What is a Lady Bird Deed?

A Lady Bird Deed is an enhanced life estate deed which is used to convey property to heirs and avoid probate.  Some interesting features of the Lady Bird Deed include:

  • The grantor retains homestead, creditor and tax exemptions
  • The Deed protects the grantor’s home from Medicaid claims during the grantor’s lifetime
  • The property passes to the recipient outside of probate without Medicaid claims and liens upon the death of the grantor
  • The grantor retains the right to sell or otherwise dispose of the property without the consent of the beneficiaries
You will not lose your Texas property tax homestead exemption; however, a home placed in a revocable or living trust (or similar type trust) loses the exclusion as a homestead and becomes a countable resource for the purposes of medicaid.  
Below are tax implications of the Lady Bird Deed:
 
**No Federal Gift Taxes 
Unlike other deeds, a Lady Bird Deed does not transfer any incidents of ownership in the property. Because the grantor does not actually transfer ownership of the property by executing a Lady Bird Deed, no federal gift tax issues arise.
 
**No Lost Step-Up in Basis for Capital Gain Taxes 
 
**No Lost Texas Property Tax Exemptions 
Lady Bird Deeds do not prevent the grantor from occupying the real property. Therefore, provided the property is the grantor’s homestead, he or she can continue to claim the homestead exemption, and over 65 or disabled homeowner exemptions permitted under Texas Tax Code $11.13
Below are potential drawbacks of the Lady Bird Deed:
**Law Could Change
Lady Bird Deeds are not without potential shortcomings. The law is subject to change. There is no guarantee that federal or state law will always permit the use of Lady Bird Deeds or that actions taken prior to such a change in law will be grandfathered. A recent example on point is HHSC’s December 2009 revised MEPD policy $F-3210 which states: “A home placed in a revocable or living trust (or similar type trust) loses the exclusion as a homestead and becomes a countable resource . . . .” 
**Title Insurability
In the vast majority of cases, when real property is purchased, sold or mortgaged title insurance is purchased to provide protection against defects in title. While there are approximately eighteen title companies authorized to sell title insurance in Texas, they each take a different approach to the risks they are willing to insure against. Because there is no uniformity in title coverage between insurers, holders of Lady Bird Deeds may run into obstacles when trying to obtain title insurance for the purpose of selling or mortgaging the property.
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