There are many types of deeds out there. Two types of deeds that have been getting a lot of attention in the estate-planning world are (1) the lady bird deed and (2) the transfer on death deed (TODD). In this post I will explain how each type of deed works, the benefits of the deeds, and the drawbacks of the deeds.
The Lady Bird Deed
An enhanced life estate deed, more commonly known as a lady bird deed, allows an individual to transfer property upon their death. Unlike a regular life estate deed, the property owner, who now holds the life estate, retains the right to revoke the deed and sell the property. Essentially, the owner retains the traditional rights we associate with property ownership while efficiently passing property at death.
Lady bird deeds are used for a variety of reasons, the most popular reasons are to avoid probate and to avoid the Medicaid Estate Recovery Program (MERP). A lady bird deed avoids probate by transferring title to property through the deed versus through a probate proceeding. Without a deed, real property must go through probate before title is cleared. MERP is how the state of Texas attempts to recapture funds from a decedent that were paid for their care through the Medicaid program. The Texas Health and Human Services Commission’s policy for MERP recovery is to only recover from a decedent’s probate estate. Since a lady bird deed avoids probate, it also avoids MERP. Therefore, if someone qualifies for Medicaid while still owning a home, a lady bird deed is generally needed to avoid MERP. It is important to note that MERP is not a lien statute in Texas. This means that MERP cannot take your home nor can they put a lien against your home to prevent its sale. MERP may recover funds from a probate estate, but they are a lower priority creditor, along with other unsecured debts. If you or a loved one is applying for or on Medicaid and has a home please consult an attorney regarding MERP.
The Transfer on Death Deed
A transfer on death deed (TODD) is similar to a lady bird deed in that it allows an individual to transfer property upon their death. However, the TODD was created by statute in Texas in an attempt to help Texans pass a family homestead in a low cost and efficient way. While this is great goal the TODD’s specific statutory requirements can cause issues.
First, a TODD cannot be signed or revoked by power of attorney. A lady bird deed can be signed and revoked by power of attorney, as long as the power of attorney document grants the power of attorney the necessary authority. This can be problematic for those who execute TODDs and then later lose capacity and need to sell their home. Additionally, this may limit necessary crisis planning.
Second, a TODD must be filed in county deed records prior to the property owner’s death. This can also limit crisis planning. Not everyone is aware of this restriction either, which has led to some individuals executing TODDs but not filing them and having an incomplete estate plan.
Third, the TODD does not offer the same tax and warranty of title advantages as a lady bird deed can.
Title Companies Are Not Fans of Either Deed
In my experience, title companies are not fans of either type of deed. It may be difficult for a title company to feel comfortable insuring title on a deed that was signed in the last months or weeks of someone’s life, especially if that deed was signed by power of attorney. Lady bird deeds or TODDs that diverge from traditional intact family planning, such as those that exclude a child or spouse, are particularly troublesome. It is not uncommon for a title company to require additional documentation or signatures when one of these deeds are involved.
Great Options in a Specific Scenario
A lady bird deed can be a great option for those on Medicaid wishing to protect their home or those who are near the end of their life with only a home to pass to their beneficiaries. Many clients are interested in executing these deeds as a primary means of estate planning because they appear to be a less expensive option. However, when we consider the possibility of a sale of the property, which would require a revocation of the deed: the potential purchase of a new property, which would require a new deed: and, the potential increased closing costs for beneficiaries it is rarely cheaper in the long run. For the average person seeking an easy way to avoid probate a revocable living trust can provide the same benefit but with less potential hassle.