Sooner or later, the majority of property passes into someone else’s hands, but how and when that happens can vary greatly. In this article, you’ll learn about choosing a lady bird deed vs. revocable trust options and get more information to help you decide which of these processes makes the most sense for your situation.
Lady Bird Deeds
Here are the basic things to know about lady bird deeds.
What Is A Lady Bird Deed?
A lady bird deed (which is also known as a ladybird deed or, more formally, as an enhanced life estate deed) is a particular type of deed that can avoid probate at death.
Probate is a process of dealing with a deceased person’s estate, generally involving organizing the assets, money, and possessions of the departed and then distributing them to the appropriate recipients after paying any final taxes, debts, and so on.
Probate can take anywhere from several months to several years, depending on the state. This can be problematic when active management or ownership of assets is essential for some purpose, such as a limited-time opportunity to sell or invest those assets.
By skipping the probate process, lady bird deeds make it easier to avoid problems from drawn-out probate processes. Further, lady bird deeds still allow maintaining control of the estate during life.
Together, these factors make lady bird deeds a popular estate planning technique.
Incidentally, the name comes from President Lyndon B. Johnson’s actions, who used this deed on behalf of his wife, Lady Bird Johnson. The nickname is ubiquitous, but it is technically an enhanced life estate deed.
Benefits of a Lady Bird Deed
There are several significant benefits to using a lady bird deed.
First, the original owner (known as the “life tenant”) has enhanced ownership, which means they can change their mind at any point without involving any of the beneficiaries. This means that, for example, children cannot stop their parents from giving an inheritance to someone the parent thinks is more deserving.
Second, it skips the probate process. We discussed this above, but ignoring the probate process has many benefits for time-sensitive situations. It’s not necessary for all estates, especially those with complicated tax obligations, but it’s certainly appealing on those grounds.
Third, lady bird deeds are more affordable than trusts. This makes them much more appealing for people with fewer assets, although the difference isn’t enough to be genuinely significant for large estates.
Limitations of a Lady Bird Deed
Despite their positive sides, there are some limits on lady bird deeds.
First, they aren’t allowed in most areas. Currently, only five states allow lady bird deeds: Florida, Michigan, Texas, Vermont, and West Virginia. Florida has the benefit of being a popular retiree state, but this limit on availability means that lady bird deeds aren’t an option in many areas.
(One somewhat-similar alternative is known as a transfer on death or a beneficiary deed, but this sort of deed has some important legal distinctions that are beyond the scope of this article.)
Second, banks and title companies may not understand them. This is especially common in places where lady bird deeds aren’t used, which is most of the country. Such organizations may require that you join in something like a conveyance or a mortgage to receive a title, rather than accepting the lady bird deed as written.
Third, there can be issues with creditors. Usually, creditors must step forward during the probate process to make a claim. However, they can attach a lien even without probate, which can be awkward if they cannot clear the debt immediately.
Fourth, lady bird deeds may conflict with other regulations. For example, spouses or minor children may have rights, and this generally supersedes a deed. For more information on this topic, you’ll need to consult a qualified attorney.
Fifth, lady bird deeds have a hard time dealing with unexpected circumstances. For example, if a recipient dies before the life tenant, processing the deed may become difficult.
In short, despite their use and popularity in regions where allowed, there are some drawbacks of lady bird deeds that you should keep in mind before deciding to use one.
Revocable Trusts
Here are the basics of revocable trusts.
What Is A Revocable Trust?
A revocable trust is a form of estate planning that helps manage assets while the original owner (called the “grantor”) lives. A person or company known as the trustee typically oversees the trust. They are responsible for managing the trust as long as the grantor permits.
This type of trust is known as a revocable trust because the grantor can change until their death. Upon their passing, the estate transfers and becomes an irrevocable trust, which means it’s no longer subject to ordinary changes. In general, assets in irrevocable trusts cannot be changed by any person, for any reason, short of special court orders.
Revocable trusts are similar to lady bird deeds in that they both offer significant amounts of control while the original owner is still alive. However, as third parties usually manage revocable trusts, owners tend to exert less direct control over the assets.
Furthermore, revocable trusts are not considered replacements for wills. While they also allow for avoiding probate, individuals with revocable trusts should still have wills to cover other matters.
Benefits of a Revocable Trust
Revocable trusts have several notable advantages.
First, revocable trusts have a lot of flexibility in dispensing assets. For example, if the trust has $500,000 when the original owner creates it, they can decree that it can only dispense $12,000 each year to its recipient, divided into twelve monthly payments. This can help prevent the beneficiaries from spending it unwisely.
Second, they provide protection from conservatorships. Suppose you’re concerned about being taken to court for control of yourself or your finances. In that case, revocable trusts are a powerful defense because the assets are already in the hands of a separate, qualified trustee.
Revocable trusts are also private, which means the details aren’t shared with the public, and all of the assets can be distributed in private without needing to tell other people what you owned.
Revocable trusts also transfer quickly, just like functioning lady bird deeds, which means the beneficiary can typically use the assets to pay any estate taxes, debts, administrative costs, or other expenses that may apply when dealing with the estate.
Limitations of a Revocable Trust
Just like lady bird deeds, there are some drawbacks to using a revocable trust.
First, there are no tax benefits. They do not shelter assets from taxes, and worse, improper planning can create adverse tax consequences for the beneficiaries. This is why it’s always essential to have an expert’s help when setting up a revocable trust.
Second, you can’t place all types of assets into revocable trusts. This is especially important because individual retirement accounts must be owned by individuals and can’t be placed in trusts this way. That’s how many people store a lot of their money, and taking it out early to put in a trust could have additional tax consequences.
Third, you must retitle any assets that go in. This mainly applies to assets with titles, but if you don’t, they automatically fall outside of the trust and must go through a separate process before they can be handed over.
Finally, heirs can contest trusts much longer. States have varying lengths for how long people can contest regular wills. For example, Washington state permits four months where people can file objections after probate opens.
States may give people as many as five years to contest a trust, though, and that can involve some aggressive legal maneuvering by different parties. People who want to prevent such contests may not get that after putting assets in a revocable trust.
There are no universally-appropriate methods of distributing assets while avoiding probate. All options have positive and negative aspects, which can range from mildly inconvenient to seriously problematic. This is why consulting a qualified estate planner is useful.
Further Information
Here is some further information on lady bird deeds and revocable trusts.
What States allow Lady Bird Deeds?
Lady bird deeds are only allowed in Florida, Michigan, Texas, Vermont, and West Virginia. This means that other states may not recognize the terms of a lady bird deed, even if the original owner dies in one of the five states listed above.
For example, let’s say that the original owner lived and died in Texas but owned property in Montana. Even if they filed a lady bird deed properly in Texas, Montana might refuse to recognize the deed and insist that the property goes through probate instead.
What States allow Revocable Trusts?
You can establish a trust in any state, which is one of the key features that makes them better than lady bird deeds. That said, while all states recognize trusts, the exact details differ between them.
It’s also possible to move a trust from one state to another for various reasons, but this usually requires hiring a specialized attorney who can file the correct paperwork. Any errors in this process could invalidate the trust and prevent it from working or at least leave it more open to challenges.
Can a Lady Bird Deed be Contested?
People can contest any will or deed. Whether the contest will be successful depends on a host of factors.
Generally, if the lady bird deed is filed correctly at all stages, it is challenging for anyone contesting it to get a successful resolution. However, if there’s a problem in the process, any contest becomes far more likely to succeed. This is why it’s crucial to have a qualified attorney help prepare any will, trust, deed, or estate plan.
As an example, if someone can demonstrate that the lady bird trust was created while the original owner was not in their right mind, a court might well throw it out. You typically cannot enter into any deed unless you are of sound mind, although proving you weren’t can be challenging on its own merits.
Can a Revocable Trust be Contested?
Yes. Just like lady bird deeds, people can contest revocable trusts in court. This can generally occur for the same reasons that someone can contest a will, such as lack of testamentary capacity, undue influence, or a general failure to follow the process’s formalities.
Keep in mind that people can challenge part of a trust, will, or deed without challenging the entire thing.
How do Courts tend to rule if Deeds or Trusts are Contested?
Courts typically try to honor the departed’s written intentions unless they have reason to believe there was a problematic element in the process.
For example, courts often rule trusts invalid if they have an unlawful purpose or something that goes against public policy. A trust with a limit on the freedom to marry or follow a particular religion is unlikely to stand up in court.
Medical documents are extremely useful for demonstrating that the creator of a trust or deed was in their right mind when they wrote it. This is why getting a psychiatric evaluation when creating the deed is beneficial, even if you don’t think you have any problems with your mind.
Remember, courts will often assume that challenges occur because somebody wanted to inherit more and are unhappy with the actual terms of a trust or deed. They may take it more seriously if a beneficiary isn’t asking for more but is showing another issue with the process.
Does a Lady Bird override a Will?
Yes, as long as the original owner of the will does not reclaim ownership while living. If that happens, the entire lady bird deed is canceled, at which point its provisions become irrelevant for all practical purposes.
Similarly, as with most things involving estates, the lady bird deed needs to be written and signed properly. If there are any mistakes in the process, the lady bird deed could be challenged and found as invalid, in which case things normally revert to probate, and any terms in the will take precedence.
Tax Implications of a Lady Bird Deed
Lady bird deeds are extremely tax-friendly, which is one reason they’re popular in states that allow them.
Notably, lady bird deeds do not subject you to a gift tax when you make them because the title does not transfer in your lifetime. This means you do not owe any such taxes on anything in the lady bird deed until you pass, at which point any property receives a fair market value, and taxes may be applied.
Similarly, beneficiaries do not have any tax obligations while you are alive. This is because the beneficiary has not actually received any gifts or property while the original owner is still alive, and it follows that they can’t owe taxes on anything they haven’t received.
Property is included in the deceased owner’s estate for tax purposes upon death, even though the ownership otherwise transfers immediately. This can generally reduce tax burdens, especially income tax from selling the property.
Does a lady bird deed have to be recorded?
A lady bird deed must be recorded at some point to be valid. Laws can vary by jurisdiction, so it doesn’t necessarily need to be recorded before you die.
However, there is basically no downside to recording it as soon as possible, whereas failure to do so could have a host of unintended consequences.
For example, an unrecorded deed could be lost or misplaced. It could even be destroyed, unintentionally or otherwise, in which case nobody will be able to enforce it.
In short, while you can leave a lady bird deed unrecorded, it’s better to record it as soon as possible and change it later if needed. Otherwise, it may never be in a state where it does what it’s supposed to do, and that defeats the purpose.
Related: Buying Property in Mexico as a U.S. Citizen
How Does a Lady Bird Deed Differ from a Revocable Trust?
This is probably the most important part of the lady bird deed vs. revocable trust debate. Both have their benefits and uses, but on the whole, I think revocable trusts are a little better. Here’s the difference.
Lady bird deeds provide distribution of real property immediately at the time of your death. As explained above, this is especially useful if any of those assets are in a place where a quick takeover is either necessary or financially useful. If the transfer doesn’t need to be urgent, a lady bird deed isn’t as valuable.
A revocable trust can apply more restrictions on distributing assets, providing additional protection for the beneficiary. This includes situations where the beneficiary is incapacitated, during divorce proceedings, or when delivering assets over time so they can’t be spent all at once.
Furthermore, revocable trusts make it easier to distribute assets to someone else if the named beneficiary is deceased. Lady bird deeds aren’t as effective at that.
Related: What is a Fideicomiso?
Final Thoughts
As you can see, lady bird deeds and revocable trusts both have value in different areas. In the lady bird deed vs. revocable trust debate, lady bird deeds are a lot tougher to pull off for complex estates, while revocable trusts have some lingering issues with challenge periods.
However, both of these options are popular ways to avoid many of the issues that can occur in probate. Ultimately, no guide on the internet can tell you what is best for your situation. If you’re still unsure which of these is best for you, consult a qualified attorney (or similarly-qualified individual) who can provide you with personalized advice and legal help.