Should you use a lady bird deed to move property into a community property trust?

No, you should not use a lady bird deed to move property into a community property trust in most circumstances. Property deeded into a community property trust via lady bird deed will probably not receive a full step up in basis, defeating the main purpose of the community property trust.

Lady Bird Deeds and Trusts

Lady bird deeds are an excellent estate planning tool in Florida. They are commonly used to avoid probate on real estate. The deed does not fully transfer ownership of the property until death, which means that during your life you retain complete control and autonomy over the property. In most situations this is a tremendous benefit.

Another benefit of lady bird deeds is that they can be used to transfer mortgaged property into trust without triggering the documentary stamp tax. This is a big benefit for many property owners who create living revocable trusts. More often than not, those property owners will need to move the property into trust in order to take full advantage of the probate-avoidance benefits a trust offers. However, moving the property into trust with a mortgage typically means that documentary stamp taxes will be owed. Thankfully though, the lady bird deed offers a tax loophole in this situation. But does the loophole apply to community property trusts?

Lady Bird Deeds and Community Property Trusts

The main benefit of the community property trust is the potential tax savings. Community property trusts can result in a full step-up in basis after the death of a spouse. The full step-up in basis can mean an incredible reduction capital gains tax. However, to get that tax savings, the property being taxed must be in the community property trust at the time of death.

The fact that the capital gains tax savings only applies to property inside the community property trust at the time death unfortunately means that lady bird deeds are probably not an effective way to move property into community property trusts. There is no good law on the details of how lady bird deeds operate. And because of this legal uncertainty, we cannot know for sure that properties moved into trust via lady bird deed are actually in that trust at the moment of death, as opposed to being moved into trust immediately after death. This means we do not know whether the lady bird deed would ruin the community property trust’s tax savings. Indeed, my best guess is that the lady bird deed would not result in the full step-up in basis.

Because of the legal uncertainty, I generally do not recommend that lady bird deeds be used to move property into community property trusts. The only exceptions to this rule are (1) when the documentary stamp tax savings of the lady bird deed outweigh the likely capital gains savings of the community property trust and (2) when the lady bird deed is used for a non-tax benefit that outweighs the likely tax savings of the community property trust. To determine whether you fit into either category, speak with a trust attorney.