Lady Bird Deed: A Handy Tool for Estate Planning

A client signing a Lady Bird Deed.

A Lady Bird Deed has nothing to do with the former president’s wife Lady Bird Johnson and everything to do with avoiding recovery by the State of Texas when a Medicaid recipient dies.

To understand the reasoning behind a Lady Bird Deed, we must first delve into the Medicaid Estate Recovery Program, affectionately known as MERP.  The purpose of MERP is to obtain money to reimburse the State after the recipient dies.  The state is entitled to recover the full amount that it paid out for the recipient’s benefit through the Medicaid program.

MERP is limited to recovering the monies from the recipient’s probate estate.   The state cannot recover against non-probate assets such as remainder beneficiaries or survivors in multiple-party accounts.  Even in a probate estate, the state does not get any special treatment in its claim process – a MERP claim is considered a Class 7 claim, which places it almost at the bottom of the pyramid, just above credit card claims.

Which brings us to the Medicaid recipient’s homestead.  Many recipients still own their homestead because it is not counted as an asset when they qualify for Medicaid.  In fact, there is a strong disincentive to sell the homestead, because any money received would have to be included as an asset and may result in the recipient not being eligible for Medicaid.  Likewise, the recipient cannot simply gift the homestead to someone because of a 5-year lookback rule on gifting.

When the recipient dies owning a homestead,  the homestead becomes part of the recipient’s probate estate.  Because it is part of the probate estate, it is subject to being sold to satisfy a MERP claim.  That is a bad outcome because most recipients want to pass the homestead on to other family members.

The solution?   Make sure the homestead never becomes a probate asset.  Enter the Lady Bird Deed.

This nifty little document called an Enhanced Life Estate Deed, allows a grantor (the Medicaid recipient)  to transfer the ownership of the property to a third party a “remainder beneficiary”) subject to a life estate in the grantor, with a couple of important provisos:

  • The grantor reserves the power to revoke the deed.
  • The grantor retains the ability to occupy and use the property for his or her entire lifetime and has no liability for wasting the property.
  • The grantor retains the ability to sell, convey, lease or mortgage the property without the consent of the remainder beneficiary, and the remainder beneficiary has no right to the proceeds, if any.
  • The grantor keeps his or her homestead right and property tax exemption.

The Lady Bird Deed can include a warranty of title and can be executed by an agent under a power of attorney.

Best of all, when the grantor dies the property passes to the remainder beneficiary outside of the grantor’s probate estate.

There is another document, a Transfer on Death Deed, that has some of the same benefits.  Compare them to find out which is best for you.

Virginia, a 1982 SMU law school graduate, has advised clients for over 35 years.  For more information, visit hammerle.com, and for newsletter sign-up, email legaltalktexas@hammerle.com.  This column does not constitute legal advice.