Lady Bird Deeds & MERP-Medicaid Estate Recovery

What is it? A Lady Bird Deed conveys property to someone (the grantee) after the owner (the grantor) dies, providing that the owner does not change his or her mind! What is such an indecisive action good for? Actually, these deeds have some pretty good uses...

Avoids Probate: The deed allows a person to convey the real estate without the necessity of probate. For example, an elderly mother could leave her home to her daughter without the expense and delay of probate.

Deed is Revocable: The deed is revocable to keep full flexibility with the grantor. The grantor can change his mind after creating this deed and sell the property without needing the agreement of the grantee. The grantee has no right, title, or interest in the property until the grantor dies. For example, mother could have a falling out with her daughter, decide to sell the home or leave it to her church instead.

Not a Transfer for Medicaid Purposes: Because the deed is revocable by the grantor, signing the deed does not create a completed gift requiring a gift tax return. Because the deed is not a completed gift, the deed does not create a disqualifying transfer for Medicaid qualification purposes.

Step-up in Basis and Homestead Exemption: Since the deed does not create a completed gift, the property is not removed from the Grantor’s estate for estate tax purposes, so the value of the property will “step-up” in value to its value at the Grantor’s date of death which is very favorable to the beneficiaries. In addition, the Grantor retains any favorable property tax exemptions that the Grantor has.

Estate Recovery: For individuals receiving Medicaid benefits to pay for nursing home expenses, Texas now has an estate recovery program. This means that the State of Texas may seek reimbursement from that individual’s estate for the Medicaid payments. Real estate passing by this deed would likely not be subject to estate recovery.

File the Deed or Safeguard: If the Deed is not immediately filed, the Grantor needs to make sure the original Deed is kept in a safe place. Only an original document can be filed.

Where Does the Name Come From? A lot of people imagine that these deeds had something to do with Lady Bird Johnson, the former First Lady and great Texan. That may be the source, but I have never seen any substantiation of this. It’s a mystery to me.