The Ladybird deed has recently received a lot of spotlight by brokers and other real estate professionals as a way to acquire title to property. But is the Ladybird deed all that it is cut out to be? While the Ladybird is a possible option to acquire title to property, there are some serious disadvantages that real estate owners need to be mindful of. This article will bring your attention to the major disadvantages of the popular Ladybird deed and shed greater light to the serious legal and tax ramifications that are hidden behind it’s seeming popularity.
Let’s start from the beginning, what is a Ladybird deed? A ladybird deed, also known as an enhanced life estate deed, is a type of deed that is designed to allow property owners to transfer their property to another person upon their death without the need for probate. While this may seem like an attractive option, consider the following questions before using this type of ownership:
1. Do you want the grantor to be able to sell and mortgage the property without the beneficiary’s consent?
One of the disadvantages of a ladybird deed is that it limits the beneficiary’s right to the property during the grantor’s life. In a regular life estate deed, the grantor holds the property during their life and if they decide to sell the property, both the grantor and the beneficiaries would have to agree to the sale. This is not the case with a ladybird deed. With a ladybird deed, the grantor can decide to revoke the deed or sell and mortgage the property without the beneficiary’s consent during the grantor’s lifetime. This can a problem for the beneficiary if they are relying on that property post the grantor’s passing.
2. Do you want creditors of your beneficiaries coming after your property?
In a Lady Bird Deed, the grantor retains the right to use and control the property during their lifetime, and the property automatically transfers to the named beneficiary upon the grantor’s death. Since the beneficiary does not own the property until the grantor’s death, creditors of the beneficiary generally cannot place a lien on the property during the grantor’s lifetime. However, be warned, after the grantor’s death, if the beneficiary owes debts or has creditors seeking payment, the property could be subject to claims and liens.
3. Do I want to pay unnecessary taxes?
There are tax implications associated with using a ladybird deed. If the property is sold after the owner’s death, the beneficiary may be subject to capital gains taxes on the difference between the sale price and the value of the property at the time of the owner’s death. Additionally, the transfer of property through a ladybird deed may trigger gift tax or estate tax liability, which can be complex and costly to navigate.
If the property were to be sold during the lifetime of the Grantor, the Grantor would not get the full income tax exemption available upon the sale of a personal residence that would otherwise have been available to them if they were the sole owners of the real estate. If you believe a sale of the property is very likely or imminent in the next year or so you probably should not consider a transfer of your real estate to a Ladybird deed as part of your Estate plan at this time.
As you may see, while a ladybird deed may seem like an attractive option for transferring property, it is important to consider the potential disadvantages. For this reason, it is always a good idea to consult with an experienced tax and estate planning attorney who can help assess your situation and recommend the best course of action for your specific needs and circumstances.
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