What Are Lady Bird Deeds?

What Are Lady Bird Deeds?

Lady Bird Johnson, the wife of President Lyndon B. Johnson, is well known for a variety of reasons, but a property deed is usually not one of them. Yet that is precisely why a Florida lawyer called a new form of deed he created the lady bird deed. The story goes that this attorney, who created the deed in the 1980s, chose the Johnson family as an example of how the new deed worked, and the name stuck.

But what is a lady bird deed? In short, it’s a legal maneuver to help with estate planning. Here are the details.

Lady Bird Deed Definition

According to the American Council on Aging (ACA), a lady bird (or ladybird) deed is a type of life estate deed. Breaking that down, a life estate is a legal form of co-ownership of property; a deed is a legal document that proves ownership and allows the transfer of property from one owner to another.

The ACA says that, when preparing an estate plan in anticipation of applying for Medicaid coverage, a lady bird deed is specifically referring to one’s primary home. It is different than a traditional life estate deed.

Lady Bird Deed vs. Traditional Deed

In both the lady bird and life estate deeds, the property owner is known as the life estate holder, the grantor or life tenant. He or she holds legal possession of the property as long as he or she lives. When the homeowner dies, the life estate ends and the property ownership is automatically transferred to the life estate’s beneficiary (who may also be called the grantee, remainderman or the remainder beneficiary).

In the case of a standard life estate deed, the property owner gives up total control over the property while he or she is still alive. The life tenant cannot sell or mortgage the home without the approval of the beneficiary.

Lady bird deeds, however, are different. The life tenant retains the right to sell or mortgage the home without beneficiary consent. The life tenant is also allowed to cancel the deed entirely or change the beneficiary. The beneficiary still receives the deed after the death of the homeowner, but does not have any rights to the home or decisions made about the home while the homeowner is alive.

Using a Lady Bird Deed in Estate Planning

A lady bird deed may be useful when planning an estate with an eye toward applying for Medicaid and, specifically, long-term care.

To be financially eligible for long-term care Medicaid, a beneficiary must have very limited assets. The limit varies from state to state. If the assets are over the state limit, the applicant must “spend down” the excess assets to meet the limit.

When calculating assets, several with higher value are exempt – including the applicant’s primary home. The amount of equity exempted is also based by state, but the ACA says that,

in 2020, the limit was either $595,000 or $893,000 in most states. (California, however, has no limit on equity value.)

To qualify for this exemption, the Medicaid applicant must live in the home. If the applicant is unmarried and needs to move into a nursing home, there must be an “intent” to return to the home in order to keep it exempt. If an applicant is married and his or her spouse lives in the home, it is exempt no matter where the applicant resides.

The Look-Back Period

Medicaid rules state that asset transfers must occur 60 months before a Medicaid application is reviewed. (California requires 30 months.) This so-called “look-back” period is intended to prevent applicants from spending down assets for less than they are worth simply to meet the asset limit. Applicants who violate the look-back rule are deemed ineligible for Medicaid for a certain period of time.

This is where a lady bird deed comes in.

In a traditional life estate deed, the beneficiary immediately has ownership rights; Medicaid considers this a “gift,” which violates the look-back rule. With a lady bird deed, the Medicaid applicant retains ownership of the home while he or she is alive; the beneficiary does not have ownership. This meets the look-back rule.

Estate Recovery

When a Medicaid recipient dies, the state tries to recover its long-term care expenses from the individual’s estate. This is known as estate recovery. The home is most often the recipient’s largest asset, and the state is allowed to make a claim against it.

A lady bird deed protects the recipient’s home from estate recovery, because it allows the estate to transfer the property automatically to the beneficiary, without the need for resolution in probate. Medicaid cannot claim assets that are not in probate.

State Limitations

The ACA notes that some states allow expanded estate recovery. This means that estate recovery is not limited to property that goes through probate. In these states, therefore, a lady bird deed does not protect a home.

Most states also do not recognize lady bird deeds. In fact, as of July 2020, the only states that allow lady bird deeds are:

• Florida
• Michigan
• Texas
• Vermont
• West Virginia

The ACA says that those who live in the other 45 states have other options for protecting their home from Medicaid estate recovery:

• Caregiver exemption.
• Sibling exemption.
• A Medicaid asset protection trust (MAPT).
• A long-term care partnership program.

The ACA strongly recommends talking with an experience Medicaid planning professional about setting up any of these legal options. The cost for having a professional draft the deed and file it with local authorities is very affordable, between $200 and $400, it says.

Summary

In summary, a lady bird deed, where legal, offers the following protections:

• Avoid probate of the property.
• Maintain the right to use, profit from and sell the property while alive.
• Avoid having to make a gift and paying federal gift tax.
• Maintain eligibility for Medicaid.
• Prevent the property from being sold after death to repay Medicaid benefits.