Lady Bird Deed in Texas - Advantages and Disadvantages

How does a Lady Bird Deed Work In Texas?

A Lady Bird Deed in Texas gives you the best of both worlds as a property owner. You can transfer the ownership of real property to someone and still keep the ability to use and dispose of that property, including selling it, for the rest of your life.

With a typical life estate, as the grantor and holder of the life estate, you owe a responsibility to whoever is going to receive the property after your death to preserve the property’s value, and you can’t sell or mortgage the property, or change the grantee, without the current grantee’s consent. You also can’t cancel the deed and rescind the grantee’s remainder interest.

A Lady Bird Deed, however, is known as an “enhanced” life estate because you retain these rights:

• The right to sell the property and keep the proceeds
• The right to mortgage the property and use the equity for yourself
• The right to revoke or amend the deed
• The right to a life estate in the property, including rights to use, possess, and collect income from it for life

To qualify as a Lady Bird Deed, all of these rights must be specified clearly in the deed.

In Texas, Lady Bird Deeds are typically used for homestead property to allow a grantor to keep the homestead until death and then transfer it automatically to a grantee without the necessity of probate.

Advantages and Disadvantages of a Lady Bird Deed

A Lady Bird Deed offers you, the grantor, certain advantages:

• You can continue to use and profit from your property during your lifetime, and you can choose to revoke the deed any time you wish
• The property is not included in your estate at your death, and it transfers automatically to the remainder beneficiary without the need for probate
• There is no federal gift tax since no present value is transferred to the grantee when the deed is created
• The home receives a stepped-up basis to its market value at the time of your death. This helps minimize the capital gains tax consequences if the grantee sells the property
• If you continue to maintain the property as a homestead, it retains the homestead and other tax exemptions under Texas property tax law
• If you need Medicaid for nursing home or long-term care costs, it helps preserve assets

Like virtually everything else, a Lady Bird Deed carries with it some disadvantages:

• A Lady Bird Deed only applies to real property. Any of your other financial assets still have to be disposed of through a will, trust, or some other instrument
• A Lady Bird Deed doesn’t establish guardianship for small children. If your Lady Bird Deed names your child as remainder beneficiary and the child is a minor when you die, a guardian will need to be appointed for that child until they reach the age of majority
• A Lady Bird Deed is not an efficient vehicle to leave your property to multiple remainder beneficiaries
• If a child is the only beneficiary and splits the proceeds with other siblings, the child who inherited the property will have to pay federal gift taxes on the proceeds they shared
• Title companies are sometimes reluctant to insure title to property subject to a Lady Bird Deed, especially if there are multiple remainder beneficiaries
• Unlike a will, a Lady Bird Deed can’t specify what happens if your grantee predeceases you

Lady Bird Deeds and Medicaid

Because of the exorbitant cost of nursing home care (around $95,000 per year for a semi-private room) and fewer insurance companies selling long-term care policies, many people are finding themselves turning to Medicaid when it comes to certain long-term care costs, including the cost of nursing home care.

For you to be eligible for Medicaid benefits, the government examines your assets, including real property, to determine if you have the resources to pay for your own care. Generally, the equity you have in your primary residence isn’t included in this assessment of your assets.

But, you must also disclose assets you gave 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 you may not be declared eligible for Medicaid benefits when you need them.

Here’s where the Lady Bird Deed is a financial life-saver. Because no interest in present value is transferred, a Lady Bird Deed doesn’t create a transfer of property subject to the look-back provisions. And since at your death the property automatically passes to the grantee without being part of the probate estate, the property isn’t subject to the state’s Medicaid Estate Recovery Program where it’s required, if you received Medicaid benefits, to look at all assets contained in your probate estate for the recovery of Medicaid claim payments made on your behalf.

Lady Bird Deed vs. Quitclaim Deed

There are several other types of documents that are likely to be considered in any estate plan, including the quitclaim deed. The problem with a quitclaim deed is that it transfers full ownership of the property to the grantee upon execution of the document. Because of this, you not only won’t continue to live on the property, you won’t receive any of the other numerous benefits of the Lady Bird Deed listed above.

Trust David Pannell and Cities Real Estate

David Pannell and Cities Real Estate understand the benefits of the Lady Bird Deed and how to use those benefits to your advantage. Why work with a realtor who doesn’t know or use the advantages provided by the state of Texas, which can save you and your family a small fortune while you’re alive, and when you pass?

If you’d like to learn more about the Lady Bird Deed or other ways to sell your property for your maximum benefit, call David today at (817) 797-9047. He’s helped hundreds of buyers and sellers since 2005; let him help you make your real estate dreams come true.