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Real property

Lady Bird deed

A Lady Bird deed is a deed that allows a real property owner to transfer ownership of the property to another person or entity while continuing to use and control the property.

In some states a Lady Bird deed may be used as an estate planning tool, allowing the owner to make a lifetime gift of the property; avoid federal gift taxes (because it is an incomplete gift and is not final); avoid probate; qualify for Medicaid benefits; and continue to live in their private home after transferring ownership (title) of it to another person or entity.

A Lady Bird deed may also be referred to as an enhanced life estate deed, as it effectively gives the owner a life estate interest in the property while transferring ownership (title) to another person or entity.

Laws vary from state to state, but a Lady Bird deed may also allow the owner to continue to have complete control of the property, without input from the grantee under the Lady Bird deed. This may include the owner’s right to change their mind and sell or transfer the property to another person or entity, or to make changes to the property.

In Texas, a Lady Bird deed, also known as an enhanced life estate deed, is a legal instrument that allows property owners to retain control over their property until death, while designating a beneficiary to automatically receive the property upon the owner's death, without the need for probate. This type of deed allows the original owner to use, occupy, and even sell the property during their lifetime without the consent of the beneficiary. The owner can also change the beneficiary at any time. Lady Bird deeds are recognized in Texas and can be a useful estate planning tool to avoid probate, potentially qualify for Medicaid benefits, and minimize tax implications. However, it's important to consult with an attorney to ensure that this estate planning strategy aligns with the individual's overall estate plan and to address any potential risks or complications.

Texas Statutes & Rules

Federal Statutes & Rules

Internal Revenue Code, 26 U.S.C. § 2036 - Transfers with retained life estate
This statute is relevant because it addresses the inclusion of transferred property in the grantor's gross estate if they retain certain interests or rights, which is pertinent to the use of Lady Bird deeds in estate planning.

Under 26 U.S.C. § 2036, if an individual transfers property during their lifetime but retains for themselves or their spouse a life estate or the right to use the property, the value of the property is included in their gross estate for federal estate tax purposes. This includes any situation where the individual has the right to designate who will enjoy the property or its income. However, Lady Bird deeds are designed to avoid this inclusion by allowing the property owner to retain control and use of the property without a formal life estate, which may not trigger the same tax implications. The specific tax treatment can vary based on how the deed is structured and state law.

Internal Revenue Code, 26 U.S.C. § 2501 - Imposition of Gift Tax
This statute is relevant because it governs the imposition of federal gift taxes, which may be a consideration for individuals using Lady Bird deeds to transfer property.

26 U.S.C. § 2501 imposes a tax on the transfer of property by gift by an individual. The tax applies whether the gift is direct or indirect and whether the property is real, personal, tangible, or intangible. However, Lady Bird deeds may be structured in such a way that the transfer is considered incomplete for gift tax purposes until the death of the original property owner, potentially avoiding the immediate imposition of gift taxes. The grantor's retention of control and the ability to revoke the deed may support the position that a completed gift has not occurred.

Internal Revenue Code, 26 U.S.C. § 121 - Exclusion of gain from sale of principal residence
This statute is relevant because it provides for the exclusion of gain from the sale of a principal residence, which may apply to property transferred via a Lady Bird deed.

Under 26 U.S.C. § 121, an individual may exclude up to $250,000 ($500,000 for married couples filing jointly) of gain from the sale or exchange of a property that has been owned and used as the individual's principal residence for at least two of the five years prior to the sale. This exclusion may still apply to a property transferred by a Lady Bird deed if the original owner continues to use the property as their principal residence, despite the transfer of title. The ability to sell the property and benefit from this exclusion may be retained by the original owner, even after executing a Lady Bird deed.

Medicaid Statutes, 42 U.S.C. § 1396p - Liens, adjustments and recoveries, and transfers of assets
This statute is relevant because it outlines the rules for Medicaid eligibility and estate recovery, which can be affected by the use of Lady Bird deeds.

42 U.S.C. § 1396p sets forth the provisions for Medicaid eligibility, including the treatment of transferred assets. Transfers of assets for less than fair market value may result in a period of Medicaid ineligibility. However, because a Lady Bird deed allows the grantor to retain control and the ability to sell or mortgage the property, it may not be considered a transfer for Medicaid purposes until the grantor's death. This can potentially help the grantor qualify for Medicaid by not counting the home as an available asset. Additionally, since the property passes outside of probate upon the grantor's death, it may not be subject to estate recovery by Medicaid, depending on state law.