In a battle of the two most common probate avoidance deeds, it is often (but now always) better in Texas to use a Ladybird Deed (which is an enhanced life estate deed) than a Transfer on Death Deed. In both types of deeds, the owner of the property retains control during life and the property then passes to the named person(s) or trust as set forth in the deed upon death of the owner.
The owner of the property can change the names of the beneficiary during the owner’s life. There are numerous reasons why these deeds are commonly used including:
1. Probate avoidance:
If one has a Will, then often probate is needed – the judicial process of having the Will approved prior to the transfer of the property to the desired beneficiary or beneficiaries.
If one doesn’t have a Will or Trust, then the property will pass according to the laws of the state. This could be particularly burdensome and costly if there are debts owed by the estate or if there are numerous heirs (and possibly unknown heirs). Costs and delays and potential problems of property passing by Will or by intestacy could be avoided by Ladybird Deeds and Transfer on Death Deeds (although beware of title issues with Transfer on Death Deed).
2. Avoidance of Medicaid estate recovery:
If probate is avoided, then it should result in avoiding a successful claim by the state (this varies from state to state) for Medicaid payments advanced on behalf of a Medicaid recipient. Both Ladybird Deeds and Transfer on Death Deeds should result in a withdrawal of a claim for Medicaid benefits paid since the homestead would pass outside probate which is an exception under the Texas Medicaid rules. Medicaid often helps pay for long-term care costs (such as nursing home care costs, drugs, care at home, etc.) and many may rely on Medicaid due to lack of coverage by Medicare, long-term care insurance, and/or inadequate income or resources. Although a homestead is a non-countable resource when applying for Medicaid (assuming the equity value is under $603,000 in Texas if single – no limit if married), the state will attempt to make a claim (not a lien) against the property after the Medicaid recipient’s death.
3. Cost of Trusts:
It should be noted that although trusts (both revocable and irrevocable) avoid probate, the cost for establishing is often far greater than preparation of either type of deed – although trusts usually provide more planning protection. Also, if a homestead is placed in a revocable living trust, it changes the resource to being countable under the Medicaid rules in Texas. If the homestead is placed in an irrevocable trust, then it is considered a transfer, subject to a 5-year “look-back” period (since Medicaid eligibility is dependent on the amounts of countable resources of the applicant, the government presumes transfers within five (5) years were done on purpose to reduce assets so that the government would pay for care costs).
4. Control during life:
Not only do most real estate owners prefer to be in control of their own assets during their life, it is best to retain control for numerous tax reasons:
- Property taxes: Homestead owners often pay lower property taxes if they have certain exemptions (i.e., over 65, disabled – besides the property being a homestead). No exemptions are lost with Ladybird Deeds or Transfer on Death Deeds.
- Step up in basis: If the property is controlled by the owner for his or her life, there would not be capital gains tax on the appreciation from acquisition until date of death under current laws. Since the real property owner retains control during life for both Ladybird Deeds and Transfer on Death Deeds, the “step-up” would be retained.
- Capital gains tax exemption if homestead is sold: If you live in your home for two (2) of the last five (5) years prior to sale of the property during your life, then a person who is single is entitled to a gain (the appreciation) of up to $250,000 without taxation and $500,000 if the homestead is owned by a married couple. Both Ladybird Deeds and Transfer on Death Deeds permit the sale of the homestead.
- No gift tax: Since control of the property is maintained during life for both Ladybird Deeds and Transfer on Death Deeds, it is not considered a gift and thus there would be no gift tax.
Although there is no advantage of using either a Ladybird Deed or Transfer on Death Deed for the four (4) common reasons use as set forth above, there are differences in the deeds (so usage will depend on goals). Some of the major advantages or disadvantages and differences of these types of deeds are as follows:
1. WARRANTY OF TITLE – (Advantage: Ladybird Deed)
Ladybird Deeds are generally prepared as either a general warranty deed or special warranty deed. Furthermore, most homeowners have a title policy. If there was a title problem subsequently discovered, the grantees (beneficiaries) of a Ladybird Deed could make a claim for breach of warranty whereas Transfer on Death Deeds have no warranty of title so beneficiaries could not make a claim.
2. POTENTIAL DELAY IN SELLING OR MORTGAGING THE PROPERTY DUE TO POTENTIAL CREDITOR ISSUES – (Advantage: Ladybird Deed)
Texas law permits the personal representative of an estate (executor or administrator) to pursue a claim against property transferred by a Transfer on Death Deed if the deceased owner’s estate is unable to pay all the debts of the estate. As a result, many title companies may not insure (issue a title policy) for two (2) years after the deceased property owner’s death if the property passes by a Transfer on Death Deed. This process could be shortened through probate, but probate avoidance was one of the main reasons why a Transfer on Death Deed is often used. If the title company does not require a 2-year wait, they may want various types of proof such as no hospital, funeral bills or credit card bills of the deceased. There is no delay with a Ladybird Deed.
3. NAMING OF CONTINGENT BENEFICIARIES – (Advantage: Transfer on Death Deed)
If the property owner wants to name a contingent (alternate) beneficiary, Transfer on Death Deeds allow this by law. Ladybird Deeds do not allow this although one could create a joint tenancy with right of survivorship among the main beneficiaries and name others as beneficiaries at death. However, this could create a problem if applying for Medicaid within five (5) years unless the primary beneficiary who is a joint owner is a spouse.
4. USING POWER OF ATTORNEY TO CREATE OR MAKE CHANGES OR REVOKE – (Advantage: Ladybird Deed)
Texas law does not permit the use of powers of attorney to create a Transfer on Death Deed unlike Ladybird Deeds. So, if the homeowner is disabled or is likely to be disabled or if there is a need to revoke the deed and they have a recorded POA, then Ladybird Deeds are clearly the best option.
5. EXIGENT FILING – (Advantage: Ladybird Deed)
Transfer on Death Deeds must be recorded during the owner’s life to be effective – unlike Ladybird Deeds.
There are other factors that could be considered in deciding which deed is best, but Ladybird Deeds have more advantages as set forth above.