Tax Implications of the Florida Lady Bird Deed

I love the Florida Lady Bird Deed (otherwise known as an “Enhanced Life Estate Deed” or a “Lady Bird Trust”). It is an incredible estate planning tool, and when used properly it can provide a number of benefits to my clients. But what are the tax implications of using the deed? Will using the lady bird deed save on taxes?

The lady bird deed results in no gift tax, no documentary stamp tax, and it preserves your step-up in basis to eliminate capital gain tax. However, it does not protect against the estate tax.

Gift Tax

Because a lady bird deed does not constitute a completed gift, using a lady bird deed does not result in any gift taxes.

Normally, if you were to give real estate to another person, you would be required to fill out a gift tax return. This is because giving anyone more than the annual exclusion in a year ($16,000 in 2022) results in the need to file a gift tax return. That does not mean you will pay gift taxes, but it does mean that your lifetime gift tax exemption amount will be reduced. And if you are all out of gift tax exemption, then you will need to pay a gift tax.

However, the gift tax only applies when there is a completed gift. The keyword here is “completed.” Lady bird deeds are special because they allow you to take back the transaction and deed the property to someone else. This means that lady bird deeds do not create completed gifts and thus do not result in any gift tax consequences.

Capital Gains Tax

If you do not sell the property until you pass away, the lady bird deed preserves your step-up in basis, eliminating all capital gains on the property up to the day of your death.

When you pass away, all capital assets in your taxable estate are given a new tax basis equal to the fair market value of the asset on the day of your death. The difference between an asset’s fair market value and an asset’s tax basis is how we calculate capital gain. Thus, by making those two numbers equal, the capital gain on all assets in your taxable estate is eliminated at death.

The key here is that this beneficial step-up in basis only applies to assets in your taxable estate. You might think that a lady bird deed removes your property from the taxable estate because the deed transfer is automatic upon your death. But this is not the case! Lady bird deeds have no impact on your taxable estate, meaning you can get the full step-up in basis at death. Simply put, if you use a lady bird deed, all capital gains on the deeded property are eliminated on the day you die.

Documentary Stamp Tax

Lady bird deeds do not result in any documentary stamp taxes when you execute the deed.

In Florida, you are required to pay documentary stamp taxes on the transfer of real estate for any consideration, including the amount of any mortgage on the property. However, because the lady bird deed does not create any present transfer of an interest, it creates no documentary stamp tax obligation (except for the minimum 70 cent obligation due on every transaction) until after you pass away. This is a huge benefit to using lady bird deeds, especially when transferring a property with a mortgage into trust.

Homestead Exemption

You can still qualify for the Florida homestead tax exemption after using a Florida lady bird deed. Nothing about the deed disqualifies you. However, you may want to doublecheck after using the deed to make sure you do not need to reapply for it.

Estate Tax

The lady bird deed does not avoid any estate taxes. However, for most people, this is not a concern and use of the deed will not actually result in any estate taxes paid.

As discussed above, the use of a lady bird deed keeps the property in your taxable estate. This is a good thing when it comes to the step-up in basis, as it eliminates all capital gains up to the day of your death. However, it also means that your property counts for estate taxes.

This might seem like awful news at first glance. What’s the point of saving on capital gains if it just results in a different tax being assessed? However, for the overwhelming majority of people, no estate taxes will be due even with the property in your estate. At the time that this article is being written, the estate tax exemption is over $11 million. This means that you would have to use up over $11 million combined between taxable gifts and assets left in your taxable estate before a single penny was paid in estate taxes. Most people never even come close. So, technically the lady bird deed can result in estate taxes, but in reality it rarely does.