There are numerous ways real estate can be transferred to avoid probate (which is also a way to avoid a successful Medicaid estate recovery claim in Texas), but which way is best will depend on the circumstances. The most common choices are either a transfer on death deed (grantee/beneficiary has no rights until the death of the grantor) or a Ladybird deed (which is an enhanced life estate deed which means the grantee/beneficiary has a vested right subject to the grantor’s right to change his or her mind). The advantages and disadvantages of these types of deeds are as follows:
Transfer on Death Deed: This deed which is a statutory form allows the transfer of property to one or more beneficiaries on the death of the grantor.
The pros for using a transfer on death deed are as follows:
1. It is cheaper since it is usually a form document;
2. It can be revoked during the lifetime of the grantor;
3. Property tax rates (exemptions) remain as they were since the property is still owned by the grantor until death;
4. Step-up in basis (if the property has appreciated) upon the death of grantor since the property is held until death – so fewer capital gains tax (grantee has a new basis on the value of the property at the death of the grantor);
5. Doesn’t affect the rights of a secured creditor or trigger the “due on sale” clause common in deeds of trust (which means the lender could call the note if there is an amount owed to the lender if the deed was signed without the prior consent of the lender);
6. Doesn’t affect public benefits of grantor since it is not an effective transfer during lifetime (not penalized);
7. Avoids Medicaid estate recovery under current Texas laws (since it avoids probate – Texas only pursues a claim if the estate is intestate or passes by probate);
8. Ability to name alternate grantee; and
9. No need for grantees to sign if the grantor is selling the property.
The negative about using a transfer on death deed is:
1. The transfer on death deed cannot have a warranty of title (which warrants the title of the owner and possibly prior owners) – so title companies will love to accept them since it has no risk of prior problems to insure;
2. Title company may require a two-year waiting period before giving new title insurance – especially if it is not on a homestead.
3. Since the beneficiary of the property is not getting a warranty of title, the beneficiary/grantee should not sign a general warranty deed (warranty of title from prior owners) when subsequently selling the property. As a result, the grantee cannot take advantage of the protection of the grantor’s title insurance policy or sue prior owners in the chain of title; and
4. Transfer on death deeds cannot be signed by an agent under a power of attorney (unlike Ladybird deeds) although the agent may be able to revoke them.
5. Beneficiaries of transfer on death deeds must survive the grantors by 120 hours;
6. If the beneficiary of the deed is on public benefits, then such public benefits (Medicaid, food stamps, Section 8 housing, etc.) would likely be jeopardized;
7. Must be recorded before grantor’s death;
8. Should match the will beneficiaries or by intestacy; and
9. Shouldn’t use with reverse mortgages (title insurance would be cut off).
Ladybird Deeds (Enhanced Life Estate Deeds):
The Ladybird Deed also transfers property at the death of the grantors avoiding probate but is considered a vested interest of the grantee subject to divestment. The advantages of the Ladybird Deeds are as follows:
1. You can change your mind and deed the property back to yourself or to someone else;
2. Property tax rates and all exemptions should remain the same since the property is still owned by the grantor until death (similar to transfer on death deed);
3. Step-up in basis (if the property has appreciated) upon the death of grantor since the property is held until death resulting in fewer capital gains taxes (similar to transfer on death deed);
4. Doesn’t affect the public benefits of grantor since not effective transfer during the lifetime of the grantor (not a penalized transfer) and could avoid successful estate recovery claim (the reimbursement claim of the state for Medicaid benefits advanced);
5. Unlike the transfer on death deed, the grantor can give a warranty of title which is better for grantees and there should be no waiting period (if properly prepared) to insure title;
6. Can be signed by agent under a durable power of attorney;
7. No 120-hour survival requirement; and
8. Trust can be named as a beneficiary (grantee) which can solve many issues ranging from the disagreement of beneficiaries to the protection of beneficiary from creditors, disability, addicts, bad marriages, the beneficiary being a spend-thrift, etc.
Disadvantages of Ladybird Deed:
1. If using power of attorney to sign Ladybird deed, the power of attorney should give broad gift-giving ability (and most do not);
2. Sometimes (if the grantor wants to sell the property during lifetime) title companies sometimes require the grantees to also sign (even though the document is contrary);
3. Unlike transfer on death deeds, Ladybird deeds cannot indicate what happens if grantee (beneficiary) dies first (unless a trust is named as the beneficiary);
4. Similar to transfer on death deeds, one must be careful in the event the grantee is disabled or on public benefits at the death of the grantor (a trust could be named as grantee to solve this potential problem) to avoid loss of public benefits;
5. If the grantor has a mortgage, some lenders think Ladybird deeds triggers the ability to call the note (unless the lender gave consent) since the property is vested in the grantee; and
6. Shouldn’t use with a reverse mortgage.
If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming virtual Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.