If the only major asset of an estate is real estate, there are a few states (Florida, Michigan, West Virginia, Texas, and Vermont) that allow the use of a special type of deed to transfer property at death with no probate court involvement or permission. This so-called “ladybird deed,” also known as an enhanced life estate deed, allows a person (the grantor) to transfer the property to others (grantees) at the grantor’s death while retaining the owner’s ability to sell, mortgage, or gift the property during his or her lifetime without the signatures or permission of the grantees. At the death of the grantor, the property automatically becomes the property of the named heirs on the deed. Should the grantor decide to dispose of the property, mortgage it, or give it to someone else, he or she does not need the permission of the grantees to do so, since they have only a revocable contingent interest in the property.
This deed also has advantageous tax benefits. Since the gift to the grantees is a contingent gift, it is not complete until the grantor dies and the deed is still in effect. So, the tax basis for purposes of determining federal capital gains tax is the value as of the date of death, not the value at the time of the deed. That means there is no gain if the heirs sell right away.
A more modern type of deed that is used to avoid probate is called the transfer on death (TOD) deed. At last count, twenty-four states recognize this type of transfer. The TOD deed is very similar to the ladybird deed in that the grantor retains control of the property during his lifetime and can revoke the deed and mortgage, sell, or transfer the property. However, in most states that recognize the TOD, it has to be registered or filed with the recorder of deeds before the grantor’s death, unlike the ladybird deed, which can be filed either before or after death, depending upon state law.
Using one of these types of deeds allows for immediate transfer of the real estate to the named heirs merely by filing the grantor’s death certificate with the register of deeds where the property is located.
In states that do not allow a ladybird deed or a TOD, a deed can still be made in which the grantor retains the right to possession of the property during their lifetime with the title transferring automatically to the remaindermen at death. However, the grantor cannot sell, gift, or mortgage the property without the permission of the co-owners (and their spouses in most cases). While the interests of the remaindermen cannot be changed, the deed can be written in such a way that if a remainderman dies before the grantor, the share of that remainderman lapses and goes to the other remaindermen, if any, and if none, back to the grantor.
