A property owner may choose to leave their real estate to one or more beneficiaries after the owner’s death. An owner can pass on real estate after death through various estate planning mechanisms. Some individuals may use Lady Bird deeds as part of a comprehensive estate plan. But how does a Lady Bird deed work to achieve estate planning goals in Texas?
What Are Lady Bird Deeds?
A Lady Bird deed, formally known as an enhanced life estate deed, enables a property owner to transfer a piece of real estate to designated beneficiaries upon the owner’s death. This transfer occurs outside of the probate process. The owner may also continue to occupy the property during their life. However, unlike traditional life estate deeds, a Lady Bird deed also allows a property owner to retain full control of the property during their life. The owner can also amend or revoke a Lady Bird deed at any time during their life. Lady Bird deeds also differ from transfer-on-death deeds (TODDs) in several ways, including:
- Lady Bird deeds cannot name alternate beneficiaries, whereas TODDs allow property owner to name alternate beneficiaries who can inherit the property if the primary beneficiary predeceases the property owner.
- Lady Bird deeds might trigger “due on sale” clauses in mortgages, whereas TODDs do not.
- Property owners can structure Lady Bird deeds as warranty deeds, whereas TODDs cannot have a warranty of title.
Only a handful of states in the U.S., including Texas, permit property owners to create Lady Bird deeds.
How Lady Bird Deeds Work in Texas
In Texas, a property owner can transfer their real estate via a Lady Bird deed by executing the deed, which must identify the beneficiary or beneficiaries who will inherit the property upon the owner’s death. The owner then records the deed with the county recorder. However, after recording the deed, the property owner remains in possession and control of the property. When the property owner dies with a valid, recorded Lady Bird deed, the property automatically transfers to the beneficiary or beneficiaries named in the deed.
Benefits and Advantages of Lady Bird Deeds
Some of the primary benefits of Lady Bird deeds for Texas estate plans include:
- Avoiding probate: A Lady Bird deed can transfer property to a beneficiary without the time and expense of the probate process.
- Retaining lifetime control: Lady Bird deeds allow the owner to lease out, refinance, or sell the property during their life.
- Protecting from Medicaid recovery: In certain circumstances, a Lady Bird deed can protect a property from Medicaid estate recovery if the owner received Medicaid benefits.
- Providing a stepped up basis: When beneficiaries inherit property through Lady Bird deeds, their “basis” in the property for capital gains tax purposes becomes the property’s fair market value at the time of the owner’s death, which can help reduce capital gains taxes if beneficiaries subsequently sell the property.
Potential Drawbacks or Limitations
Lady Bird deeds do have limitations and drawbacks that can restrict their usefulness for estate planning purposes, such as:
- Lady Bird deeds can only transfer real estate, not other assets like personal property or financial accounts
- Only a handful of states recognize Lady Bird deeds, so they may not work for property in other states
- Some title companies or banks may choose not to work with properties subject to a Lady Bird deed
- Errors in drafting or recording a Lady Bird deed may undermine the deed’s validity or lead to unintended consequences
Contact Our Estate Planning Attorneys Today to Learn More
When you have real estate in Texas that you want to leave to loved ones, you need experienced legal counsel to help you evaluate your options, such as by executing a Lady Bird deed. Contact Guest & Gray today for a confidential consultation with a Texas estate planning attorney to learn more about Lady Bird deeds in Texas and discuss whether a deed can help you achieve your estate planning goals.
