Texas Estate Planning: The Power of Lady Bird Deeds

Lady Bird Deeds, also known as enhanced life estate deeds, are an mportant tool in Texas estate planning. This article will shed light on Lady Bird Deeds' advantages and disadvantages, their implications on Medicaid eligibility in Texas, and how they compare to other estate planning documents.

What Is A Lady Bird Deed?

A Lady Bird Deed is a distinctive type of property deed that allows you to retain control over your real estate during your lifetime and ensure the automatic transfer of ownership to your chosen beneficiary upon your death. This arrangement, known as retaining a “life estate” in the property, offers several compelling advantages in Texas estate planning. It’s especially valuable for estates whose primary or sole asset is real estate. Let’s discuss some of their advantages and drawbacks.

Advantages

Continued Use and Control

One of the most significant advantages of a Lady Bird Deed is the grantor's ability to maintain control and use of the property throughout their lifetime. As long as they live, the grantor can reside on the property and reap financial benefits from it. This includes the right to lease the property, take out a mortgage against it, make alterations, or even sell it, all without the beneficiary's involvement. This flexibility is particularly attractive to many Texans when planning their estates.

Flexibility

Lady Bird Deeds offer remarkable flexibility as they are easily revocable and amendable. To revoke a Lady Bird Deed, the grantor merely needs to file a written revocation in the relevant property records. Additionally, if the grantor wishes to designate a different beneficiary, a subsequent Lady Bird Deed can override the existing one. This allows the grantor to easily adapt to changing circumstances.

Bypass Probate

Avoiding an expensive and protracted probate process is a common concern in estate planning. Court fees and probate-related costs can deplete an estate's assets. A Lady Bird Deed in Texas effectively circumvents probate court, automatically transferring the property to the designated beneficiary upon the original owner's passing.

Protect Your Property from Estate Creditors

By sidestepping probate, a Lady Bird Deed shields the property from creditors' claims, which would otherwise be applicable if it passed through a will. If real estate constitutes the primary asset in your estate, a Lady Bird Deed can help safeguard its value for your family's benefit.

No Immediate Tax Impact

Although a Lady Bird Deed will eventually transfer ownership, it doesn’t do so until the grantor’s death. As such, no present value is conveyed to the grantee upon its creation, thus avoiding federal gift tax implications.

Stepped-Up Valuation

The grantor's real estate receives a stepped-up basis to its market value at the time of the grantor's death. If the property has appreciated since acquisition, this lowers the grantee's future capital gains tax liability in the event of a sale.

Homestead Exemption

If the grantor continues to occupy the property as their homestead, it retains the homestead and other exemptions under Texas property tax law. This exemption can result in substantial property tax savings, ranging from 20% to 30%.

Disadvantages

However, like virtually every estate planning tool, Lady Bird Deeds come with their share of disadvantages:

Real Property Only

Lady Bird Deeds exclusively impact real estate. Any other financial assets, such as a bank account, must still be addressed through a will, trust, or another instrument.

No Guardianship for Children

In cases involving small children, a Lady Bird Deed does not establish guardianship for them. Similarly, if a Lady Bird Deed names a minor child as the remainder beneficiary, a guardian must still be appointed for the child until they reach the age of majority.

Multiple Inheritors

If the desire is to leave the property to multiple beneficiaries, a Lady Bird Deed may not be the most efficient method. To sell the property after the owner dies, unanimous agreement among all beneficiaries is required. If they choose to retain ownership, they must cooperate in managing it. This can quickly lead to disagreement and conflict.

Title Companies

Title insurance companies in Texas sometimes hesitate to insure property subject to a Lady Bird Deed, especially if multiple remainder beneficiaries are involved.

No Contingent Planning

Unlike a will, a Lady Bird Deed cannot specify what happens if the grantee predeceases the grantor. If the chosen beneficiary dies before the grantor, the property will not pass to them.

No Statutory Form

Creating a Lady Bird Deed lacks established statutory form language, potentially making it more susceptible to challenge upon the grantor's death or by a title company if the grantor intends to sell or mortgage the property.

Lady Bird Deeds and Medicaid Eligibility

Lady Bird Deeds play a pivotal role in asset preservation for those contemplating Medicaid for nursing home or long-term care costs. Medicaid eligibility hinges on an evaluation of the applicant’s assets, including the value of their real property. The government examines whether you possess sufficient resources to cover your care expenses. Applicants must also disclose assets given away or disposed of over the previous five years (the "look-back period"). If the applicant transfers the title to their home to their children in an attempt to qualify for Medicaid but doesn’t receive fair market value for the house in return, they will be penalized and may not be declared eligible for benefits when they need them.

Here's where the Lady Bird Deed proves invaluable. Since it doesn't convey any interest in the property at the time of execution (as it can be revoked before the named beneficiary receives the property), it doesn't trigger the look-back provisions. This way, an applicant can transfer an asset out of their name without potential penalty.

Additionally, federal regulations require states to implement a Medicare Estate Recovery Program to continue receiving federal Medicaid funds. Under this program, if you receive Medicaid benefits, the state will assert a claim for repayment from your estate's remaining assets after your passing. However, with a Lady Bird Deed, the property automatically transfers to the grantee upon the grantor's death, bypassing the probate estate and thus avoiding the Medicaid Estate Recovery Program.

Comparisons To Some Other Estate Planning Documents

Transfer On Death Deeds

The Texas Legislature has recently enacted statutes introducing Transfer on Death Deeds (TODD), which function similarly to Lady Bird Deeds. Both allow grantors to name beneficiaries for the automatic transfer of property upon the owner's death. However, there are distinctions:

• Lady Bird Deeds can be signed by an agent acting on the grantor's behalf with a power of attorney, which is useful in cases of mental incapacity. TODDs cannot be signed by such agents.

• TODD beneficiaries must survive the grantor by 120 hours, a requirement not applicable to Lady Bird Deeds.

• Property transferred via a TODD remains subject to claims against the grantor's estate for two years after the grantor's death. However, it is exempt from the probate estate for Medicaid Estate Recovery Program purposes.

Revocable Living Trusts

Revocable living trusts offer an alternative to Lady Bird Deeds for avoiding probate and providing control and flexibility during the grantor's lifetime. These trusts can encompass all of the grantor's assets, not just their primary residence. However, if the primary residence constitutes a significant portion of the grantor’s net worth, a Lady Bird Deed often incurs lower establishment costs. Nevertheless, a primary residence owned by a revocable living trust is considered a countable asset for Medicaid eligibility, making Lady Bird Deeds or TODDs more suitable for Medicaid planning.

In Texas, Lady Bird Deeds offer a powerful means to retain control, protect assets, and navigate the complex terrain of estate planning, ensuring that your legacy remains intact for generations to come. An experienced estate planning attorney can help you determine which tools align best with your and your family's needs. Schedule a consultation with the Caleb Patterson Law Firm, PLLC today to discuss your own estate planning!