Both Lady Bird Deeds and Texas Transfer on Death Deeds (TODDs) are essentially beneficiary designations for your real estate. Both Lady Bird Deeds and Texas Transfer on Death Deeds (TODDs) allow property owners to transfer real estate to heirs without the need for probate while keeping full control during their life. But they are not identical.
Lady Bird Deeds are a product of common law, whereas Transfer on Death Deeds are product of statute. This article will help you understand the similarities, differences, and which deed will best suit your needs.
What is a Texas Transfer on Death Deed?
A Texas Transfer on Death Deed is authorized by statute. It lets you name one or more beneficiaries who take title to your real property when you die. You get to keep all rights to do whatever you want with your property during your life, including the right to sell, refinance, or change the beneficiaries.
To be effective, the deed must be signed, notarized, and recorded in the county property records before death.
What is a Lady Bird Deed?
A Lady Bird Deed arises from Texas common law. It creates an enhanced life estate for you. This means you have the power to occupy, sell, mortgage, or cancel the deed without the beneficiary’s consent. Unlike a transfer on death deed, it doesn’t have a statutory recording requirement to be valid between the parties.
How Lady Bird Deeds and Texas Transfer on Death Deeds are Alike
Lady Bird Deeds and Transfer on Death Deeds are similar in a number of ways. In addition to transferring your property outside of probate, Lady Bird Deeds and Transfer on Death deeds also:
- Do not count as a gift for federal gift tax purposes;
- Do not affect homestead rights or tax exemptions;
- Allow you to sell or mortgage the property that is subject to the deed without the consent of the remainder beneficiaries;
- Provide you with the flexibility to change the remainder beneficiaries at any time;
- Protect the property from the creditors of the remainder beneficiaries during your lifetime;
- Preserve your ability to immediately qualify for Medicaid benefits;
- Allow for a step-up in basis at your death; and
- Avoid Medicaid Estate Recovery.
Currently, the Medicaid Estate Recovery Program (MERP) can only recover assets included in the deceased individual’s probate estate. A home that is part of a deceased person’s probate estate can be subject to MERP. Because both the Lady Bird Deed and Texas Transfer on Death deed pass property outside of probate, they avoid Medicaid estate recovery.
Key Differences Between Lady Bird Deeds and Transfer on Death Deeds
Despite their similarities, Lady Bird Deeds and Transfer on Death Deeds differ in several significant ways:
Two Year Clawback Period
Texas recognizes that the use of Transfer on Death Deeds can affect the ability of a decedent’s creditors to recover a deceased person’s debt. Therefore, the statute allows the personal representative or creditor of the estate to claw a piece of property that the homeowner transferred by transfer on death deed back into the estate if the homeowner’s estate is not sufficient to the pay the debts of the estate, related taxes, or allowances to the homeowner’s family.
As a result, title companies may be reluctant to insure clear title for two years, until the claims period has expired, or at least until they receive assurances that the deceased homeowner’s debts have been paid.
Warranties
Ladybird deeds allow homeowners to transfer their interest in the property with warranties, whereas the Texas Transfer on Death Deed statute specifically states that the interest in the property transfers without covenant of warranty of title, even if the deed contains a contrary provision. Therefore, whether the beneficiary of a Transfer on Death Deed will be covered by the grantor’s title policy is uncertain.
Who Can Sign the Deed
The Texas Transfer on Death Deed statute states that only the homeowner can sign a Transfer on Death Deed. An agent under a Durable Power of Attorney cannot create one on the owner’s behalf.
By contrast, if the power of attorney expressly authorizes it, an agent may sign a Lady Bird Deed for an incapacitated owner. Therefore, if the homeowner lacks capacity, an agent under a power of attorney cannot execute a Transfer on Death Deed. However, an agent under a power of attorney will be able to execute a Lady Bird Deed if the power of attorney so authorizes.
Recording Requirements
In Texas, most deeds don’t have to be recorded to be valid. Texas law only requires the grantor to sign the deed and deliver it to the grantee. However, there are several benefits of recording the deed. Recording the deed gives the public notice of the property transfer. This can help avoid disputes and ensure that all parties recognize the transfer.
In order for a Transfer on Death Deed to be valid, it must be signed, notarized, and recorded in the property records of the county where the property is located. A Lady Bird Deed does not require recording to be valid as between the parties. Therefore, if there is a possibility that the Grantor will not be able to record the deed before their death, the Ladybird Deed is a better option.
Note, however, a title company recently refused to accept the validity of a deed my deceased client signed transferring his interest in his home to his trust, arguing that the fact that my client did not record the deed before he died suggested that he may have intended to revoke it.
Lady Bird Deed or Texas Transfer on Death Deed: Which is Best for You?
It depends.
A Transfer on Death Deed is a great option for most homeowners who want to transfer property without probate. But, if the homeowner lacks capacity, there is a concern about future title problems, or a desire to sell the property within the two-year claims period, a Lady Bird Deed may be a better option.
Do I Need a Will if I Have a Lady Bird Deed or Transfer on Death Deed?
Yes. Lady Bird Deeds and Transfer on Death Deeds are efficient ways to pass your real estate without probate, but they don’t control all of your property. They also don’t provide a backup plan in case the deed fails for some reason, like if all the beneficiaries you named do not survive you.
A valid Texas Will acts as a safety net. It lets you appoint a trusted friend or family member to settle your estate, care for your children, and transfer your remaining property to your beneficiaries.
Legal Considerations for Lady Bird Deeds and Transfer on Death Deeds
One thing to watch is whether courts will impose rules that apply to the Transfer of Death Deeds on Lady Bird Deeds.
According to legal precedent, if a statute revises the common law, the statute controls. However, the Transfer on Death Deed statute specifically provides that “the statute does not affect any method of transferring real property otherwise permitted under the laws of the state.”
So a question remains about whether courts will interpret Lady Bird Deeds as a “method of transferring real property otherwise permitted under the laws” of Texas. If so, the Transfer on Death Deed statute would not control them. If not, then courts may impose the rules that apply to Transfer on Death Deeds on Lady Bird Deeds.
For example, the Transfer on Death Deed statute permits allows the personal representative or creditor of the estate to claw a piece of property transferred by Deed, whereas no such rules applies to Lady Bird Deeds. However, in one district court case, a court ruled that a Lady Bird Deed was subject to the claw back provision of the Transfer on Death Deed Statute. There is no appellate court opinion related to this case because the case settled before the appellate court issued a decision.
Conclusion: Get Legal Advice for Your Situation
If you are considering incorporating Lady Bird Deeds or Transfer on Death Deeds into your estate plan, consulting with an experienced Texas estate planning attorney can provide valuable guidance, including assistance with Lady Bird Deeds, Transfer on Death Deeds, and other legal matters.
