We recently discussed Transfer on Death Deeds in Texas. If you missed that blog post, click here.
Today, we will turn our attention to enhanced life estate deeds, also known as “Lady Bird Deeds.” Unlike Transfer on Death Deeds, Lady Bird Deeds (“LBD”) are not a statutory creation, meaning there are no set statutory guidelines regarding these documents. Instead, it is Texas case law that governs the interpretation of LBDs, and there are actually very few cases on this topic.
What is a LBD? A LBD is a deed that transfers a person’s (the “grantor”) interest to another (the “remainderman”) but reserves a life estate in favor of the grantor. Unlike a traditional life estate deed, a LBD’s retained life estate interest includes not only the right to occupy and use the property, but also includes the ability to sell, convey, lease, or mortgage the property without the consent of the remaindermen. The grantor has no obligation to obtain permission of the remaindermen to take any of these actions and does not have an obligation to account to them for any income the grantor receives. This is the key distinction between a life estate deed and a LBD.
Who can execute a LBD? Anyone with contractual capacity may execute a LBD. Unlike a transfer on death deed, an agent acting under a power of attorney may execute a LBD. This is a key distinction between LBDs and transfer on death deeds.
What may be transferred by a LBD? Any real property in Texas can be transferred by LBD.
What must be included in a LBD? A LBD is simply a deed that includes the designation of remaindermen and reservation of the life estate and enhanced rights to the grantor. It may be in the form of a general warranty deed, special warranty deed, or a deed with no warranty. As with any deed, the property description that must be included in the deed should match the deed originally granting the property to the transferor. The property description from the Appraisal District, for example, may be insufficient or inadequate to satisfy the necessary requirements.
What must be done with an LBD? Like any other deed, a LBD must be executed by the grantor, and recorded in the deed records in the county where the property is located.
Can a LBD be revoked? Yes. The LBD grantor has the right to revoke the LBD either by filing a revocation document or by filing a subsequent conflicting LBD. Additionally, the LBD allows the grantor to retain all control, including the right to sell, gift or otherwise transfer the property. Thus, the grantor could sell, gift, or transfer the property during his or her lifetime, which would result in cancellation of the LBD.
What other rights are affected by a LBD?
- A LBD does not affect the grantor’s right to claim the property as their homestead.
- A LBD does not affect any property tax exemptions afforded to the grantor (i.e. over 65 years old exemption).
- A LBD could potentially trigger a “due on sale/transfer” clause in a mortgage or other loan. Although the interest transferred to a beneficiary is minor and could be revoked, a mortgage or other loan document could view the execution of a LBD and a transfer sufficient to trigger the due on sale clause. This is different than the case of a transfer on death deed, because there the actual transfer does not occur until the death, whereas here, the remainder interest is granted upon execution of the LBD. This may be a key consideration to consider when determining whether to use a LBD or a transfer on death deed.
- A LBD generally does not subject the property to claims of a creditor of the remainderman. The remainderman has no interest in the property while the grantor is alive. Additionally, if any remainderman creditor seeks to take action regarding the property, the grantor could simply revoke the LBD.
- Because the property remains part of the grantor’s estate, the property does receive a stepped up basis adjustment at the death of the grantor. This is important for capital gains tax purposes if the property is ever sold.
- Since the LBD is not a completed gift, the designation of remaindermen is not considered a taxable event for the purposes of gift taxes.
- The LBD grantor retains the right to take back the property, a LBD should not be considered a transfer for purposes of the Medicaid transfer penalty.
- By executing a LBD, the property at issue is no longer considered part of the grantor’s probate estate, meaning that property subject to a LBD should avoid Medicaid Estate Recovery, at least under current law.
What action must be taken by the remainderman at the grantor’s death? The LBD allows the property to pass outside the probate process. At the death of the grantor, the title of the property vests in the specified remainderman without going through the probate process. Generally, a remainderman will file an affidavit or some other document notifying that the grantor has passed away and that the ownership has fully vested in the remainderman.
What are the pros of LBDs? The key benefit of a LBD and purpose for which they were created was to assist with Medicaid planning. As noted above, the execution and filing of a LBD is not considered a transfer for Medicaid purposes. This means the Medicaid transfer penalty is not triggered. Additionally, because property passing through LBD is not considered part of the decedent’s probate estate, it is not subject to Medicaid Estate Recovery, at least under current law. Additionally, the use of an LBD will allow the property to pass outside the probate process.
What are the cons of LBDs? One of the biggest downsides to a LBD is simply the lack of Texas law regarding this type of deed. Unlike transfer on death deeds, there is no statute governing the use of LBDs and very little case law on them as well. There is no standard form or statutory guidance of using a LBD. Additionally, because there is no statutory authorization for these types of deed, a court decision could greatly change the legal status of LBDs at any time. Additionally, as noted above, a LBD could potentially trigger a due-on-sale/transfer clause in a mortgage, which could certainly cause unintended consequences for the grantor.