Ladybird Deeds, Wills, and Step-Up in Basis: Clearing Up the Confusion
Attorney Brenton Begley
Recently, a client reached out with a question that many people have when comparing estate planning tools. He wrote:
“About two years ago you helped me establish a Lady Bird Deed for my property. I have recommended your firm to several people who showed interest in this type of estate planning.
Recently I was explaining to a friend the advantages of this type of deed, including the stepped-up cost basis for the beneficiaries. She indicated that her lawyer had told her that a Will accomplishes the same step-up advantage as well. Is this true?
Also, she pointed to an article posted by The Trusts and Estates Law Group here in Raleigh that states the following about a Lady Bird Deed:
‘If the property is sold after your death, your beneficiaries may face higher capital gains taxes if the property’s value has increased significantly.’Can you reconcile this for me?”
Here’s Attorney Brenton Begley’s response:
Good to hear from you again.
The author of that article doesn’t seem to explain his assertion, so it’s hard to guess his reasoning for that conclusion. However, let me break this down to assure you of my position.
These concepts are rooted in IRC §§ 1014 and 2036, which discuss basis and taxable estates.
Step-Up In General
Any asset that is included in the taxable gross estate of the decedent receives a step up in basis. This means that if the Decedent is considered to have owned the property at death, the person who inherits it does so with a step-up in the tax basis in the property, equal to the fair market value at the date of death. If the Decedent didn’t give it away during their life, they still own it, and it’s included in the gross estate.
Basically, if it’s includable in the taxable gross estate, then it gets a step-up.
The logic looks like this visually:
If Decedent is considered to have Owned it at death —> It’s included in Decedent’s gross estate.
If included in Decedent’s gross estate —-> then it receives a step up in basis when inherited.
Life Interests vis a vis Step-Up
A Ladybird Deed is a life estate deed, wherein the Grantor (property owner) retains a life interest, coupled with the right to sell and retain the proceeds from the property i.e., a life estate deed where the Grantor still entirely owns the property but designates a beneficiary.
The fact that a life estate receives a step up is well settled. Treasury Regulation § 20.2036-1 specifies that a life estate retained is included in the gross estate of the Grantor. Therefore, an inheritance that is conveyed by virtue of a deed wherein a life estate is retained, including Ladybird Deeds, receives a step-up.
Arguably, a Ladybird Deed would be more likely to be considered to receive a step up than a traditional life estate. In a traditional life estate, the Grantor retains only a life interest and not the right to sell the property or control it. With a Ladybird Deed, the owner is considered to not have given any portion of the property away. Remember, the more you own, the more likely it’s considered to be included in the gross estate, and therefore more likely to receive a step-up.
The Will vis a vis Step-Up
The will passes any property owned by the decedent at death to their heirs. You can, by now, probably guess that means it’s included in the gross estate, and therefore receives a step-up, just like the Ladybird Deed.
The difference is the will passes assets through probate, which serves as a significant risk to your assets. NC is a limited recovery state, meaning probate is the opportunity for creditors to come after the estate.
Start or Update Your Plan with McIntyre Elder Law
While both a Will and a Ladybird Deed can provide the step-up in basis advantage, the key distinction is in asset protection and probate avoidance. A Ladybird Deed not only maintains the step-up benefit but also keeps property out of probate—helping shield it from creditor claims and streamlining the transfer to beneficiaries. For many North Carolina property owners, that added layer of protection makes the Ladybird Deed a powerful estate planning tool.
Schedule your free consultation today and let our experienced North Carolina elder law attorneys give you the peace of mind you deserve.
📍 Offices in Shelby, Charlotte, and Hendersonville
📞 Call us at 1-888-999-6600
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Don’t wait until it’s too late—take control of your future today!
Attorney Brenton Begley
Estate Planning & Elder Law Attorney
Chief Legal Officer, McIntyre Elder Law
Shelby, NC
