Benefits of Lady Bird Deeds and Transfer on Death Deeds

There are several significant reasons that estate planning attorneys may advise a property owner to use one of two types of special deeds, a Lady Bird Deed or a Transfer on Death Deed (TODD) (collectively, Special Deeds) to transfer real property to third parties instead of by will, trust, inter vivos gift, outright sale, or intestacy law. Either type of deed is attractive for the right client because each allows:

1. Instant transfer of real property to intended third party(ies) on the date of the property owner’s death;

2. Flexibility and control to revoke deeds at any time while the property owner is competent;

3. Avoidance of costs and delays associated with probate (legal, timing, court procedures, etc.);

4. Avoidance of Medicaid recovery of a Medicaid recipient’s real property after the property owner dies;

5. Exemptions and creditor protections; and

6. Avoidance of costs and ongoing tax and legal implications of trusts.

Both deeds have similarities and some differences. Regardless of which deed is used to transfer a property, the property owner files the deed with the county property records department. But unlike a deed of transfer upon the sale of real property, the transfer is not completed upon the filing. Rather, the transfer takes place automatically upon the property owner’s death.

Additionally, unlike with a trust or inter vivos gift, the property owner can decide to revoke the Special Deeds by filing a formal revocation with the county or filing a subsequent Special Deed. The property owner can also automatically revoke the Special Deeds simply by transferring the real property by sale or gift.

These Special Deeds bypass probate. They also override wills and intestacy laws that otherwise name certain beneficiaries to receive the real property. The process is akin to naming specific beneficiaries in a life insurance policy, which also bypasses probate. Avoiding probate may save the beneficiaries some legal costs and certainly saves time as probate may take months or years to complete, depending upon challenges to the will or finding heirs and getting them to agree on the disposition of the property.

Medicaid pays for the healthcare of millions of Texans. Of particular concern to property owners is that Medicaid makes one spend down a significant portion of one’s assets—excluding the real property—before Medicaid begins paying for long-term care services. But after the owner dies, the government may recover its costs against the estate, which would be principally the real property. Because these Special Deeds immediately transfer the real property upon the property owner’s death, the asset is not subject to probate. Because it is not subject to probate and no longer an estate asset, the government generally has not made a claim. With a TODD, the government cannot make a Medicaid recovery claim.1 Although, estate creditors may make a claim against the real property if the estate has insufficient assets to pay creditors.2 Because these special deeds are not inter vivos gifts or sales of property, the property owner maintains the existing property tax exemption and real property creditor protections.

Trusts can be an excellent way of transferring assets, but they come with additional upfront and ongoing costs and complexities that are not suited for everyone. If the primary concern is how to smartly transfer a real property, the Special Deeds provide a low-cost, hassle-free way to do so.

Another perk is that because these special deeds are not inter vivos gifts or sales of property, the property owner maintains the existing property tax exemption and real property creditor protections.

The concept of Special Deeds began decades before the practice was codified.3 The Lady Bird Deed is a construct of common law based on property law. While case law validates the use of Lady Bird Deeds, one must piecemeal multiple cases together to defend or attack a Lady Bird Deed, depending on what issues are presented.4 Whereas TODDs are statutorily authorized. The TODD was created in 2015 by the Texas Legislature to specifically address giving a future right to real property with the right to revoke that gift while competent.5

Regardless of which option best fits a client’s particular needs, Special Deeds present opportunities to better meet a client’s wishes as to whom should receive a significant asset in a simple, cost-effective manner—while alive and beyond.

Mark P. Yablon founded Yablon Law PLLC to be a clientcentered law practice, helping business and individuals with estate planning, probate, real estate, bankruptcy, and commercial litigation. He is on the editorial board of The Houston Lawyer

Endnotes

1. “Notwithstanding Subsection (a), real property transferred at the transferor’s death by a transfer on death deed is not considered property of the probate estate for any purpose, including for purposes of Section 531.077, Government Code.” TEX. EST. CODE § 114.106.

2. TEX. EST. CODE § 114.106(a).

3. “A person may make an inter vivos conveyance of an estate of freehold or inheritance that commences in the future, in the same manner as by a will.” TEX. PROP. CODE § 5.041.

4. In re Estate of Turner, No. 06-17-00071-CV, at *2 (Tex. App.—Texarkana Dec. 8, 2017).

5. TEX. EST. CODE § 114.101, et al.