A Lady Bird Deed is a special form of Life Estate Deed. A Texas Lady Bird Deed allows a property owner to retain control over his or her property during life and transfer the property automatically at death, without the need for probate. Lady Bird Deeds are also used to avoid Medicaid consequences when transferring a Texas homestead. Texas is one of a handful of states (including Florida) that recognize Lady Bird Deeds.
What is a Life Estate Deed?
Texas Lady Bird Deeds are a form of Life Estate Deed. A Life Estate Deed is signed during a person’s lifetime, but doesn’t transfer property until the person’s death. When a person creates a Life Estate Deed, she divides her single interest into two legally distinct interests:
- Life Estate – The interest that the owner retains for his or her life is called a life estate. A person with a life estate is known as a life tenant.
- Remainder Interest – The interest that passes at the owner’s death is called a remainder interest. A person that holds a remainder interest is known as a remainderman or remainder beneficiary.
On the death of a life tenant, the owner’s life estate terminates. At that time, the real estate passes to the remainder beneficiary. This transfer happens automatically and without probate.
Life estate deeds have long been recognized in Texas and other states. But traditional Life Estate Deeds have a significant drawback: They can prevent the life tenant from changing his or her mind or otherwise dealing with the property without the involvement of the remainder beneficiaries.
The problem arises from the fact that a traditional Life Estate Deed immediately and irrevocably transfers an interest in the property to the remainder beneficiary. Once the deed is signed, the property is owned by both the life tenant and the remainder beneficiary. Since the remainder beneficiary has a present (but nonpossessory) interest in the property, the remainder beneficiary must join in any conveyance of the property (even while the life tenant is still alive). The owner/life tenant cannot deal with the property or remove the remainder beneficiary from the title without the remainder beneficiary’s consent.
Although Lady Bird Deeds are often a better choice than Life Estate Deeds, there are situations where a traditional Life Estate Deed may be appropriate. This could occur if the remainder beneficiary is purchasing his or her interest in the property. See What is a Life Estate? For a more detailed explanation of traditional Life Estate Deeds.
What is a Lady Bird Deed?
A Texas Lady Bird Deed—also known as Enhanced Life Estate Deed—is a Life Estate Deed coupled with the power to sell, convey, or mortgage the real estate without the remainder beneficiary’s consent.
Lady Bird Deeds provide all benefits of traditional Life Estate Deeds: They allow the current owner to retain a life estate interest and pass the property to the remainder beneficiaries without going through probate. But unlike traditional Life Estate Deeds, Lady Bird Deeds do not create an irrevocable interest in the remainder beneficiaries.
With a Lady Bird Deed, the owner/life tenant reserves:
- The right to take the property back;
- The right to mortgage, lease, sell, convey, and otherwise dispose of the real estate without involving the remainder beneficiary;
- The right to keep or spend the proceeds from any mortgage, lease, or sale of the property without giving any part of the proceeds to the remainder beneficiary; and
- The right to add or remove remainder beneficiaries during the owner/life tenant’s lifetime.
The reservation of these rights distinguishes Texas Lady Bird Deeds from traditional Life Estate Deeds. A Texas Lady Bird Deed provides all benefits of a traditional Life Estate Deed without forfeiting control over the property.
Pros and Cons of Texas Lady Bird Deeds
Texas Lady Bird Deeds provide several important benefits that distinguish them from other Texas deed forms:
- Avoiding Texas Probate – Texas Lady Bird Deeds transfer property automatically at a deceased owner’s death. Because the transfer is complete at the time of death, Texas probate is not legally required. This avoids the delay, cost, and privacy concerns associated with Texas probate. See Using Deeds to Avoid Probate in Texas for more information about probate avoidance.
- Medicaid Asset Protection – Texas Lady Bird Deeds can preserve Medicaid eligibility during the owner’s life. They can also prevent the property from going to the government at the owner’s death under the Texas Medicaid Estate Recovery Program. See Texas Lady Bird Deeds and Medicaid Asset Protection for more information about how Lady Bird Deeds provide Medicaid benefits.
- Retaining Homestead Exemption – Because an owner who creates a Lady Bird Deed retains full control over the property during his or her lifetime, the property retains its homestead status. This allows the owner to take advantage of the favorable property tax and asset protection exemptions available to Texas homestead. See Texas Homestead for a detailed discussion of Texas homestead benefits.
- Avoiding Capital Gains – Because a Lady Bird Deed does not create a completed gift for federal tax purposes, the owner/life tenant is treated as retaining the property until his or her death. As a result, the remainder beneficiary will receive a “stepped-up basis” for income tax purposes. A stepped-up basis erases any appreciation in the property that occurred prior to the deceased owner’s death. This can create a substantial income tax savings when the remainder beneficiary sells the property. See our discussion of community property tax benefits for an illustration of basis step-up.
- Retaining Control – Unlike traditional Life Estate Deeds or outright transfer of the property (such as a joint tenancy with right of survivorship), Texas Lady Bird Deeds allow the owner to retain control over the property. If the owner changes his or her mind or new circumstances arise, the owner has the flexibility to change the transfer without involving the remainder beneficiary.
- Saving Money – The benefits of Lady Bird Deeds could also be accomplished through a Texas living trust. But preparation of a Texas Lady Bird Deed is less expensive than the cost of preparing a Texas will or living trust. This can result in a substantial lifetime savings to the owner. And because Lady Bird Deeds save probate costs at the owner’s death, the savings can also benefit the owner’s heirs or other beneficiaries.
These benefits make Lady Bird Deeds an attractive option for many Texas property owners.
Relationship to Texas Transfer-On-Death Deeds
Although Lady Bird Deeds are popular, well-accepted planning tools in Texas, they are not specifically authorized by the Texas Estates Code. But, as discussed in our section on Medicaid benefits, Lady Bird Deeds are recognized by the Texas Section I-3000 of the Texas Medicaid for the Elderly and People with Disabilities (MEPD) Handbook. The MEPD Handbook specifically excludes Lady Bird Deeds from classification as a transfer that would trigger a Medicaid penalty.
On September 1, 2015, the Texas Estates Code was amended to recognize Texas Transfer-On-Death Deeds. A Texas Transfer-On-Death Deed is similar to—but not identical with—a Texas Lady Bird Deed. A Transfer-On-Death Deed transfers property at a person’s death, but gives the person the right to revoke or change the deed during the person’s life.
The Texas Estates Code does authorize Transfer-On-Death Deeds, but (as of the time of this writing) the MEPD Handbook does not. That means that a Texas Lady Bird Deed may be the better alternative if Medicaid planning is a concern. For more information, see our sections on Texas Transfer-On-Death Deeds and Texas Deeds and Medicaid Asset Protection.