If you have no idea who Claudia Alta Taylor Johnson is, you’re not alone. Despite the fact that she was a multimillionaire who was creating a powerful media empire as early as 1942 and a pioneer of the environmental beautification movement, most people have never heard of her.
Well, at least they aren’t familiar with her given name. But most people will recognize her by her nickname—Lady Bird—and by her most famous role—First Lady to President Lyndon B. Johnson.
Nicknamed by a nurse who told the Taylor family that, as a child, Claudia was “pretty as a lady bird,” Johnson expanded the role of First Lady, and many of her projects still impact Americans today. For example, she championed the 1965 Highway Beautification Act and became a prominent conservationist, working tirelessly to preserve California’s Redwoods and bring green spaces to Washington, D.C.
And while there’s less evidence she or her president-husband had anything to do with lady bird deeds, the type of will named after her, there’s no question the way LBJ transferred his property to his wife before his death permanently changed probate law in Texas.
Lady bird deeds explained
A lady bird deed, also known as an enhanced life estate deed, is a type of deed that lets a property owner have their cake and eat it too.
Unlike a traditional will, which must go through the probate process before assets are distributed to beneficiaries, a lady bird deed splits ownership of real property between the original owner’s life and death. Under a lady bird deed, the original owner maintains the rights to the property for the duration of their life and can occupy, rent, or sell the property, but ownership of the property transfers automatically to a designated beneficiary once the grantor dies. That beneficiary is known as the remainder beneficiary or remainderman.
In short, a lady bird deed is a legal workaround that lets you avoid probate by allowing you to keep your real estate and give it away at the same time.
A lady bird deed can help with your eligibility for Medicaid, but only if you execute the deed at least five years before applying for Medicaid. Another advantage of lady bird deeds? Because they keep your property out of your estate, the government can’t target it as part of the Medicaid Estate Recovery Plan (MERP).
As tempting as it sounds to skip probate, though, a lady bird deed isn’t right for everyone. There are only five states that recognize lady bird deeds: Texas, Florida, Michigan, Vermont, and West Virginia. So you won’t be able to use it if your property is in, say, California or New York (the former allows a different type of transfer-on-death deed, but the latter does not).
Other disadvantages of a lady bird deed include challenges in obtaining title insurance and satisfying unpaid property liens after an owner’s death. However, an experienced estate and trust attorney can help you navigate these challenges and find the right planning tools for your circumstances
How do lady bird deeds impact Texas property taxes?
When it comes to the pros and cons of lady bird deeds, the tax implications could fall under both categories.
There are distinct tax benefits associated with a lady bird deed. To start, because property ownership isn’t formally transferred during the owner’s lifetime, it isn’t considered a completed gift under federal tax laws. As a result, the remainder beneficiary won’t be subject to any gift taxes.
Like many other states, Texas has homestead exemptions, which can reduce taxes by removing part of your home’s appraised value from property tax calculations. Since lady bird deeds allow an owner to retain a homestead exemption during their lifetime, they can take advantage of lower property tax bills.
Lady bird deeds also operate on a “step-up” system for valuation. If the remainder beneficiary decides to sell the property, taxes are based on the estimated value of the home at the point when the deed was signed and they received ownership, not the current market value, which allows them to avoid steep capital gains taxes.
The downside is that property transferred via a lady bird deed will be subject to a new tax assessment that could (and often does) result in higher property taxes generally. The homestead exemption can still bring the total bill down, but remainder beneficiary may end up with a higher property tax than they expected after inheritance.
Also note that lady bird deeds are not ideal mechanisms for leaving property to multiple beneficiaries.
Losing your Homestead exemption may be unavoidable, at death, but there is a possibility that after the Lady Bird Deed is recorded, the taxing authority may remove your homestead exemption, so you may need to refile it.
Consult with an experienced Texas elder law attorney
Estate and elder law can be complicated, and seemingly small decisions can have unintended long-term effects that could negatively impact how your estate is distributed after your death. The best way to ensure your wishes are followed after your passing is by working with an attorney experienced in estate planning and elder law.
If you have questions about how to efficiently and effectively pass on your estate to your loved ones and simplify what they must do to wrap up your affairs, contact our team today. We’ll use our experience and knowledge to help you create a plan that works for you.