Using a Lady Bird deed in estate planning

If you live in a state that allows Lady Bird deeds, making one may a good way to avoid probate and qualify for Medicaid payment of long-term nursing care.

What is a Lady Bird deed?

An "enhanced life estate deed," commonly called a Lady Bird deed, has only been approved in a few states. To understand the unique qualities of a Lady Bird deed, first it is necessary to understand a traditional life estate.

With a traditional life estate deed, the owner of property (the grantor) reserves the right to live on the property until their death, at which time the property goes to the beneficiary (the grantee) designated in the deed.

A major drawback to a traditional life estate is that the grantor gives up the right to sell or mortgage the property.

A Lady Bird deed also allows the grantor to live on the property until their death and then transfers it to the grantee.

What makes a Lady Bird deed different is that the grantor retains the right to sell or mortgage the property. The grantor's interest is called a life estate, and the grantee's interest is called a contingent remainder.

A Lady Bird deed form contains a provision to the effect that the life estate is "coupled with an unrestricted power to convey during the Grantor's lifetime." However, it is important to be sure the deed complies with state law.

States that allow a Lady Bird deed

Lady Bird deeds are currently only authorized in Florida, Michigan, Texas, Vermont, and West Virginia.

Approximately half of the U.S. states have what is called a transfer on death (TOD) or beneficiary deed, which is similar to, and may be preferable to, a Lady Bird deed. TOD deeds designate a beneficiary upon the grantor's death, in the same way a bank account can have a designated beneficiary.

The purpose of a Lady Bird deed

The primary purpose of a Lady Bird deed and a traditional life estate deed is to avoid having the property go through probate upon the death of the grantor. Additional benefits of a Lady Bird deed include:

• Being able to sell or mortgage the property, or outright cancel the deed
• Being able to qualify for Medicaid benefits for long-term care
• Retaining the state homestead rights and property tax limitations
• Avoiding federal gift tax
• Protecting the property from claims against the grantee

Lady Bird Deeds and Medicaid

A Lady Bird deed can be useful if the grantor may someday want to apply for Medicaid to pay for long-term nursing care.

To qualify for Medicaid, the value of your assets needs to be below certain limits. Many states allow you to keep your primary residence and still qualify.

But if, during the five years before you apply for Medicaid, you use a traditional life estate deed to avoid probate, the value of your home will be an included asset and you may be disqualified from Medicaid. This does not happen if you use a Lady Bird deed, because it is not considered to be a transfer.

When a Medicaid recipient dies, Medicaid may make a claim against the person's probate estate to recover the benefits paid. A Lady Bird deed avoids probate, so the home is not part of the probate estate and Medicaid cannot go after it.

Disadvantages of a Lady Bird deed

A Lady Bird deed may not be a good idea in the following situations:

• If you plan to apply for a mortgage on the property, some title insurance companies may be reluctant to provide title insurance on property subject to a Lady Bird deed.
• You want to leave the property to more than one grantee.
• There is a fairly large mortgage balance on the property.
• You want more flexibility, such as being able to name an alternative beneficiary in the event the grantee dies before you do, in which case a trust may be better.
• Some states limit property tax increases, which ends upon transfer. Because property taxes may increase substantially for the grantee, a trust might work better.

Lady Bird deeds compared with other documents

There are other types documents that are likely to be considered in any estate plan.

• Lady Bird deed vs. quitclaim deed. Both quitclaim and warranty deeds would transfer full ownership of the property to the grantee. Neither of these allows the grantor to continue to live on the property, nor offers any of the other advantages of a Lady Bird deed.
• Lady Bird deed vs. revocable trust. A revocable trust can accomplish the same things as a Lady Bird deed. If your primary home constitutes most of your net worth, the Lady Bird deed cost will be much less than the cost of having a revocable trust created. If you have a significant amount of property of any type in addition to your primary home, a revocable trust may be a better way to go.
• Lady Bird deed vs. will. If a Lady Bird deed conflicts with a will, the deed controls. The only exception is if the grantor invokes the right to cancel the deed.