Ladybird Deeds are often used to protect a homestead from a Medicaid estate recovery claim as it avoids probate and are supposed to permit the grantor (the one who signs the deed) to reserve for the grantor’s life, the full possession, benefit and use of the property as well as the rents, profits, the ability to mortgage and the unilateral power of sale of any or all of the property with or without the consent of any remainder beneficiary (the “grantee”). The grantor can even change who are the grantees (remainder beneficiaries). However, such deeds have apparently caused some confusion for some title company underwriters if the property is sold during the life of the grantor. Many Texas title companies have taken the position that the grantees have some immediate rights to title as some title companies are requiring all grantees to join in the sale or conveyance of the real estate described in the Ladybird Deed (also known as an Enhanced Life Estate Deed). Texas courts have ruled to the contrary. Although an appellate court affirmed a Texarkana trial court’s summary judgment in 2017 that the grantor had a unilateral right to convey the property and such conveyance was not an impermissible restraint on alienation, title companies are either unaware or simply disregard judicial precedent when requiring the grantees to be a party to a conveyance. Of course, insurance companies are mostly concerned with risk. 

In the Texarkana case (in Re Estate of Turner), the grantor transferred property before he died (although he previously signed a Ladybird Deed) to a LLC (and not the grantee of the Ladybird Deed). The remainder beneficiary (the grantee) claimed they had an interest in the property. However, the court ruled the Ladybird Deed operated as a transfer of a contingent interest which the grantor may unilaterally terminate. It should also be mentioned that the Texas Health and Human Services Commission (which determines Medicaid eligibility) also considers the deed as a transfer of a contingent interest which the grantor may unilaterally terminate.

This is important for any person who should apply for long-term care Medicaid (which helps pay for care at a majority of the nursing homes, some assisted living facilities and sometimes at home) since some of the Medicaid programs have a five year “look-back” period whereby transfers are normally penalized if the application is made within five years of the transfer. Ladybird Deeds are an exception to the rule (because it is only a transfer of a contingent interest that only vests upon the death of the grantor). This is different than a simple deed with a reservation of life estate whereby the remainder beneficiaries would have an immediate vested interest (and thus could be subject to a transfer penalty if the grantor applied for long-term care Medicaid within five years). Thus, it certainly would be more understandable if title companies required remainder beneficiaries to join in the conveyance if the property is subject only to a life estate (not an enhanced life estate) deed.

Additional benefits of Ladybird Deeds include the following: 

  1. Homestead and all property tax exemptions (i.e., disabled owner or over age 65) are unaffected; 
  2. Ladybird Deeds can be on any real estate – not just homesteads; 
  3. Since the grantor’s estate would include the property due to the elements of grantor’s control, there would be a step up in basis to the value of the property as of the grantor’s date of death. In other words, there would be no capital gains tax on the appreciation from date of acquisition to the value as of the date of grantor’s death; 
  4. Since the grantor retains control of the real estate until death, it is not subject to gift taxes; 
  5. Creditors of the remainder beneficiary cannot make a successful claim against the property during the grantor’s life. Of course, if the grantor knows this, the grantor can change the remainder beneficiary; and 
  6. Unlike Transfer on Death Deeds, can be signed by agent under a Power of Attorney.

If interested in learning more, consider attending our next free “Estate Planning Essentials” workshop by calling us at (214) 720-0102 or sign up by clicking here.

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