Estate planning can be stressful, especially if you haven't taken that first step. The idea of creating a will can be overwhelming. However, there are other documents that may help you make your wishes clearly known. Two such documents are the Lady Bird Deed, or LBD, and the Transfer on Death Deed, or TODD. Both allow homeowners to continue living in their homes while naming a beneficiary or grantee to take ownership of the home when the owner or grantor, dies. They also allow the grantor to maintain all rights of ownership, such as the ability to sell, lease, or mortgage the property. Although the two deeds share similarities, they do have significant differences.
These deeds are especially helpful for other reasons, such as:
- Avoiding probate – Probate is the judicial process of having a deceased person’s will approved prior to the transfer of property to the beneficiary or beneficiaries named in the will. Unless otherwise specified, the home would be listed as part of this property. By using a LBD or a TODD, the home transfers immediately upon the death of the grantor, meaning it is not formally part of the estate and is not subject to probate, helping the grantee avoid possible costly delays.
- Avoiding Medicaid Estate Recovery Program (MERP) – In both instances, homeowners will not be disqualified from receiving Medicaid. However, the Medicaid Estate Recovery Program, or MERP, requires that recovery costs paid to Medicaid come from the estate of the person who received Medicaid assistance. Each applicant is required to sign a form acknowledging that assets from the estate are subject to MERP claims when they die. Once that person dies, the state must file a claim against the estate of a recipient 55 years old or older. However, because both the LBD and the TODD pass ownership of the property to the grantee immediately up the death of the grantor, the home is no longer considered part of the estate and is not subject to the claim.
- Property taxes – Homestead owners are often eligible to pay lower taxes if they qualify for certain exemptions, such as being over 65 or having a disability. Neither a LBD nor a TODD will interfere with those exemptions.
- Capital gains tax – Both the LBD and the TODD allow the transferee or grantee to receive a stepped-up basis at the death of the owner.
- No gift-tax – Because ownership of the property is maintained during the grantor's lifetime under the LBD and the TODD, the property would not be considered a gift, so there would be no gift tax.
However, there are important differences that should be considered before choosing between the two, such as:
- Power of Attorney – A TODD can only be created and signed by the grantor with the legal capacity to create or revoke the document. No other agent has the authority to do so. With the LBD, however, a Power of Attorney may designate an agent to create the document if the grantor should become incapacitated.
- Transfer Effectiveness – The TODD become effective after the death of the grantor. The grantee must file an affidavit of death and a certified copy of the grantor's death certificate with the county clerk where the deed was recorded in order for it to become effective. The LBD, however, is legal as long as it is recorded in the county clerk's office before the grantor's death. It will be effective to transfer property outside of probate.
- Number of Beneficiaries – TODD allows the grantor to name more than one beneficiary, each receiving equal and undivided shares in case the first beneficiary should die or become incapacitated, whereas the LBD only allows the grantor to name one beneficiary They may, however, change the beneficiary at any time or revoke the document if they desire.
- Creditor Claims or Clawback Period – Under the TODD, if the estate lacks enough assets to pay debts, taxes, or family allowances, the personal representative or executor to bring property back into the estate. This claims period can last up to two years after the death of the grantor. The LBD, however, has no such statute, keeping the property safe from creditors.
- Warrantied – This issue is a result of the Clawback Period. A TODD transfer title may be without any covenant of warranty. This no-warranty for TODD might raise questions about whether the grantor's policy will cover the grantee. For this reason, many title companies won't insure this property for up to two years and sometimes require extra documentation after a TODD transfer. However, an LBD can be drafted with or without warranties, similar to other deeds, protecting it from these issues.
Both the Lady Bird Deed and the Transfer on Death Deed have pros and cons. If you aren't sure which is right for you, we're happy to answer your questions and help you make the choice that fits your needs. Call us at 254-221-8588 for an appointment.