Lady Bird Deeds 101

While estate planning is (of course) an essential way to avoid conflicts and minimize taxes, sometimes difficult choices can arise in the estate planning process. One such difficult choice is the tension between becoming eligible for Medicaid while maintaining full control of their property (or properties) during their lifetime. This (along with a few other traditional estate planning goals) is one of the main uses of the Lady Bird Deed in Texas Estate Planning. For clarification and terminology purposes, a Lady Bird Deed is also sometimes referred to as an Enhanced Life Estate Deed. Before we get any further, a quick detour to talk about terminology. Why is this type of deed called a “Lady Bird Deed” in the first place? The explanation is about as straightforward as you might expect – President Lyndon B. Johnson used this type of deed to transfer property to his wife, Claudia Alta “Lady Bird” Johnson (it is fitting that Texas is one of only five states that allow the use of Lady Bird Deeds, since LBJ was one of only two Texan presidents). Here are some of the benefits that property owners and estate planners may obtain by the proper use of a Lady Bird Deed in Texas.

1. ENHANCE OR PRESERVE ELIGIBILITY FOR MEDICAID BENEFITS, WHILE PROTECTING THE ESTATE FROM FUTURE COST RECOVERY SUITS UNDER MERP

Medicaid is a form of public assistance that provides health coverage to individuals that are age 65 or older or have a severe disability. Although Medicaid is primarily a federal program, it is administered jointly by the federal governments and the states. There are two sides to Medicaid that are important for estate planning purposes. These are: When a person applies for Medicaid assistance, he or she must disclose any “transfers” that occurred within the previous 5 years. This creates a “lookback period” to determine eligibility. If the Medicaid applicant transferred the property to someone for less than the fair market value during the lookback period, the Health and Human Services Commission will impose a penalty. This is essentially the number of days that the applicant is disqualified from Medicaid due to the transfer.

• preserving Medicaid eligibility (determined by the recipient’s assets, excluding any present homestead, but including any transferred homesteads) and
• limiting the amount of estate recovery that can be had by the state (in Texas, this is called the Medicaid Estate Recovery Program or MERP).

When a person applies for Medicaid assistance, he or she must disclose any “transfers” that occurred within the previous 5 years. This creates a “lookback period” to determine eligibility. If the Medicaid applicant transferred the property to someone for less than the fair market value during the lookback period, the Health and Human Services Commission will impose a penalty. This is essentially the number of days that the applicant is disqualified from Medicaid due to the transfer. Many gifts to family members are, of course, transfers at less than fair market value which would accordingly result in penalties to the Medicaid applicant. However, a properly drafted Lady Bird Deed need not be disclosed to Medicaid, nor can it be used for purposes of determining Medicaid eligibility. The other shoe drops after the passing of the Medicaid recipient. In Texas, the Medicaid Recovery Program or MERP permits the State of Texas to initiate an action to recover Medicaid benefits paid out of the recipient’s estate assets after their passing. While one state may differ from another in how it defines estate assets, because the State of Texas defines them as the probate estate, the use of a Lady Bird Deed can effectively shield the entire property from any potential suit for cost recovery by the MERP.

2. MAINTAIN COMPLETE CONTROL OVER PROPERTY

One of the other major benefits of the Lady Bird deed was alluded to a little earlier. Without using a Lady Bird Deed, most of the goals and benefits discussed above would require the owner to give up some amount of control or real ownership (and even then, potentially remain subject to the lookback period). The terms of the Lady Bird Deed, however, allow a person to maintain complete control over the property during his or her lifetime, without losing any of the other benefits discussed above. Basically, you get to have your cake and eat it, too. Essentially, a Lady Bird Deed gives the property owners complete control over their properties even if they have designated beneficiaries. This control passes on to the beneficiary only upon the death of the original property owner. It is a plan that still gives them the right to access, the right to make necessary changes or alterations and/or make any encumbrances to the property without interference, requirement to obtain consent, etc., from the beneficiaries.

3. AVOIDING PROBATE

The execution of a Lady Bird Deed will help avoid probate since the property will automatically transfer to the designated beneficiary upon the death of the original owner, thus reducing the size of the probate estate and providing more convenience to the heirs While the feature of probate avoidance is hardly unique to the Lady Bird Deed, and can be accomplished by any one of several other estate planning techniques (trusts, transfer on death deeds, beneficiary designations, limited partnerships, and more), it is a strong benefit that the Lady Bird Deed offers.

4. LEGAL TAX EXEMPTION

Since the property only passes on to the beneficiary upon the death of the original owner, the gift tax does not attach to the property and the beneficiary is not required to pay for it. Essentially, since the property was supposed to have been “newly” acquired, there is great significance to the value of the property that would have a large effect on the payment of capital gains tax or income tax on the part of the beneficiary. On the other hand, the beneficiary may not be able to take full benefit of the “step up in basis at death” that many tax attorneys advocate to take advantage of.

5. THE DUE ON SALE CLAUSE MIGHT NOT APPLY

After the death of the original property owner, the property passes on to the designated beneficiary. Problems may arise when the property has encumbrances attached to it. For an instance, when a property has been mortgaged to a bank or another. In such cases, the “due on sale” clause may be triggered. This clause gives the right to mortgagors to essentially “accelerate” the entire balance of the mortgage to the property once there has been a change of ownership. The Lady Bird Deed may potentially prevent mortgagors from automatically applying the due on sale clause, depending upon how that particular clause is drafted. The only way to properly determine whether or not a Lady Bird Deed is the right plan for you is by working with a competent Texas Estate Planning Attorney. So consult your lawyer about whether this is the right choice for you.