What is a Lady Bird Deed?
A lady bird (ladybird) deed goes by a variety of names, including an enhanced life estate deed, lady bird trust, and a transfer on death deed. Regardless of name, it is a type of life estate deed. Essentially, 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 pertains to one’s primary home. In further explaining this type of deed, it is important to discuss 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 their home as long as they are 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 their home. For example, the life tenant cannot mortgage or sell their home without beneficiary approval. Lady bird deeds differ from traditional life estate deeds in that a beneficiary has no right to the home (or decisions made in regards to it) as long as the homeowner is alive. This means the life tenant can mortgage or sell their home without beneficiary consent. If the home is sold, however, and another home purchased, a new ladybird deed would have to be established. In other words, a ladybird deed is not transferrable. A life tenant also has the capability to cancel a lady bird deed or change the named beneficiary.
Lady Bird Deed as an Estate Planning Tool
To better understand the relevancy of a lady bird deed as a Medicaid estate planning tool, it is important to discuss how assets, and in particular, the home, is viewed by Medicaid. To be financially eligible for long-term care Medicaid, assets are limited. While the asset limit varies by state, generally speaking, it is $2,000 for a single applicant. If a Medicaid applicant is over the asset limit, the excess assets must be “spent down” to meet the limit. See state-specific asset limits here.
There are several higher valued assets that are exempt (not counted) towards the asset limit. This includes the Medicaid applicant’s primary home, given the applicant’s home equity interest is under a state specified value. Home equity interest is the amount of the home’s value owned by the applicant. In 2022, the limit is generally either $636,000 or $955,000. California, however, 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 their home is sufficient to keep the home an exempt asset. If an applicant is married, and their spouse lives in the home, it is also exempt, regardless of any other circumstances.
Medicaid has a look-back period in which all asset transfers 60-months immediately preceding one’s Medicaid application date are reviewed. California is an exception and has a 30-month “look back”. New York is another exception in that the state does not have a “look back” for Community Medicaid, which provides home and community based services to prevent nursing home admissions. The state, however, will implement a 30-month look back no earlier than March 31, 2024.
The look back 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 fair market value to meet the asset limit. If an applicant violates the look-back rule, a penalty 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 their 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. 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 their beneficiaries. If one’s home does not go through probate, Medicaid cannot try to collect reimbursement from it.
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 insured. The title is a document that indicates ownership of a property. 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 they reside. 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 their home from Medicaid’s estate recovery program for a loved one. For instance, there is the child 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.