Similarities and Differences between Lady Bird Deeds and Transfer on Death Deeds

Both Lady Bird Deeds and Texas Transfer on Death Deeds are essentially beneficiary designations for your real estate.  Lady Bird Deeds are a product of common law, whereas Transfer on Death Deeds are product of statute. However, both will allow you to transfer your real estate to your heirs without the need for a probate proceeding.

Similarities between Lady Bird Deeds and Texas Transfer on Death Deeds

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:

1. Do not count as a gift for federal gift tax purposes;
2. Do not affect homestead rights or tax exemptions;
3. Allow you to sell or mortgage the property that is subject to the deed without the consent of the remainder beneficiaries;
4. Provide you with the flexibility to change the remainder beneficiaries at any time;
5. Protect the property from the creditors of the remainder beneficiaries during your lifetime;
6. Preserve your ability to immediately qualify for Medicaid benefits;
7. Allow for a step-up in basis at your death; and
8. Avoid Medicaid Estate Recovery.

Differences between Lady Bird Deeds and Texas Transfer on Death Deeds

Despite their similarities, they are different in several ways. Below are some of the differences between Lady Bird Deeds and Transfer on Death Deeds:

Two Year Claw Back 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, Section 114.106 of the statute allows the personal representative or creditor of the estate to claw back 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.

Those Authorized to Sign the Deed

The Texas Transfer on Death Deed statute states that only the homeowner can sign a Transfer on Death Deed, whereas no such restrictions exist for a Lady Bird Deed. 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

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. In contrast, a Lady Bird Deed does not have a recording requirement. All that is required for a deed to be valid in Texas is delivery to the Grantee.

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 Should You Use?

It depends.

Under most circumstances, a Texas Transfer on Death Deed will accomplish the homeowner’s objectives. However, 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 the better option.

A Caveat

One thing to watch is whether courts will imposing rules that apply to Transfer on 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 the rules that apply to Transfer on Death Deeds may be imposed 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, I recently learned of a district court case in which a court ruled that a Lady Bird Deed was subject to the claw back provision of the Transfer on Death Deed Statute. The case was not appealed, and it later settled, so there is no appellate court opinion related to this case.

The statute is less than five years old, and cases will flesh out this issue over time. Or perhaps, we will get a more definitive legislative guidance.

It’s always best to get legal advice about your unique situation.