27 Apr WHEN TO “LOOK A GIFT HORSE IN THE MOUTH” – DISCLAIMING A LADYBIRD DEED
A Ladybird deed is an enhanced life estate deed used to avoid probate after the death of the grantor (the one who signs the deed). As an example, if you own a home and you sign a Ladybird deed, you retain all the benefits of home ownership until your death. The one who is named as the grantee is entitled to the property at your death. This is similar to a Transfer on Death deed, although there are differences. This avoids a court determination of who gets the property at your death either under your will or by the laws of intestacy (if you do not have a will).
Ladybird deeds are commonly used in Texas to avoid Medicaid Estate Recovery. A homestead is generally a non-countable resource for Medicaid eligibility (i.e. governmental assistance in paying for care costs at a nursing home or home care). However, the state has a right of reimbursement for the benefits it paid on your behalf after your death if your home passes by your will or by laws of intestacy. A Ladybird deed not only avoids Medicaid Estate Recovery, but it also avoids a penalized transfer (normally uncompensated transfers are subject to a 5-year “look back” period).
The Texas Property Code gives the right to disclaim property to be received at death whereby it is treated as if the person, etc. who was to receive the property never vested. The use of disclaimer results in treating as if the beneficiary, heirs (or in this case, grantee) etc. never received the property – as if the beneficiary, heir, etc. had died first and the property goes to the next contingent beneficiary or heir. If the disclaimant was a transferee of a transfer on death deed, it would pass to the alternate beneficiary named in the deed. As a result, creditors can’t get to property you did not own. Also, if there was a concern about gift taxes, then a federal disclaimer could be made within 9 months of the decedent’s death (there is no time frame for making a disclaimer under Texas law).
So why would anyone who is to receive the home at death “look a gift horse in the mouth”? Why would someone not want to receive real estate without paying for receipt?
Although this is not common, there are a few reasons when a disclaimer (whereby the grantee renounces the right to own the property) is used if you are the grantee of the Ladybird deed:
Creditor Protection – If there is a threatened lawsuit or a judgment against the grantee, the grantee may use a disclaimer (process described below) so a family member would get the property instead of the property being subject to the claims or judgments of a creditor. For example, if the grantee is a parent and disclaims his or her right to the property, then the parent’s child might be entitled to the property. However, a disclaimer is not effective for protection to avoid child support, obligation to pay student loans or IRS liens.
Affordability – If the property has a mortgage or there are past due taxes or it is expensive to maintain, the grantee may disclaim if the family member(s) to receive the property after disclaimer has more financial ability to pay.
Environmental Liability – If the property to be received has contamination which would have a great cost for cleaning, then the grantee may not want the property. It should be noted that the grantee can’t just disclaim the part of the land that is contaminated (must disclaim all of the property).
Correction When Grantee Has a Will – If the grantee dies first, then the property usually vests and would pass according to the grantee’s will (if the grantee had a will). Otherwise, it would pass by laws of intestate succession. For example, if the grantee had a will whereby the beneficiary is the surviving spouse and it is preferred that the property pass to the grantee’s children, a disclaimer could be given to the representative of the estate so it would pass to the children.
CAVEAT: If the grantee of a Ladybird deed is on Medicaid, a disclaimer would result in a transfer penalty. Many planners mistakenly think this would avoid losing valuable public benefits of the grantee.
If a disclaimant wants to disclaim an interest to be received by a Ladybird deed, then there must be a written instrument affirmatively declaring disclaimer, giving the legal description of the property to be disclaimed, signed by the disclaimant before a notary public and recorded in the county where the property is located.
It should be noted that if the grantee paid the property taxes, lived in the home, or collected rent or listed the property for sale before a disclaimer was made, this would be tantamount to ownership resulting in the loss of the use of the disclaimer.
Disclaimers can be used in many ways (most frequently used for tax planning such as bypass trust planning on taxable estates or disclaiming a retirement account due to the high tax bracket of the disclaimant). Sometimes it is better to disclaim (not give) rather than receive.
If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.