In the states that allow them, such as Texas, Ladybird Deeds are a relatively simple and useful tool that should be used more often.
The Ladybird Deed allows one to automatically transfer real estate to a third party on death, by simply making a notation on the deed during their lifetime.
The In re Estate of Maggie Williams Turner, No. 06-17-00071-CV (Tex. App.–Texarkana 2017), case provides an opportunity to consider the benefits of these types of deeds.
Facts and Procedural History
Ms. Turner owned 13 tracts of real estate in Texas. Before her death, Ms. Turner executed a Ladybird Deed (AKA an Enhanced Life Estate Deed). The deed transferred the property to Mr. McIntosh but allowed Ms. Turner to continue to retain all rights in the property during her lifetime, including the power to sell the property without Mr. McIntosh’s permission, with the property passing to Mr. McIntosh upon her death if the property was not sold prior to this.
Four years later, Ms. Turner transferred the property to her limited liability company. She did so without Mr. McIntosh’s permission.
Ms. Truner died and the property was part of her probate estate. Litigation ensued with Mr. McIntosh and the personal representative for the estate.
The trial court concluded that Mr. McIntosh did not have any interest in the real property. The appeals court affirmed the trial court.
Ladybird Deeds in Texas
Transfer & Retained Control
Ladybird Deeds do just what was described above. They allow a person to transfer property out of their name, but enjoy the benefit of the property during their lifetime and still retain the ability to sell the property.
As noted above, a significant advantage of a Ladybird Deed is its provision for transfer on death without the need for probate. This means that the grantor can specify in the deed who will receive the property upon their death, and the designated beneficiaries do not have any rights or ownership until that time. This streamlined transfer process helps to avoid the time, expense, and complexity associated with probate proceedings.
Additionally, unlike a traditional life estate, a Ladybird Deed allows the grantor to retain control over the property during their lifetime. This means that the grantor can continue to manage the property as they wish, including the ability to sell, mortgage, or make modifications without requiring the consent or involvement of the designated beneficiaries. This retained control provides the grantor with flexibility and autonomy over the property while still ensuring a smooth transfer of ownership upon their passing.
Ladybird Deeds are often used to qualify for Medicaid or for other asset protection purposes.
With respect to Medicaid, they prevent the government from recouping Medicaid benefits by putting having the property transferred by deed without the need for probate. No probate means no probate property which means no asset for the state to take.
Medicaid is a government program that provides healthcare coverage for individuals with limited income and assets. When determining eligibility for Medicaid, certain assets are considered countable, meaning they can affect an individual’s eligibility.
One of the advantages of a Ladybird Deed in Medicaid planning is that the property transferred through this deed is generally treated as a non-countable asset. This means that it is excluded from consideration when determining Medicaid eligibility.
With a Ladybird Deed, the grantor retains a life estate in the property, allowing them to continue living in and using the property during their lifetime. Since the grantor still has an ownership interest in the property, it is not considered a divestment of assets for Medicaid purposes.
To fully benefit from the Medicaid planning advantages of a Ladybird Deed, it is important to complete the transfer well in advance of applying for Medicaid. Medicaid has a look-back period during which any asset transfers are reviewed, and if deemed improper, it can result in a penalty period of Medicaid ineligibility.
Another potential benefit of using a Ladybird Deed in Medicaid planning is that it may help protect the property from estate recovery. After a Medicaid recipient passes away, Medicaid may seek reimbursement for the costs of care from their estate. Texas implements this program thru its MERP process. By using a Ladybird Deed, the property may pass directly to the named beneficiaries outside of the probate process, potentially avoiding estate recovery claims.
Tax Consequences of Ladybird Deeds
The Ladybird Deed does not have any Federal income tax implications for the owner. The beneficiary, if they inherit the property, may get a stepped-up tax basis in the property. This can allow the beneficiary to sell the property without incurring income taxes on the sale.
The deeds also do not trigger Federal gift taxes. They are not completed gifts for gift tax purposes. The property does remain in the decedent’s taxable estate for estate tax purposes. So they can trigger estate taxes if the estate collectively is large enough to trigger estate taxes.
They do not void Texas homestead tax exemption for the same reason. The property is still in the decedent’s name during their lifetime.
Watch Out for Joint Ladybird Deeds
Another consideration with these deeds involves situations where the property is owned by spouses. The joint-ladybird deed can still be revocable by both spouses, but upon the death of the first spouse, the deed may not be fully revoked by the survivor. This can be fixed by including language in the ladybird deed, but absent this type of planning, there may be unintended consequences. This is why ladybird deeds require careful planning, as they can appear to be very simple, but the interplay of the estate distribution rules and wills can result in unintended consequences.
Ladybird Deeds are not valid in many states. The appeals court in this case confirms that Ladybird Deeds are valid in Texas. They can be a great tool for avoiding Medicaid and other claims while not triggering adverse tax consequences.
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