Key Takeaways
- An enhanced life estate deed transfers ownership of property after the owner’s death without the necessity for probate.
- The owner retains control of the property after the deed is in place and during their lifetime, unlike with standard life estate deeds.
- Enhanced life estate deeds were 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 lookback period, because the property is still in the owner’s control.
Definition and Example of an Enhanced Life Estate Deed
An enhanced life estate deed is an estate-planning instrument that transfers real estate to one or more beneficiaries during the owner’s lifetime. This avoids the need for probate at the time of the owner’s death. You might bequeath your home to your adult child in this way in your later years with the understanding that you’re not moving out. You retain the right to live there and maintain control over the property until your death.
note
An enhanced life estate deed shouldn’t be confused with a standard life estate deed. It 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 President Lyndon B. Johnson’s wife. There’s no evidence that the President ever transferred property to Lady Bird Johnson in this way.
This type of deed is recognized in five states as of 2022: Florida, Michigan, Texas, Vermont, and West Virginia.
How Does an Enhanced Life Estate Deed Work?
The initial owner of the real estate, referred to as the “life tenant,” retains control over the property during their lifetime. The life tenant retains the right to mortgage or sell the real estate without the consent of their beneficiaries or the remaindermen named in the deed. 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 cannot mortgage or sell the home without the permission and “joiner” of their remaindermen. This type of deed effectively gives the remaindermen the property in the present time. The owner merely 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 still be prepared, signed, and recorded in the county land records office just like any other deed. A property that’s transferred by either of these deeds would require probate if the remainder beneficiaries should die before 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 thinking about using one as part of your estate plan. You might accidentally create a standard life estate deed instead of an enhanced life estate deed if you make a mistake and if you happen to 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 enhanced life estate deeds. 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. 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 recognized transfer-on-death deeds in their statutes as of 2020:
- Alaska
- Arizona
- Arkansas
- California
- Colorado
- District of Columbia
- hawaii
- Illinois
- Indiana
- Kansas
- Maine
- Minnesota
- Mississippi
- Missouri
- Mountain
- Nebraska
- Snowfall
- new Mexico
- North Dakota
- Ohio
- Oklahoma
- Oregon
- South Dakota
- Texas
- Utah
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
| 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 “lookback” 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 “lookback” period on Medicaid eligibility if a time should come when you require long-term care and you apply for these benefits. This means that you can’t transfer ownership of assets within five years of making the application. Some people have done this in an effort to “spend down” their assets in order to become eligible for Medicaid assistance, which is needs-based.
note
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 “lookback” rule.
The extent of your Medicaid eligibility depends on the value of assets you own at the time you apply. Less is more. Many people believe that they can simply give property away before applying, but that isn’t the case. 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. 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 depends 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 recover benefits, but some states will only take from probate estates. Your property would be spared in this case if you were to transfer it by Lady Bird deed. Otherwise, your remainder beneficiaries might be forced to sell the home.
Do I Need to Pay 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. Only estates with values ​​in excess of $12.06 million are subject to the federal estate tax as of the 2022 tax year.
note
You won’t incur gift tax for transferring property this way, because you’re granting the home at your death, not during your lifetime.
Several states also have estate taxes, however. Some of their exemption thresholds are much lower.
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 after your death. Their basis in the property is its value at the time of your death, not its value at the time you originally acquired it, as would be the case if it were transferred to them during your lifetime. This can make a considerable tax difference.
Thanks for your feedback!
