Lady Bird Deed

A Lady Bird Deed can be a beneficial tool in Texas estate planning. Purportedly named after the wife of U. S. President Lyndon B. Johnson, this unique type of real property deed allows individuals to retain control over their property during their lifetime while ensuring a seamless transition of property ownership upon their death. Because a Lady Bird Deed conveyance completely bypasses a probate court proceeding, it notably offers a streamlined approach to transferring real estate.

A Lady Bird Deed grants a real estate owner the means to transfer a remainder (future) interest in the property to one or more beneficiaries, and at the same time reserve a life estate to themselves. Typically, the remainder owners – called remaindermen – are heirs of the owner, but they don’t have to be.  Any individual or entity can be named a remainder interest beneficiary.

Upon the death of the owner – referenced in the deed as the “life tenant” — the remainderman becomes the new property owner. The owner can revoke the Lady Bird Deed any time before their death, or even replace the original Lady Bird Deed with a new Lady Bird Deed with new terms.

The reserved life estate gives the owner as the life tenant the right to occupy and use the property during their lifetime. The life estate owner has the right to collect income from the property, mortgage it, lease it, or sell it. The owner can change the remainder beneficiaries at any time. If the owner dies without revoking the deed, the property passes outright to the beneficiaries without probate. In short, the owner has full control over the asset during his or her lifetime.

A Lady Bird Deed offers a host of estate planning advantages:

1. Automatic Transfer Upon Death: Upon the grantor-owner’s death, the property automatically transfers to the designated remainder beneficiaries (grantees), bypassing the probate process. This feature underscores a Lady Bird Deed’s utility in estate planning because it facilitates a smooth transition of property ownership.
2. Homestead Rights and Tax Exemptions: Utilizing a Lady Bird Deed does not alter the owner’s existing homestead rights or affect any property tax exemptions for which the owner qualifies. This ensures the owner’s financial advantages related to homestead or other tax-exempt status are maintained throughout his or her lifetime, even as plans are made for future property transfer.
3. Beneficiary Flexibility: The owner has the liberty to change the designated remainder beneficiaries at any point without their consent. This flexibility allows property owners to adjust their estate plans according to changing relationships or circumstances.
4. Federal Gift Tax Exclusion: Unlike typical property transfers which might be subject to federal gift taxes, a property transferred via a Lady Bird Deed is not considered a gift at the time of transfer. This distinction means the owner can pass significant value to the beneficiaries without incurring federal gift tax liabilities, preserving more of the estate’s value for the intended recipients.
5. Step-Up in Basis: Upon the owner’s death, the property is valued at its current market value for tax purposes, rather than its value when originally acquired. This “step-up” in basis can significantly reduce capital gains taxes when the property is sold by the beneficiaries, increasing the value of the inheritance.
6. Medicaid Eligibility Preservation: A Lady Bird Deed is strategically beneficial in Medicaid planning, as the property does not count as an asset that could disqualify the owner from receiving Medicaid benefits. This allows individuals to plan for long-term care without sacrificing property intended for their heirs.
7. Medicaid Estate Recovery Avoidance: Since the property transferred by a Lady Bird Deed does not go through probate, it is not subject to Medicaid Estate Recovery. This means the state cannot claim the property to recoup Medicaid expenses paid on behalf of the deceased, preserving the full value of the property for the beneficiaries.
8. Transfer with Warranties: Property owners can transfer their property interest with warranties using a Lady Bird Deed. This means the grantor can assure the grantee-beneficiary of the property’s clear title, offering additional legal protection and peace of mind to the recipient.
9. No Recording Requirement: Technically, a Texas Lady Bird Deed does not need to be recorded of public record to be effective; it only needs to be delivered to the grantee. However, the act of recording deeds in Texas makes it easier for title companies to issue title policies, which in turn, maintains the commerciality of the property.

A disadvantage of using of a Texas Lady Bird Deed is that they are not creatures of Texas statutory law.  Instead, they’re products of Texas common law and in essence, governed by current common law.  The lack of statutory authority means the legal status of Texas Lady Bird Deeds could be influenced by future court decisions.

For certain, there are nuances in the strategic use of Lady Bird Deeds which our estate planning attorneys well know.  They can guide you in reviewing those nuances to help you determine if a Lady Bird Deed is right for your consideration. Reagan Moore continually reviews all court rulings that apply to all Texas estate planning solutions, including Lady Bird Deeds. You should rely on experienced attorneys to keep all your estate planning in line with current Texas law.

For certain, we are experienced Texas estate planning lawyers. Understanding your goals will shape our estate planning strategy for you. We’re here to discuss your options.