Estate planning is a multi-layered process that awards people with many distinct options to protect their estates and beneficiaries. One of the options is a lady bird deed used to protect a Medicaid beneficiary’s estate from the estate recovery program. The estate recovery program recoups medical or healthcare costs incurred during a Medicaid beneficiary’s lifetime from the assets they leave behind after passing away.
Therefore, people use a ladybird deed to transfer their estate as an inheritance to a named beneficiary or trust upon death. With this deed, the named beneficiary assumes property ownership without going through the exhausting probate process. A lady bird deed is used when an individual wants to qualify for Medicaid while retaining their assets within the family. It is important to note that this type of deed is not enforceable in all states.
This article will explain the ladybird deed, how it works, and why it is used.
Lady Bird Deed
A lady bird deed is a revocable deed where the creator names a beneficiary to inherit their estate upon death while retaining a life estate to control the estate when they are alive. This deed protects the estate owner’s primary home from Medicaid estate recovery. As the estate owner, you can revoke or amend the deed at any time . Thus, only if you are the legal owner at the time of death can the property be passed to the grantee.
The deed goes by various names, such as:
- Enhanced life estate deed – “enhanced” refers to the flexibility awarded by the deed where the creator (life tenant) retains control of the estate without the beneficiary’s involvement. This privilege distinguishes this type of deed from traditional life estate deeds.
- Ladybird deeds (without the gap between the words lady and bird)
- Ladybird trust
- Transfer on death deed
Name of the states
Enhanced life estate deed is used in several states in the US. These states are:
- West Virginia
However , be aware that Medicaid recovery rules will vary by state, and as a result, the outcome is not always defined. Despite the benefits of a lady bird deed, it is used in very few states and thus is not that common. The reason for that is that title insurance companies are willing to insure title for property obtained through a lady bird deed.
Title insurance companies in other states are hesitant to insure such titles. This is because of the potential issues that can stem from such a title which would lead to costly legal action to rectify the problems. In addition to that, an uninsured title significantly lowers the property’s value, which is another reason why this type of deed is not popular in most states.
The deed was formulated in the 1980s in Florida, Texas, by a lawyer named Jerome Ira Solkoff. The deed got its name after US President Lyndon Johnsons’s wife who was called Claudia Alta (Lady Bird) Johnson when he transferred his property to her through this type of deed.
Lady Bird Deed Vs. Traditional Life Estate Deed
Both deeds are used for transferring estate to the named party after the death of the estate owner/grantor/life tenant. Both deeds also allow the life tenant to retain possession of the estate. However, the grantor is not accorded full authority over the estate with a traditional life estate deed. For example, they cannot undertake specific actions such as mortgaging or selling the property without the beneficiary’s consent. They can, however, take such actions with a lady bird deed even without the grantee’s approval.
In other words, the grantee does not assume rights until after the grantor’s death. However, if the property specified in the deed is sold and the grantor buys another property, the original lady bird deed does not grant the named grantee automatic inheritance rights. A new deed would have to be created for the new property because a lady bird deed is not transferrable. In addition, the grantor has the power to revoke/cancel or modify the named grantee at will.
How Does a Lady Bird Deed Work
A ladybird deed with minor improvements deed, assigns the estate to the grantor for the entirety of their lifetime and the remainder beneficiary or grantee after the grantor’s death and hence is also called enhanced life estate deed. Upon death, if the deed is not altered and the estate still belongs to the grantor, it automatically transfers to the grantee without probate.
With a lady bird deed in place, the grantor is allowed to change or revoke the deed at their discretion without involving the remainder beneficiaries or alternatively known as remaindermen. In particular, this deed cannot be transferred. For the property to be automatically transferred to the grantee whenever the grantor sells and purchases new property, a new ladybird deed must be made. . Only if the grantor passes away without changing the deed, would the property be automatically transferred to the named beneficiary without probate as per law.
Medicare-Related Reasons to Use Lady Bird Deed
As mentioned earlier, lady bird deeds protect a grantor’s eligibility for Medicaid and the Medicaid Recovery Program. In the following section, the eligibility of the ladybird deeds for these two programs is discussed in detail.
To be eligible for medicaid, applicants need to fulfil specific requirements. One of these is to have very few assets. Since some applicants will typically transfer some assets to their relatives to reduce the value of their possessions, each applicant must disclose any assets they have given away in the look-back period (in the previous few years, typically five years).
Applicants who have given away any property during this period are barred from receiving Medicaid benefits for a while. However, a ladybird deed asset transfer is not mandatory to disclose since the grantor retains sovereign control over the assets. This way, the grantee remains eligible for Medicaid benefits provided they meet other eligibility requirements.
Medicaid recovery of assets
The deed may also be advantageous to the inheritors in protecting the property after the grantor passes away if the grantor was Medicaid beneficiary. This is due to the Medicaid estate recovery program’s attempt to reclaim Medicaid spending from assets left behind by the deceased. Depending on the state’s regulations, certain state governments may also pursue non-probate property such as payable-on-death bank accounts. State governments primarily target real estate that must go through probate. However, because a ladybird deed avoids the probate process, the estate cannot be eligible for Medicaid reimbursement.
Factors to Consider While Creating a Lady Bird Deed
Before creating a lady bird deed, there are some factors to be considered. Generally, lady bird deeds are based on common law rather than statutory authorization and therefore their application guidelines will vary by state.
The general factors to consider include:
- An accurate legal description of the estate or property should be given in the deed.
- It should be declared if a consideration such as money will exchange hands.
- The deed formatting (font size and page format) should follow the applicable state’s guidelines.
- If the property is transferred to multiple owners, the deed must clearly mention how the co-owners will share the ownership (title).
- The deed must contain any additional information required by the state. This includes tax parcel numbers, any indexing instructions, etc.
- Applicable signing and notarization requirements of the specific state must be fulfilled.
Advantages of Lady Bird Deed
The deed has certain advantages that make it ideal for different grantors. Some of these advantages are discussed below.
Avoid the lengthy and expensive probate process
Probate, a court-supervised inheritance distribution, can be time-consuming and expensive. Probate fees are generally higher than the administrative costs of a ladybird deed. This is because probate is heavily regulated. Lady bird deeds are used to avoid probate estate settlement and associated fees. They allow the beneficiaries to attain title to the property promptly after the demise of the grantor , as the only requirement is to file the death certificate at the land records office. Therefore, these deeds are a relatively easy and cost-effective way to avoid probate.
Helps retain control over property
The most important reason for using a ladybird trust deed is to ensure that the grantor retains complete control of the property until death. Therefore, the grantor has complete freedom over selling or leasing the property without requiring any consent from the remainder beneficiary.
Helps with Medicaid planning
Using a lady bird deed ensures that the grantor’s eligibility for Medicaid is not jeopardized by any assets transferred should they want Medicaid benefits at any time . Eligibility for Medicaid is compromised if an individual has transferred property in the past five years. Also, the deed allows grantors to prepare for a situation where the state would want to seize their property through the Medicaid recovery program after death to reimburse Medicaid benefits received during their lifetime. The deed prevents the state from seizing the property as it is automatically transferred to the named beneficiary.
Federal tax planning
Lady bird deeds help with federal taxes in two ways. Firstly, it protects the grantor from reporting, filing, and paying taxes for the estate under the gift tax. This is because the IRS considers the estate an incomplete gift since the grantor retains title and control of the estate until death. Secondly, upon the grantor’s death, the beneficiary who inherits the estate pays less inheritance tax than they usually would because the estate is considered eligible for a stepped-up (adjusted) basis. This stipulation erases the estate’s appreciation accrued during the grantor’s entire ownership tenure. As a result, the estate is taxed at a reduced value.
Property tax planning
Since certain states like Michigan, Florida, and Texas award caps on how many local authorities can increase a property’s value for taxation purposes, the ladybird deed can be used to protect this right. The local authorities cannot value the estate above the set cap even if its actual value exceeds this cap. Therefore, property taxes cannot exceed a specific amount, which benefits the estate owner.
This cap will typically be lost should the property be transferred to a new owner. However, when using a ladybird deed, the estate is not transferred until the grantor passes away, and this privilege is retained throughout the grantor’s lifetime. This protects the inheritor from paying high property taxes that they would have paid if they received definite ownership of the estate. This is because property tax laws typically focus on the current owner of an estate and may not consider the future transfers of a grantor’s deemed ownership.
A cost-effective estate planning tool
Lady bird deeds are cost-effective means of transferring property to inheritors without subjecting the estate to probate and having the beneficiaries incur probate costs. This is more affordable than living trusts, yet they achieve the same results. Ladybird deeds are thus more viable for individuals with few assets.
Reduce risk and avoid capital gains tax
Since the deed does not grant immediate ownership to the beneficiaries, it lowers the risk of being exposed to their financial liabilities before the grantor’s demise. This is because the beneficiaries are not considered co-owners or joint owners. Such liabilities include claims from creditors, foreclosures and divorce settlements.
It thus allows an individual to transfer the property to their children without exposing it to any additional risks. Using the deed also ensures the estate is protected under the state’s property tax cap should the grantor be required to sell the property later. This is because the estate is technically not transferred to the beneficiary until the grantor dies.
Retained homestead exemption
Most states accord an individual’s primary residence or homestead certain privileges. These include lower tax assessment and eligibility for certain creditor protections. Property can lose this status or eligibility if it is fully transferred to a new owner. However, through a ladybird deed, these privileges are retained.
Saving legal expenses
The functions of a lady bird deed can be achieved through a living trust. However, executing a living trust requires more money as it needs the services of an attorney to create a trust and the deed to transfer the estate into the trust. A lady bird deed on the other hand, allows individuals to achieve the same objectives while incurring fewer expenses.
Disadvantages of Lady Bird Deed
Despite many advantages, lady bird deeds do have their shortcomings. Some disadvantages include:
- The deed is limited to certain states. It is used in five states only, which means that its applicability is very limited.
- Ladybird deeds lack flexibility. The deed may not be easy to execute if a new remainder beneficiary is added.
- Also, if there are multiple estates/homes to transfer, the deed will typically not suffice in keeping the estate from undergoing probate.
- A ladybird deed is less adaptable compared to a living trust. This is because the beneficiaries inherit the estate only after death. However, a living trust is more adaptable and can be personalized to match specific and unique requirements. For example, the age of inheritance can be decided. Also, the living trust would be more air-tight against the beneficiaries’ liabilities such as bankruptcy, substance abuse-related mismanagement, divorce, and creditors, or if it needs to be ensured that the beneficiaries remain eligible for certain government benefits like Medicaid.
There are alternative deeds that grantors can use to transfer their estate under similar conditions as a ladybird deed. These alternatives can be helpful to grantors outside the five states where lady bird deeds are used. An example of such an alternative is the transfer-on-death (TOD) deed. The TOD deed is a more simple deed which is used to avoid probate. Also noteworthy is the fact that this deed is applicable in 30 states.
What is the Lady Bird Deed and Warranty of Title
Deeds can be categorised based on the probate avoidance ability or warranty of title. Examples of deeds based on probate avoidance capability include lady bird deeds, TOD deeds, and life estate deeds. Examples of deeds named based on the warranty of title include warranty deeds, quitclaim deeds, and remarkable warranty deeds. Therefore, these two properties of deeds are significantly different and independent. For example, a ladybird deed has the probate avoidance ability, but it does not t automatically guarantee a warranty of title. However, one deed can have both properties, and as a result, a lady bird deed can simultaneously be a quitclaim deed.
Relationship to Last Will and Testament
Unlike a ladybird deed, the last will, and testament transfer property through probate. Therefore, the directives stipulated by the last will will not affect the execution of a ladybird trust deed as the deed only transfers non-probate property. The estate should thus go to the remainder beneficiaries named in the lady bird deed irrespective of the will’s directives. Also, the will executor has no authority over any property transferred through the lady bird deed.
Frequently Asked Question
Ladybird deed costs vary depending on the state and how experienced is the attorney who handles the lady bird deeds. On average, the deed will cost approximately $30 if prepared without an attorney or somewhere around $200 – $400 for professional services, including preparation and filing.
Professional assistance is not mandatory when creating the deed. However, it is advisable to use professional services to ensure compliance with state requirements.