The Lady Bird Deed: Has the Remainderman Interest Nested or Vested?
| Publication year | 2023 |
| Pages | 40 |
The Lady Bird Deed Has the Remainderman Interest Nested or Vested?
By Rachel E. Carr and G. Danielle Bennett
In preparation for the end of life many people ask the question "how can my family avoid probate and liens against my property when I die?" A quick internet search may prompt a client to ask about lady bird deeds. A lady bird deed (often called an "enhanced life estate deed") is a type of life estate deed that purports to allow the grantor to maintain complete control of the property.[1] A lady bird deed transfers the property to remaindermen outside of the deceased life tenant's probate estate.[2]
Attorneys are faced with to two conflicting views when considering lady bird deeds; one through the lens of estate planning, and one through the lens of real estate title. While not all attorneys who regularly practice in estates are versed in real property title issues, and vice versa, it is imperative that we consider the broad consequences of our legal advice. A practitioner may recommend a lady bird deed to accomplish certain estate planning goals, but must also be wary of creating other practical or substantive real estate problems. This article will discuss some of the real estate concerns posed by lady bird deeds - including the paucity of modern law governing ladybird deeds in the Carolinas, and insurability of a ladybird deed in the chain of title.
I. Recognizing a Lady Bird Deed
A lady bird deed contains enhancement language explicitly reserving all rights of ownership to the grantor or life tenant, until their death, at which time a fee interest is conveyed to the remainderman grantee.[3] The enhancement typically states:
Grantor reserves unto himself, for and during his lifetime, exclusive possession, use, and enjoyment, right to income of the property, and Grantor further reserves the right to sell, lease, encumber by mortgage or deed of trust, pledge, lien or otherwise maintain and dispose of, in whole or in part, or grant any interest thereon, of the property by gift, sale, or otherwise, without consent or joinder of the Grantee, which may terminate the interest of Grantee. Grantee shall be a remainderman in the property described herein and upon the
death of Grantor, if the property described herein has not been previously disposed of prior to the death of Grantor, all right and title to the property, then remaining, shall fully vest in Grantee as fee simple subject to such liens and encumbrances which may exist at the time of Grantor's death.
This enhancement purports to allow the life tenant full control of the property, including the ability to sell, mortgage and to retain any proceeds from the sale of the property. The remaindermen's interests are revocable, and the life tenant has no obligation to maintain the property for the remaindermen. This language also evidences the intention for the remaindermen's interests to vest after the life tenant's death. It is as if the grantor maintains a fee interest for life. This may be an effective reservation of power in other states,[4] but in the Carolinas it creates a nest[5] of remaindermen whose rights must be accounted for in a real estate closing.
II. History and Use of Lady Bird Deeds
Life estate deeds can effectively pass title to the remaindermen outside of probate, but for the life tenant's life they are left with little control over their property.[6] For example, if they want to make upfits to the real property, refinance or sell, they cannot do so without the remainderman's consent. Perhaps this is why a Florida attorney in the 1980s sought an alternative.
Jerome Ira Solkoff, a Florida attorney, created the lady bird deed.[7]The name "lady bird" comes from First Lady Claudia Alta "Lady Bird" Johnson. Although the historical accuracy is questionable, it is generally believed to be named as such because, anecdotally, President Lyndon B. Johnson went to great lengths to avoid probate transfers of his assets to his wife.[8] Additionally, Medicaid was implemented during the Johnson Administration so the name possibly has some historical reference to its effect for avoiding Medicaid liens.[9]
Navigating the best estate plan for our clients requires us to ask questions about their family relationships, financial security and long-term plans. A triggering word for asset and estate planning is "Medicaid." Chances are that if you practice in real estate or estates, you will meet a client that is planning for the end of life with the probability of needing Medicaid benefits. Lady bird deeds are used in other states to avoid probate and the consequences of Medicaid-funded long-term care.[10]Medicaid application requirements and Medicaid expenditure liens should be considered when giving legal advice.
There is a timeframe in which an applicant for Medicaid benefits will have financial records reviewed to determine eligibility for care; this is called the Five-Year Lookback.[11] In that timeframe, any gift transfer of assets (including real property) is subject to the penalty.[12] The penalty could mean that a person in need of care is delayed in receiving Medicaid benefits. Additionally, Medicaid has the authority
to seek recovery of payments made for an individual's care, including liens that will be paid after the person dies.[13] A lady bird deed may accomplish the desired effect of avoiding these concerns with Medicaid.[14] While a primary residence is generally exempt from a Medicaid recipient's asset limits, it is not exempt from the Estate Recovery Program which allows Medicaid agents to seek reimbursement from a decedent's estate.[15] Clients must be advised that while a lady bird deed may avoid Medicaid liens or ineligibility for Medicaid long term care, the unintended consequence may be marketability issues with the real property in the Carolinas.
III. Marketable Title - Practical and Substantive Concerns
Marketable title deals with the buyer's ability to sell the property in the future at fair market value.[16]Title insurance companies never insure marketability of the property.[17]Insurable title deals with the risk a title company is willing to take in the event a person asserts a title claim.[18] It is in the title insurance company's sole discretion to provide insurance for title issues or, alternatively, to make them an exception to a policy.[19] To ascertain the risk, the title insurance company will look to the contract structure and the legal authority in the state.
In a real estate transaction, the standard contracts used in the Carolinas warrant that the seller conveys marketable and insurable title. Title insurance companies in both states require all...
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