Lady Bird Deeds For Medicaid and Estate Planning

The mother and father of one of my asset protection clients wants to give my client (their son) and his wife their homestead property after they decease. The parents are concerned about subjecting their homestead to medicaid claims in the event they both leave the home to reside in a nursing home. They also want to make sure my client’s family gets the home upon their death without probate. They asks if they can titled their homestead in the name of my client and his spouse.

Simply transferring a homestead to a child’s name is not a good idea for several reasons. For example, the house loses homestead protection when it is not owned by the people who occupy the home. The parents would essentially be tenants. Another reason is that transfers of assets to other family members can be clawed back for up to five years for purposes of medicaid eligibility and liability.

I recommended these parents deed their home to their son using an “enhanced life estate deed” which are also referred to as “lady bird deeds.” A standard life estate deed involves the owner’s conveyance of your property to a third party with the condition that the owner may used to property throughout his lifetime. The right to use a property that you have titled in another’s name is the “life estate” interest. A typical life estate deed restricts the life estate holder’s rights to sell or mortgage the property, and the life tenant may be liable if the property deteriorates. The standard life estate deed is irrevocable.

The enhanced life estate (lady bird deed) provides greater rights to the life estate tenant. Typically, lady bird deeds are used by parents to convey legal title of their homestead to their children After the deed is recorded, the holder of the life estate (typically, the parents) have the right to profit from the property, sell or mortgage the property, and improve the property. The parents reserve the right to change the beneficiaries of the deed.

There is a significant benefit from lady bird deeds in planning for the parent (grantor’s) medicaid planning. Upon the parents’ deaths, full legal title automatically transfers to the named child beneficiaries outside of probate and free of claims by Medicaid Because the grantor retains enhanced rights in his life estate the lady bird deed is not treated as a transfer of the homestead subject to the five year claw back period in determining medicaid eligibility. The parents retain the properties’ homestead exemption for taxation and creditor protection.

About the Author

Gideon Alper specializes in estate planning for individuals and their families.

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