How Do Lady Bird Deeds Impact Taxes?

millman law group lady bird deeds impact taxes

Learn more about how lady bird deeds impact taxes for your heirs.

Lady Bird Deeds are enhanced life estate deeds designed to make property transfer easier in a few states, including Florida. Lady Bird Deeds permit the grantor to live on their property until their death, at which point the property is immediately transferred to their beneficiary. Lady Bird Deeds impact taxes and probate, both of which are parts of the estate administration process many individuals dread. Your Millman Law Group attorney can help you understand how Lady Bird Deeds can help beneficiaries benefit from a stepped-up tax basis, possible income tax savings, and continued homestead exemption benefits. Keep reading to learn more and determine whether this estate planning tool is right for you.

The Homestead Exemption and Lady Bird Deeds

In Florida, the homestead exemption provides property tax reductions and creditor protection for primary residences that qualify. When a property is transferred with a Lady Bird Deed, the owner keeps the homestead exemption benefits during their life. As long as the home remains their primary residence, the owner can continue to enjoy reduced property taxes and protection from creditors. 

However, you must also consider the implications for the homestead exemption after the property owner’s death. If the individuals who inherit the property through the Lady Bird Deed do not themselves qualify for the homestead exemption, the property may lose some or all of those benefits. This might result in higher property taxes and potential exposure to creditors. 

Income Taxes and Lady Bird Deeds

When you inherit a property through a Lady Bird Deed in Florida, you generally do not trigger income tax liabilities as the beneficiary. This is because the inherited property is not considered taxable income on the federal level. However, note that any income generated from the property after the transfer (e.g., rental income) will be subject to income taxes. 

Lady Bird Deeds and Capital Gains Taxes

When a property is inherited by a Lady Bird Deed, the beneficiaries receive a stepped-up tax basis. What does this mean? It means the property’s value for capital gains tax purposes is modified to its fair market value at the time of the owner’s death. Therefore, if the beneficiaries choose to sell the home, they would only be liable for capital gains tax on the value appreciation that occurs after the property owner dies. This stepped-up tax basis will potentially result in significant tax savings for the property beneficiary. 

It is always best to consult with a trustworthy estate planning attorney and tax advisor to make sure you understand how Lady Bird Deeds impact taxes. Every person’s circumstances are unique, so professional guidance is best to ensure proper planning and optimization of your tax benefits. 

Estate Planning Made Easy With Millman Law Group

Millman Law Group, PLLC is rare because it’s one of the only law firms that offer life planning in South Florida. From life care planning to the preparation of detailed estate plans, Millman Law Group has committed to serving Floridian elderly communities in Boca Raton, Palm Beach County, Ocean Ridge, Hillsboro Beach, and many other areas since 2018. Our dedicated team also specializes in special needs Trusts and catering to any age demographic because we know for certain it’s never too early to start preparing you and your family for your future. For the latest news in estate planning and elder care law, follow us on Facebook, Twitter, Linked In, and Pinterest. You can also contact us at 561-463-6480.