What is a Lady Bird Deed?
A lady bird (ladybird) deed (also called an enhanced life estate deed, lady bird trust or a transfer on death deed) is a type of life estate deed. In simple terms, a life estate is a form of co-ownership in a piece of property, and a deed is a document that legally transfers the property from one owner to another. For the purposes of Medicaid estate planning, a lady bird deed is specifically referring to one’s primary home. In explanation of what this type of deed is, it is also important to discuss the topic of a traditional, or standard, life estate deed.
Lady Bird Deed vs. Traditional Life Estate Deed
With both lady bird deeds and traditional life estate deeds, the owner of the property, the life estate holder, also called the grantor or life tenant, maintains possession of his / her home as long as he / she is alive. Upon the death of the homeowner, the life estate ends, and the home is automatically transferred to the beneficiary, also called the grantee, remainderman, or the remainder beneficiary. With a standard life estate deed, the life tenant (the homeowner) no longer has full control over his or her home. For example, the life tenant cannot sell or mortgage his / her home without beneficiary approval. Lady bird deeds differ from traditional life estate deeds in that the life tenant continues to have the right to sell or mortgage his / her home without beneficiary consent. In fact, the life tenant is even able to cancel the deed or change the beneficiary. Stated clearly, the beneficiary will receive the title of the home after the death of the homeowner, but he / she but has no right to the home (or decisions made in regards to the home) as long as the homeowner is alive.
Lady Bird Deed as an Estate Planning Tool
To better understand the relevancy of a lady bird deed for the purposes of using it as a Medicaid estate planning tool, it is important to discuss how assets, and in particular, the home, is viewed by Medicaid. In order to be financially eligible for long-term care Medicaid, assets are limited. While the limit varies by state, generally speaking, the asset limit is $2,000 for a single applicant. (See asset limits by state here). If a Medicaid applicant is over the asset limit, the excess assets must be “spent down” in order to meet the limit.
That said, there are several higher valued assets that are exempt (not counted) towards the asset limit. One of which is the Medicaid applicant’s primary home, given the applicant’s equity interest (the amount of the home’s value that is owned by the applicant) in the home is under a certain amount, which is state-based. In most cases, in 2020, the limit is either $595,000 or $893,000. However, California is an exception in that there is no limit on equity interest. In addition to the equity interest limit, the Medicaid applicant must live in the home. If an applicant is unmarried and has to move into a nursing home, an “intent” to return to his / her home is sufficient to keep the home an exempt asset. If an applicant is married, and his / her spouse lives in the home, it is also exempt, regardless of any other circumstances.
It is important to mention that Medicaid has a look-back period, in which all asset transfers 60-months (30-months in California) immediately prior to one’s Medicaid application date are reviewed. This rule is in place because, as mentioned above, Medicaid has an asset limit, and states do not want applicants to give away assets or sell them for less than they are worth in order to meet the asset limit. If an applicant is found to have violated the look-back rule, a period of Medicaid ineligibility will be established.
Traditional life estate deeds violate Medicaid’s look-back rule because the beneficiary immediately has ownership rights, and therefore, it is considered a gift. On the other hand, lady bird deeds do not violate the look-back rule. This is because the Medicaid recipient maintains ownership of the home during his / her life and the beneficiary does not have ownership. Therefore, there is no penalty for establishing this type of life estate deed.
How Do Lady Bird Deeds Work?
Upon the death of a Medicaid recipient, the state will try to recover expenses spent on long-term care through the individual’s estate. This is called estate recovery, and since a Medicaid recipient’s home is generally the largest asset still owned, the state generally tries to recoup funds by making a claim against it. However, lady bird deeds protect one’s home from estate recovery. This is because they allow persons to automatically transfer property (in the case of a Medicaid recipient, their home) upon their death without it going through probate. (Probate is a court process in which the property of a deceased person is transferred to his or her beneficiaries). If one’s home does not go through probate, Medicaid cannot try to collect reimbursement from it.
On that note, it is important to mention expanded estate recovery, in which some states apply. In these states, estate recovery is not limited to property that goes through probate. Stated differently, a lady bird deed does not protect a home in a state that employs expanded estate recovery.
Which States Allow Lady Bird Deeds?
Lady bird deeds cannot be used in all states, which partially comes down to title insurance, or better stated, the inability to get the title (a document that indicates ownership of a property) insured. If a title insurance company will not insure the title, the lady bird deed may not be considered valid. In addition, as mentioned previously, some states try to collect reimbursement for long-term care from property that does not go through probate. At the time of this writing, the following states allow lady bird deeds: Florida, Michigan, Texas, Vermont, and West Virginia.
How Much Do They Cost?
Creating a lady bird deed is very inexpensive. In fact, the approximate “do it yourself” cost is only $30. Professional assistance is also very affordable, and on average, costs between $200 and $400. This includes drafting the deed and filing it with the local register of deeds.
Is Professional Assistance Needed?
While professional assistance is not required to create a lady bird deed, it is highly recommended that one seeks counsel from a Medicaid planner when using this type of deed as an estate planning tool for Medicaid. While only a handful of states allow them, each state has its own requirements that must be met in order for the lady bird deed to be valid. In addition, it is important that one use the correct life estate form for the state in which he / she resides. Incorrectly establishing an enhanced life estate deed can have a negative impact. For instance, it can potentially result in Medicaid disqualification or the state collecting reimbursement of funds from the home after the death of the Medicaid recipient. Click here to locate an experienced Medicaid planner in the area in which you reside.
Alternatives to Lady Bird Deeds
If the state in which one resides does not allow lady bird deeds, there are other ways for one to protect his / her home from Medicaid’s estate recovery program for a loved one. For instance, there is the caregiver exemption, which provides a way for a Medicaid applicant’s home to be transferred to an adult caretaker child without a period of Medicaid ineligibility. There is also a sibling exemption, which allows the transfer of the home to a brother or sister without violating Medicaid’s look back rule. Another option exists, but it must be done well in advance of the need for long-term care Medicaid, as it violates Medicaid’s look back period. This option is a Medicaid asset protection trust (MAPT), a type of irrevocable (cannot be altered or cancelled) trust that protects one’s assets from Medicaid. If planning to utilize any of these options, it is highly recommended that one consult with a Medicaid planning professional. Find an experienced Medicaid planner here.
One might also want to consider a long term care partnership program, which is a partnership program between a state’s Medicaid agency and a long term care insurance company. Basically, an amount equal to that which the insurance policy has paid for a beneficiary’s long term care is protected from Medicaid’s asset limit, as well as Medicaid’s estate recovery program. This option is only relevant for those who do not require long term care Medicaid in the near future.