Lady Bird Deeds

"Lady Bird" deeds offers a simple way to transfer real estate at your death, without probate.

These deeds are also called “enhanced life estate” deeds. With a standard life estate deed, you could name a beneficiary to inherit your property while you keep ownership of it for your lifetime, but with significant restrictions. You wouldn’t have the right to sell or mortgage the property, and you might also be liable to the beneficiary you named if you greatly decreased the value of the property—for example, let a house fall into serious disrepair. By contrast, an enhanced life estate deed (the Lady Bird deed), lets you:

  • Avoid probate of the property
  • Keep the right to use and profit from the property for your lifetime
  • Keep the right to sell the property at any time
  • Avoid making a gift that might be subject to federal gift tax
  • Avoid jeopardizing your eligibility for Medicaid
  • Recognized by Texas and 12 other states
  • In some states, prevent the property from being sold, after your death, to repay the cost of Medicaid benefits you received

A Lady Bird deed is a legal document that protects a family’s homestead from potential efforts of the state of Texas to recover Medicaid expenditures paid out on behalf of a loved one. Lady Bird deeds offer an alternative method for transferring real property upon the death of the owner. Any individual undergoing Medicaid planning for themselves or a loved one should consider the execution of a Lady Bird deed to protect the property from Medicaid estate recovery.

Many clients planning for long-term care fear that the State or the Texas Medicaid program will take their home if they apply for and receive Medicaid benefits. The Medicaid Estate Recovery Program (MERP) is responsible for recovering from the estate of a deceased Medicaid recipient funds expended by the Medicaid program for that recipient's benefit. While exceptions to recovery exist, many single individuals face the prospect of their home being subject to estate recovery. The good news is that under current Medicaid rules there are ways to protect the home from any estate recovery effort.

Texas does not have a statute specifically allowing for the creation of a transfer on death deed, however, Texas, along with nine other states, permit the use of Lady Bird deeds as a mechanism for transferring property upon the death of the owner. A Lady Bird deed, also known as an enhanced life estate deed, allows the grantor to transfer a remainder interest in the property while retaining the ability to sell, convey or mortgage the property without the consent of the remainder beneficiaries. Moreover, if the grantor sells the property during his or her lifetime, the grantor retains one-hundred percent of the sales proceeds.

The first Lady Bird deed was drafted by a Florida attorney in 1982. The deed got the name Lady Bird deed because in a lecture discussing the benefits of the deed, the presenter used the names of President Lyndon Johnson and his family in an example of how the deed operated.

Lady Bird deeds are commonly used during the process for planning for Medicaid long-term care benefits. Not only does the execution of a Lady Bird deed protect the home from a potential Medicaid estate recovery claim, but the deed also allows the grantor to transfer a remaining interest in his or her property without incurring a Medicaid transfer of assets penalty. This is because the remainder beneficiaries (i.e. the grantees) do not have an ownership interest in the property that they can sell. The only interest the remainder beneficiary has under the Lady Bird deed is to receive the property if the grantor still owns it at the time of death.

In addition to the benefits of a Lady Bird deed in the Medicaid planning process, Lady Bird deeds can serve other functions for the grantor. First, it allows the grantor to transfer a remainder interest in the property while still maintaining control. The grantor does not need the consent of the remainder beneficiaries for any actions taken over the property and does not owe any duty to the remainder beneficiaries. A Lady Bird deed also avoids probate because the property transfers immediately upon the death of the grantor without the necessity of a court proceeding. Additionally, a Lady Bird deed protects the property from any creditor of the beneficiary. If creditors of the beneficiary threaten the property, the grantor can revoke the Lady Bird deed and execute a new one to a different beneficiary.

For tax purposes, there is also no gift tax liability for the grantor since the transfer is not a completed gift. Upon the death of the grantor the property will receive an adjusted basis for tax purposes, which generally has the effect of avoiding any capital gains tax liability when the beneficiary sells the property after the death of the grantor. Finally, a Lady Bird deed allows the grantor to maintain his or her property tax exemptions, including homestead, over-65 and disability exemptions.

Lady Bird deeds offer an alternative method for transferring real property upon the death of the owner. Any individual undergoing Medicaid planning for themselves or a loved one should consider the execution of a Lady Bird deed to protect the property from Medicaid estate recovery.

If you’re looking for a way to avoid probate for your house or other real estate, you may run across something called a “Lady Bird” deed. It offers a simple, inexpensive way to transfer real estate at your death, without probate.

A Lady Bird deed may be a good idea if you think you might need Medicaid, the joint state-federal program that helps many Americans with nursing home costs. It may help preserve your eligibility for Medicaid and keep assets in the family that otherwise would be taken by the state to repay the cost of Medicaid benefits you receive during your life.

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Although this information has been gathered from sources believed to be reliable, it cannot be guaranteed and the accuracy of the information should be independently verifies. Federal tax laws are complex and subject to change. As with all matters of tax and legal nature, you should consult with your tax and legal counsel for advice. Feliciano Financial Group and Lion Street Financial, LLC do not offer tax or legal advice.

 

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