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.
How Does a Lady Bird Deed Work?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:
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.
Advantages of a Lady Bird DeedA lady bird deed offers a grantor certain advantages:
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.
Disadvantages of a Lady Bird DeedA lady bird deed, like virtually everything else, comes with disadvantages as well as advantages:
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.
Consult an Experienced Estate Planning AttorneyA 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.