If you're shopping around for a way to avoid probate for your house or other real estate, you might run across something called a "Lady Bird" deed. This is a deed that offers a simple, inexpensive way to transfer real estate at your death, without probate. You might also run into a Lady Bird deed as a potential solution if you're trying to protect your home from Medicaid estate recovery.
A Lady Bird deed is a deed that names a beneficiary (inheritor) to receive your home when you die, but allows you to retain a life estate in the deed, meaning the home is yours to use as you please during your lifetime. However, the Lady Bird deed differs from a basic life estate deed in one important way: When you make a Lady Bird deed, you keep the right to revoke or change the deed during your lifetime. For this reason, Lady Bird deeds are sometimes also called "enhanced life estate" deeds.
People who make Lady Bird deeds primarily use them to preserve financial eligibility for Medicaid while keeping assets in the family. If you use Medicaid to pay for medical or long-term care costs such as nursing homes, the state can recover those costs from your assets when you die—a process called "estate recovery." Lady Bird deeds are sometimes used to transfer a home to a loved one and protect it from the reach of the state. However, this works only in some states, and not all.
Lady Bird deeds are used in only a handful of states. Medicaid recovery rules vary by state, and Lady Bird deeds don't always work to protect your home from estate recovery. In some states, the outcome might be unclear. If you're interested in creating a Lady Bird deed and don't see your state on the list below, speak with a local estate planning attorney to find out more about whether Lady Bird deeds are used in your state.
Local custom can be important; in some places, for example, title companies may be reluctant to insure property transferred using a Lady Bird deed.
Even if you do see your state on this list, the extent to which Lady Bird deeds are used might still vary. For example, Lady Bird deeds are quite common in Florida and Texas, but might be less so in one of the other states.
With a standard life estate deed, you could name a beneficiary to inherit your property while you keep ownership of it for your lifetime, but only with significant restrictions. You wouldn't have the right to sell or mortgage the property, and you might also be liable to the beneficiary you named if you greatly decreased the value of the property—for example, let a house fall into serious disrepair.
By contrast, an enhanced life estate deed (the Lady Bird deed) lets you:
To understand how Lady Bird deeds might protect your real estate from Medicaid recovery, it's necessary to first understand how Medicaid works.
Medicaid benefits are intended for people who can't otherwise pay for their medical care. So if you apply for benefits, you must typically show that you have very little in (1) income and (2) assets. (Note that California, while it has a low income limit, is in the process of eliminating its asset limit.) Some assets, however, aren't counted for purposes of Medicaid eligibility. Typically, your primary residence isn't counted when Medicaid adds up the value of your resources. It may be completely exempt, or exempt up to a certain value. For example, if your state exempts residences up to $750,000, then any value above that amount will be counted as a resource belonging to you.
When you apply for benefits, you must also disclose any assets you've given away in the previous few years, called the look-back period. Otherwise, people could simply give away their valuable assets to family members, claim poverty, and receive Medicaid benefits. If you've given away valuable property in recent years (usually five years), it may disqualify you from receiving benefits for a certain period of time.
Lady Bird deeds, however, are not considered a transfer that you have to disclose to Medicaid. That's because you keep complete control over the property. So if your state exempts the value of your residence when determining whether you qualify for Medicaid, your continuing ownership won't make you ineligible for benefits.
Example: If you had transferred your house to your daughter within the look-back period, it could make you ineligible for benefits. If, however, you had executed only a Lady Bird deed, it wouldn't be considered a transfer that you had to disclose to Medicaid; you would still qualify for Medicaid so long as you meet all of the other financial requirements.
There's another Medicare-related reason to use a Lady Bird deed: It can help your family members after your death. If you receive Medicaid benefits during your life, then after your death, the state will try to recover the costs from the assets you leave behind. Federal law requires every state to have such a Medicaid estate recovery program.
Some states only go after property in your probate estate—that is, the property that goes through probate after your death. Others go after any property you leave, whether or not it goes through probate. For example, a state might make a claim on a payable-on-death bank account that goes (without probate) to your son at your death.
In other words, your family will get to inherit your property without repaying the government for the benefits you received if:
As discussed above, only a handful of states use Lady Bird deeds. Are there alternatives?
One significant alternative is the transfer-on-death deed. The transfer-on-death (or TOD) deed is often a simpler and more readily accepted way to avoid probate than a Lady Bird deed. In addition, the TOD deed is available in about 30 states.
However, if you're interested in the Medicaid-related benefits of a Lady Bird deed, you'll need to talk to a local lawyer to find out whether a transfer-on-death deed in your state can accomplish your Medicaid goals.