Lady Bird Deed
A comment we hear often is “I need to talk to a lawyer about getting a Lady Bird Deed so my loved on can qualify for Medicaid.” So what is a Lady Bird Deed and why do folks need one to apply for Medicaid?
The answer is you do not need a Lady Bird Deed to qualify for Medicaid. But a Lady Bird Deed is a very useful tool that allows Medicaid recipients to protect their home from forced sale by the State after they die.
What is a Lady Bird Deed?
A Lady Bird Deed (also known as an “enhanced life estate deed with power of sale”) is a type of deed that transfers ownership of real estate upon the owner’s death without needing to probate the owner’s estate.
More specifically, it is a deed where the owner (called the “grantor”) conveys the property to another (called the “beneficiary” or “remainderman”) but reserves a “life estate” in the property for themselves. The life estate allows the grantor the right to live in, occupy, use, and enjoy the property for the rest of their life. But when the grantor dies, the beneficiary becomes the property owner.
Life estate deeds are not a new concept but have existed in American law for centuries. But Lady Bird Deeds are different than “traditional” life estate deeds because they are revocable by the grantor at any time. That means the grantor can change their mind and revoke the deed – or even sell the property to another – and the beneficiary gets nothing.
This makes Lady Bird Deeds a useful and flexible estate planning tool. They allow the grantor to give real estate to pass on real estate without the time and expense of probate. And they allow the grantor to change their mind at any time and sell the property if they choose.
What do Lady Bird Deeds have to do with Medicaid?
Lady Bird Deeds are a critical tool that protects a Medicaid recipient’s home from forced sale after their death. They also allow the recipient to convey property after their death without incurring Medicaid transfer penalties.
Protecting the Home from Forced Sale
Under federal law, every State that receives Medicaid funding is required to have a Medicaid Estate Recovery Program (“MERP”). MERP allows the state to seek reimbursement from deceased residents that received Medicaid benefits. Each state administers its own MERP program under its own laws and regulations. In most states – but not Texas – MERP places a lien on the Medicaid recipient’s home. The state can foreclose on the home after the person dies if the lien is not satisfied.
But under Texas law, MERP cannot place a lien on the recipient’s home. Instead, the law requires the State to file a claim against the Medicaid recipient’s estate in probate court. If there is insufficient cash in the estate to pay the claim, MERP can force the estate to sell the home to satisfy the claim.
Lady Bird Deeds eliminate this risk entirely. Because property conveyed under a Lady Bird Deed passes to the beneficiary immediately upon death, it is not part of the grantor’s probate estate. This shields the property MERP claims. This makes Lady Bird Deeds an incredibly valuable tool in Medicaid planning because they allow families to protect what is usually their most valuable asset – their home.
For example, John owns a home worth $350,000. John was a Medicaid recipient and the state paid $75,000 for his care before his death. John signed a Lady Bird Deed before he died conveying the home to his son, William. The Lady Bird Deed allows William to inherit the home immediately upon John’s death. William can keep it, sell it, or rent it out as he sees fit.
Without the Lady Bird Deed, William may be required to sell the house unless 1) there are enough other assets in the estate to pay the claim, or 2) he can claim a lawful MERP exemption.
Common MERP exemptions include: (1) if the decedent was survived by: (a) a spouse, (b) child under 21, or (c) child of any age that is blind or disabled; (2) the estate is worth $10,000 or less; (3) the MERP claim is for $3,000 or less; or(4) there is an unmarried adult child that lived in the home with the decedent for at least 2 years. Other exemptions may apply based on the facts and circumstances of the estate and the financial resources of decedent's surviving family.
Avoiding Transfer Penalties
Medicaid’s rules state that a transfer of assets by the Applicant for less than equivalent value will result in a delay of eligibility. This is known as a “transfer penalty”. Medicaid imposes this penalty for any transfers for less than equivalent value that occurred within 5 years of when the person applied for Medicaid. This is known as the “Five Year Lookback” period. The length of the transfer penalty is based on the amount transferred. As of September 1, 2019, the transfer penalty was 1 day of eligibility for every $213.71 given away. Fortunately, Lady Bird Deeds do not cause a transfer penalty because they are revocable. This means the Applicant can safely convey their homestead using a Lady Bird Deed without jeopardizing their Medicaid eligibility.
For example, John owns a home worth $350,000. He wants to apply for Medicaid, but he heard a rumor that he must get rid of all his assets to qualify. This rumor is false because Medicaid’s homestead exclusion rule allows John to keep his house and still qualify. But in a panic he signs a deed giving the home to his son William, who doesn’t pay anything in return. This results in a transfer penalty of 1,637 days ($350,000 / $213.71 = 1,637 days). John’s misinformed actions mean he may not be able to qualify for Medicaid for almost 4 ½ years!
Lady Bird Deeds are an invaluable tool for Medicaid planning. They allow families to protect and pass on their most prized asset – their home – without exposing it to forced sale by the State.