operate in a manner that is analogous to enhanced life estate deeds. However, the language in the deed must expressly indicate this in order for the trust to go into operation and transfer property to beneficiaries after the testator has passed away. The property does not need to go through the probate process. Because there is already a mechanism, the deed, in place to transfer ownership from the owner who has passed away to one or more live beneficiaries, it does not become part of the deceased person's estate that must go through the probate process. As of the year 2020, the statutes of more than half of the nation's states acknowledged the validity of transfer-on-death deeds: Alaska Arizona Arkansas California Colorado United States: District of Columbia Hawaii Illinois Indiana Kansas Maine Minnesota Mississippi Missouri Montana Nebraska Nevada NM (New Mexico) State of North Dakota Ohio Oklahoma Oregon State of South Dakota Texas\sUtah\sVirginia Washington West Virginia Wisconsin Wyoming

The Implications for Medicaid

If there comes a time in the future when you will require long-term care, and you decide to apply for these benefits, the government will subject your eligibility for Medicaid to a "lookback" period that lasts for five years. This indicates that you won't be able to change ownership of assets for at least five years after submitting the application. This is something that some individuals have done in an effort to "spend down" their assets and therefore became eligible for the needs-based assistance that is provided by Medicaid. Before you can qualify for Medicaid services, the government mandates that you spend your own money and assets to cover the cost of your medical care. As a result of this, the "lookback" rule was created since it is not uncommon for homeowners to try to circumvent this by transferring their property to their children. When you apply for Medicaid, the value of your assets will be evaluated to determine the degree of your eligibility for the program. Less is more. Many people are under the impression that they may avoid the application process by simply giving away their property, but this is not the case. For the purposes of eligibility, it is possible to "bring back" into the worth of your estate any assets that were given away during this five-year time period. According to the legal definition, an increased life estate deed does not constitute a transfer. You will continue to hold control of the property. This control will not be transferred until after your passing. Although this is not typically the case with transfer-on-death deeds, the legislation in each state determines whether or not this is the case. After your passing, however, it is possible that your house will still be deemed an asset that can be used to repay your Medicaid benefits. Some states will only take money from estates that go through the probate process, despite the fact that federal law requires all states to have an "estate recovery scheme" in place to recoup benefits. If you were to transfer your property via a Lady Bird deed, it would be protected from loss in this scenario. In that case, the beneficiaries of your remaining could have little choice but to sell the property.

Should I Prepare for the Estate Tax?

For the purposes of calculating estate tax, the value of a residence that has been transferred using a Lady Bird deed is included in the homeowner's overall estate value. Your residual beneficiaries are entitled to think of the property as an inheritance that they have been given. As of the 2022 tax year, the federal estate tax will only apply to estates whose values are greater than $12.06 million, regardless of their total size. Because you are giving away the property after your death rather than during your lifetime, you will not be subject to any gift taxes as a result of this method of property transfer. However, there are also estate taxes in a few states. There are a few of their exemption thresholds that are significantly lower. Your beneficiaries will be eligible for a "stepped up" basis in the event that they sell the property after your passing and are subject to any capital gains tax that may become due as a result of the sale. If you were to transfer the property to them during your lifetime, their basis in the property would be the value it had at the time of your death; however, if you were to pass away, their basis in the property would be the value it held at the time of your death. This can result in a significant change to the tax burden.

Key Takeaways

Property ownership can be transferred after the owner's death through the use of an improved life estate deed, which eliminates the need for probate.
In contrast to conventional life estate deeds, reversionary life estate deeds allow the current owner to continue to exercise control over the property even after the deed has been recorded.
By the year 2020, only five states had adopted legislation to accept enhanced life estate deeds.
Because the property is still under the control of the original owner after the execution of an enhanced life estate deed, the transaction is not regarded as a transfer of property that would be subject to Medicaid's five-year lookback period.