14 Apr Ladybird Deed vs. Transfer on Death Deed
After the law was changed last September whereby the state legislature allowed Texans to pass real estate on death similar to a paid on death account at a bank to avoid probate, many elder law attorneys have pondered whether to use the traditional enhanced life estate deed (also known as a Ladybird Deed) or the new statutory Transfer on Death Deed since both work to avoid estate recovery – the right of the government to make a claim (normally against the Medicaid recipient’s homestead) to the extent that Medicaid benefits (often nursing home care costs and medications) have been advanced. Typically, the largest exempt resource that a Medicaid recipient has is his or her homestead since a single person can have an equity interest in a homestead up to $552,000 without it counting as a resource (there is no equity limit if you are married). In Texas, the state can make a claim against such homestead if it passes by probate or intestacy (no will). So, a common technique is to simply have the property pass outside of probate. Since both Transfer on Death Deeds and Ladybird Deeds pass a property outside of probate, it avoids a successful claim by the state to recoup Medicaid benefits advanced.
So, what is the difference and which one is best? A Transfer on Death Deed gives no warranties, can be revoked by all grantors or by a new deed, does not result in a transfer penalty for Medicaid, retains all property tax exemptions and other tax advantages for the grantor and does not trigger a due-on-sale clause (if there is a mortgage on the property), but it cannot be signed by an attorney-in-fact under a Power of Attorney. A Ladybird Deed typically retains for the benefit of the grantor the right to sell, lease or mortgage and keep all proceeds of the property and you can deed the property back (and do a new deed if you like), allows the grantor to keep all property tax exemptions and other tax advantages for the grantor, does not incur a transfer penalty for Medicaid, does not trigger a due-on-sale clause if there is a mortgage, but normally conveys warranties and can be signed by an agent acting under a Power of Attorney.
As a result, if the grantor lacks mental capacity, it is always best to use a Ladybird Deed (we review the Will if there is one to be consistent with the intent of the grantor). Furthermore if a Transfer on Death Deed is used, title companies could argue that the grantee (the one who receives the property) is not entitled to protection since they may not meet the definition of insured under the title policy. Certainly, a title company would love to reduce risk of a potential claim and thus would not mind such a deed. So, if there is a title policy, the grantee would prefer a Ladybird Deed, but the grantor may not care since they may not have liability of a potential title claim – and it might be less likely to result in title company objections to title. If the grantor does not have a title policy, then a transfer on death deed might be best. As a result, these options should be decided to determine which is best for the client.