Several types of deeds are used in Texas for estate planning purposes. Transfer-on-death deeds, lady bird deeds, and traditional life estate deeds can all transfer real estate at a person’s death while retaining a right to use the property during the person’s life. These types of deeds avoid probate and have important Medicaid planning benefits.
What is Medicaid?
Medicaid provides health coverage for individuals that are age 65 or older or have a severe disability. Although Medicaid is primarily a federal program, it is administered jointly by the federal governments and the states. Two sides to Medicaid are important for planning purposes: preserving Medicaid eligibility and limiting estate recovery. The Medicaid Estate Recovery Program Receipt Acknowledgment published by the Texas Department of Aging and Disability Services provides an overview of Texas Medicaid basics.
Preserving Medicaid Eligibility – Qualifying for Texas Medicaid During Life
To be eligible for Medicaid long-term care assistance, the applicant must meet several criteria. These criteria include a “countable resource” limitation. Under Section 358.321(c) of the Texas Administrative Code:
If a person’s countable resources exceed the resource limit as of 12:01 a.m. on the first day of the month, the person is not eligible for the entire month. Eligibility may be reestablished no sooner than the first day of the next month.
This limitation is intended to ensure that only people with financial need qualify for governmental assistance.
When a person applies for Medicaid assistance, he or she must disclose any “transfers” that occurred within the previous 5 years. This creates a “lookback period” that the Texas Health and Human Services Commission will review to determine edibility. If the Medicaid applicant transferred property to someone for less than fair market value during the lookback period, the Health and Human Services Commission will impose a penalty. The penalty is a number of days that the applicant is disqualified for Medicaid due to the transfer. The transfer penalty period begins when the person applies for Medicaid, not when the gift was made.
Many gifts to family members are uncompensated “transfers” that result in penalties to the Medicaid applicant. But there is a special rule for lady bird deeds (formally referred to as enhanced life estate deeds). Under Section I-3000 of the Texas Medicaid for the Elderly and People with Disabilities (MEPD) Handbook:
Transfer of the person’s home does not result in a penalty when the title is transferred to the person’s … children, siblings, etc., if the deed is an enhanced life estate and has been approved by the regional attorney. The person must sign a statement that he intends to return to the home.
This section creates an exception to the transfer penalty for property transferred via Texas lady bird deed. Because the transferor retains a life estate and the right to sell the property or revoke the transfer, the deed is not treated as a present transfer for Medicaid penalty purposes.
For this exception to apply, the lady bird deed must be reviewed by the regional attorney for the Texas Health and Human Services Commission. To help ensure a successful review, the lady bird deed should include proper language that reserves the rights required to classify the deed as an enhanced life estate (lady bird) deed.
A Note on Transfer-On-Death Deeds
Texas recently adopted a new form of deed: The Texas transfer-on-death deed. Like a lady bird deed, a Texas transfer-on-death deed creates a life estate while reserving certain powers in the original owner, including the power to change the beneficiaries or revoke the deed.
Because the two types of deeds are conceptually similar, there is no legal reason to treat them differently. Section 114.101(4) of the Texas Estates Code provides that, during the original owner’s life, the transfer-on-death deed will not “affect the transferor’s or designated beneficiary’s eligibility for any form of public assistance, subject to applicable federal law.” Because Medicaid is a form of public assistance, this provision indicates that the transfer penalty should not apply to Texas transfer-on-death deeds.
Even though Texas transfer-on-death deed should be disregarded for Medicaid qualification purposes, the Medicaid agencies have not yet adopted rules implementing this provision. At the time of this writing, the Health and Human Services Commission has not updated the Texas MEPD Handbook to recognize transfer-on-death deeds as an exception to the transfer penalty.
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Limiting Estate Recovery – Protecting Real Estate from the Texas Medicaid Estate Recovery Program
The second area of concern for Medicaid planning purposes is known as “estate recovery.” The Texas Medicaid Estate Recovery Program (MERP) allows the Texas Health and Human Services Commission to file a claim against the estate of a deceased Medicaid recipient.
MERP allows the Health and Human Services Commission to recover any funds spent for the Medicaid recipient’s care during his or her lifetime. This means that assets that would otherwise have passed to a person’s family or other intended beneficiaries will instead go to the government at the person’s death. The goal of Medicaid asset protection planning is to eliminate or minimize the amount that the government receives and maximize the amount that the family receives.
Federal Medicaid law requires states to implement an estate recovery program, but gives states leeway to determine exactly what is included in the estate for Medicaid recovery purposes.
- The recoverable estate must include any real or personal property included in the estate under Texas probate law.
- The recoverable estate may include any other real or personal property not included in the estate under Texas probate law.
The Texas limited Medicaid recovery rules limit estate recovery to minimum required—the “probate estate” of the deceased Medicaid recipient. This means that the only assets subject to MERP are the assets included in the deceased Medicaid recipient’s probate estate. The probate estate does not include assets that pass automatically to another person upon a deceased person’s death. As a result, deeds used avoid probate—transfer-on-death deeds, lady bird deeds, and traditional life estate deeds—have the added benefit of removing the property from MERP.