Lady Bird Deeds

A lady bird deed is a special kind of "life estate" deed that allows you to transfer real estate to a designee at your death without having to go through the probate process. Texas is one of only a few states that recognize them. Depending on your circumstances, there may be advantages to incorporating this mechanism into your estate plan. Before you decide, however, you should be aware that there are disadvantages as well, and that a lady bird deed is not a substitute for careful estate planning.

With a lady bird deed, you can transfer ownership of real property to someone and yet retain the ability to use and dispose of that property as you wish for the rest of your life. This is called retaining a life estate in property. With a typical life estate, you as the grantor and holder of the life estate owe a responsibility to whomever will receive the property after your death (often called the grantee or remainder beneficiary) to preserve its value, and you cannot sell or mortgage the property, or change the grantee without the grantee's consent. Nor can you cancel the deed and rescind the grantee's remainder interest. A lady bird deed, however, is known as an "enhanced" life estate because it allows you to retain the following rights:

• The right to a life estate in the property, including rights to use, possess and collect income from it for life;
• The right to sell the property and keep the proceeds;
• The right to mortgage the property and to use the equity for yourself; and
• The right to revoke or amend the deed.

All these rights must be specified clearly in the deed for it to qualify as a lady bird deed. In Texas, these kinds of deeds are typically used for homestead property, to allow a grantor the ability to keep the homestead until death and then transfer it automatically to a grantee (for example, the grantor's child) without the necessity of probate.

A lady bird deed offers a grantor certain advantages:

• You can continue to use and profit from your property during your lifetime, and you can revoke the deed at any time;
• The property is not included in your estate at your death and transfers automatically to the remainder beneficiary without the need for probate;
• No present value is transferred to the grantee when the deed is created, so there is no federal gift tax;
• The house receives a stepped up basis to its market value at the time of the grantor's death, which helps minimize the capital gains tax consequences if the grantee sells the property;
• If the grantor continues to maintain the property as a homestead, it retains the homestead and other exemptions under Texas property tax law; and
• If the grantor may need Medicaid for nursing home or long-term care costs, it helps preserve assets.

These days, many people find themselves turning to Medicaid when they are unable to pay for certain long-term care costs, including the cost of nursing home care. But in order to establish your eligibility for Medicaid benefits, the government will examine your assets, including financial assets and real property, to determine whether you have sufficient resources to pay for your own care. Generally, the equity you have in your primary residence is not included in this assessment of assets (within certain limitations). But you must also disclose assets given away or disposed of over the previous five years (the "look-back period"). If you transferred property for less than its fair market value during the look-back period, you will be penalized and may not be declared eligible for benefits when you need them.

In addition, the federal government requires all states to have in place a Medicare Estate Recovery Program in order to continue to receive federal Medicaid funds. Under the estate recovery program, if you receive Medicaid benefits, after your death the state will make a claim for repayment on whatever assets remain in your estate. In Texas, the state looks to all assets contained in your probate estate for recovery.

Here's where the lady bird deed comes in handy. Because no interest of present value is transferred (since the deed could be revoked before the remainder beneficiary receives the property), a lady bird deed doesn't create a transfer of property subject to the look-back provisions. And since at the grantor's death the property automatically passes to the grantee without being part of the probate estate, the property isn't included in the grantor's probate estate and is therefore not subject to the Medicaid Estate Recovery Program.

A lady bird deed, like virtually everything else, comes with disadvantages as well as advantages:

• A lady bird deed operates only as to real property; any other financial assets you have must still be disposed of via a will, a trust, or some other instrument.
• If you have small children, a lady bird deed does not establish guardianship for them. Similarly, if a lady bird deed names your child as remainder beneficiary and that child is a minor at your death, a guardian will still need to be appointed for that child until he or she reaches the age of majority.
• If you wish to leave the property to multiple remainder beneficiaries, a lady bird deed is not an efficient vehicle. All the beneficiaries would need to agree in order for them to dispose of the property or decide how it should be managed. Consider how your children relate to each other - is it likely they'll be able to cooperate on this after your death?
• Conversely, if you choose to leave property via a lady bird deed to only one child with the idea that he or she will sell the property and then split the proceeds with the other siblings, consider the likelihood that the child who inherits the property will have to pay federal gift tax on the proceeds shared with the others.
• As you know if you've ever bought or sold property in Texas, typically when real estate is sold, bought, or mortgaged title insurance is also purchased to protect against defects in title. But sometimes title insurance companies are reluctant to insure title to property subject to a lady bird deed, especially if there are multiple remainder beneficiaries.
• A lady bird deed, unlike a will, cannot specify what happens if the grantee predeceases the grantor.
• There is no established statutory form language to follow in creating a lady bird deed, which might leave it more open to challenge upon the grantor's death, or by a title company if the grantor wishes to sell or mortgage the property.

Recently, the Texas Legislature enacted a statute creating something called a Transfer on Death Deed, which functions similarly to a lady bird deed. Like a lady bird deed, a transfer on death deed permits a grantor to retain a life estate in real property, which is then transferred to a grantee upon the grantor's death outside of the probate process. It differs from a lady bird deed in certain critical respects.

First, a lady bird deed can be signed by an agent acting on the grantor's behalf with a power of attorney. This makes a lady bird deed useful if the grantor suffers from mental incapacity. On the other hand, a transfer on death deed cannot be signed by an agent acting under power of attorney. Next, for a transfer on death deed to take effect, the remainder beneficiary must survive the grantor by 120 hours. This requirement does not apply to lady bird deeds. Finally, property transferred by a transfer on death deed remains subject to claims against the grantor's estate for two years after the grantor's death. This means that the grantor's creditors can look to the property to satisfy any outstanding debts. However, note that the statute does exclude property subject to a transfer on death deed from the probate estate for purposes of the Medicaid Estate Recovery Program.

A lady bird deed may be a useful arrow in the quiver of estate planning options, particularly if your primary or only asset is your home. But its usefulness is limited and it may not be sufficient depending on your circumstances. And there may be times when a transfer on death deed is a better option. The only way to be certain to protect your assets is to consult with an experienced estate planning attorney to develop a complete estate plan. I can help you review the specific circumstances of your estate, and create a plan tailored to your needs. Call me today at (903) 944-7537 for a consultation.