Can the IRS attach a lien to an interest created by a lady bird deed?
The IRS probably cannot attach a lien to the remainder interest created by a lady bird deed, but it can attach a lien to the life estate interest. However, for title insurance purposes, you should act as though the IRS can put a lien on any interest created by a lady bird deed.
Lady Birds and Legal Words
The Florida lady bird deed (also called an “enhanced life estate deed”) is a means to give someone your property when you die without giving up the right to sell it to someone else while you are still alive. Very technically, the grantor of a lady bird deed reserves a life estate and grants to someone else a remainder interest in the property. However, in a lady bird deed, the grantor also reserves the right to convey the property to someone else. This means that remainder interest can be taken back.
The IRS can attach a lien for unpaid taxes to any of the taxpayer’s property or “rights to property.” [1] However, a defense to this is simply that the taxpayer has no right to the property. Thus, the question before us is whether a lady bird deed creates a right to property. If so, then the IRS can attach a lien for taxes owed. But if not, then the IRS cannot attach a lien to the interest, even when the taxes are owed.
Remainder Interest
The IRS probably cannot attach to the remainder interest created by a lady bird deed. To be clear, this is not settled law (although this is not unusual for lady bird deeds). But a review of the relevant cases leads me to believe that the IRS has no ability to attach a to a lady bird remainder interest because that interest should not be considered either property or a right to property.
Normally, the IRS can attach a lien to remainder interests created by life estate deeds. In fact, any creditor with a judgment can attach a lien to a remainder interest. [2] But lady bird deeds are not like other life estate deeds. There is a reason they are called enhanced life estate deeds. The enhancement is the ability to take the remainder interest back. That ability to take back the interest means that the lady bird remainder interest is not “a valuable, transferable, legally protected right.” [3] Thus, it seems to me that the holder of the lady bird interest has no rights in the property at all! The right is not created until the grantor dies.
But from a practical perspective, the IRS may as well have the ability to create the lien. Because this is unsettled law, title insurers will probably not be willing to insure a property when there is a tax lien on the remainder interest. And title insurance is almost certainly going to be required if you sell the property. Thus, the IRS may not technically have the ability to create the tax lien, but unless you are willing to fight the matter in court, it is better to act as if the lien does attach.
Life Estate Interest
Unlike the remainder interest, the life estate interest held by the grantor is property owned by the grantor. Thus, the IRS clearly can put a lien on a life estate interest when back taxes are owed. The remainder interest may be able to escape Uncle Sam’s grasp, but the life estate interest is firmly within the scope of the Service’s ability to levy. However, the federal lien terminates when the life estate interest terminates, meaning that the problem goes away after the taxpayer dies. [4]
References
[1] United States v. National Bank of Commerce, 472 U.S. 713, 722 (1985)
[2] Anemaet v. Martin-Senour Co., 114 So. 2d 23, 27 (Fla. 2d DCA 1959).
[3] Drye v. United States, 528 U.S. 49, 51 (1999).
[4] United States v. Swan, 467 F.3d 655 (7th Cir. 2006); Rev. Rul. 54-154, 1954-1 C.B. 277.