Hello from the central region of Texas! As attorneys serving clients in the Lone Star State, we provide comprehensive estate planning assistance to residents, offering guidance, and support throughout the complex process of estate planning.
Two significant estate planning instruments we help our clients set up include the Transfer on Death Deed and the Lady Bird Deed (also called an Enhanced Life Estate Deed). These two instruments have considerable benefits, but taking a cookie-cutter approach to something as important as your estate plan is never a good idea.
Let’s review the fundamental characteristics of each, their strengths and weaknesses, and what you should consider as you make your decisions.
What is a Transfer on Death Deed?
The Transfer on Death Deed (often shortened to TODD) is a legal instrument that enables property owners to designate a beneficiary who will receive ownership of their real estate upon their demise, as stipulated by the Texas Estates Code Section 114.151.
Most importantly, this option allows the deceased person’s (or decedent’s) estate to bypass the State’s probate process.
Advantages of a Transfer on Death Deed
There are many advantages of a Transfer on Death Deed.
When an individual has a properly recorded TODD, their real property may bypass the probate even if they do not have a will. Note that even if you have a choice, most property in Texas must pass through probate, which incurs court and administrative costs and adds stress during an already difficult time.
Ease of execution
Executing this type of deed is often uncomplicated and without the legal formalities usually associated with the probate process. If the person who established the TODD has used Medicaid benefits, the property passed through the deed will not be subject to the state’s Medicaid Estate Recovery Program (also known as MERP).
In this situation, when a person applies for Medicaid and long-term services and support from the government, the government retains the right to ask for money back from that person’s estate after they pass. Because the property being transferred by a TODD is transferred outside of the probate process, that property is deemed to no longer be in the estate. Therefore, that property is not subject to Medicaid Estate Recovery Program claims.
Finally, another aspect to note is that you may revoke or modify a TODD if you have a change of heart regarding your designated beneficiary. This allows valuable flexibility throughout a grantor’s lifetime.
However, there are disadvantages associated with the use of a TODD.
Disadvantages of a Transfer on Death Deed
First, the scope of a Transfer on Death Deed can be narrow. While the probate process or a will might be expansive and control the entirety of a decedent’s estate, this type of deed is limited to real estate transactions and does not encompass any other types of assets like personal or intangible property.
Second, if a beneficiary predeceases the person who established TODD, the property held by the deed could transfer to the beneficiary’s heirs—and this might run counter to the wishes of the grantor.
For example, suppose you name your sibling as your beneficiary, but she passes away before you. In that case, your property may automatically pass to her children (your nieces and nephews) when you did not intend for them to inherit it.
What is a Lady Bird Deed?
The Lady Bird Deed, also known as the Enhanced Life Estate Deed, is a special estate planning instrument in Texas. The Lady Bird Deed enables Texas property owners to maintain authority over their property while also naming a beneficiary for the remaining interest.
Advantages of a Lady Bird Deed
Like a TODD, a Lady Bird Deed can help bypass the probate process, as it automatically transfers to the beneficiary upon the grantor’s death.
Maintain right to use
The Lady Bird Deed provides the grantor the authority to continue using their property, including activities such as selling, leasing, or mortgaging the property stipulated in the deed without requiring the beneficiary’s consent.
Medicaid and tax advantages
Property transferred into a Lady Bird Deed doesn’t count against your Medicaid eligibility, nor does it count as part of your estate if you’re subject to MERP. Moreover, including property in a Lady Bird Deed can help you avoid gift tax rules.
However, the Lady Bird Deed does have some drawbacks.
Disadvantages of a Lady Bird Deed
First, creating a Lady Bird Deed is more complex than preparing a TODD, necessitating exact legal terminology to establish its legal efficacy.
The intricate nature of this deed may create confusion among title companies and individuals who are not well-informed regarding this type of deed.
Given its complexity, the Lady Bird Deed can create additional hurdles that the more established instrument may not face.
Which instrument is best for you?
Estate planning in Texas possesses distinct characteristics and dimensions. Developing a comprehensive understanding of your resources, familial connections, and long-term prospects is critical to your choice.
Choose between a TODD and a Lady Bird Deed based on your requirements.
Texas estate planners consider the Lady Bird Deed the leading strategy for safeguarding against Medicaid estate recovery. If you are in pursuit of autonomy and adaptability to exchange beneficiaries as needed, then the Lady Bird Deed might be the better choice for you.
However, if your main goal is to circumvent the probate process, and if you are seeking the simplest way to do that, then the TODD might be your best option.
It is essential to exercise caution and consider the potential ramifications of choosing either a TODD or a Lady Bird Deed. Working with an attorney with extensive estate planning experience within Texas can reduce the difficulty of navigating your options.
We’re here to help
At Shann M. Chaudhry, Attorney at Law, PLLC., we are always available to provide guidance, address questions, and empower you to make well-informed decisions on estate planning.
Contact us today to discuss if a Transfer on Death Deed or a Lady Bird Deed would work for your planning needs.