There are numerous ways real estate can be transferred to avoid probate, but which way is best will depend on the circumstances. The most common choices are either a deed of gift, transfer on death deed or a Ladybird deed (which is an enhanced life estate deed). The advantages and disadvantages of these types of deeds are as follows:
Deed of Gift: This deed is often used when there is no consideration other than “love and affection” and can be done without any warranty of title. This deed vests title immediately in the name of the grantee (the beneficiary of the deed) and thus gets the five-year lookback period started if the grantor (the one who deeds the property) should apply for long-term care Medicaid. Title companies accept these deeds as long as there was no fraud or self-dealing (i.e., agent under power of attorney deeding the property to self).
The negative about Deeds of Gift is that is should probably not be used if there is much appreciation in the value of the property since the beneficiary would have to likely pay more capital gains taxes on the sale of the property (since the beneficiary/grantee takes the basis as the grantor). Higher property taxes should also be considered (loss of exemptions such as over 65 homestead or being disabled).
Transfer on Death Deed: This deed which is a statutory form allows the transfer of property to one or more beneficiaries on the death of the grantor.
The pros for using a transfer on death deed are as follows:
1. It is cheaper since a standard statutory form is available that anyone can get;
2. It can be revoked during lifetime of the grantor;
3. Property tax rates (exemptions) remain as they were since the property is still owned by the grantor until death;
4. Step-up in basis (if property has appreciated) upon death of grantor since property is held until death – so less capital gains tax;
5. Doesn’t affect the rights of a secured creditor or trigger the “due on sale” clause common in deeds of trust; and
6. Doesn’t affect public benefits of grantor since not effective transfer during lifetime (not penalized and avoids estate recovery under current laws since it avoids probate).
The negative about using a transfer on death deed is:
1. The transfer on death deed cannot have a warranty of title (which warrants title of the owner and possibly prior owners) – so title companies will accept them, but the title company may require a two-year waiting period prior to insuring title – especially if it is not on a homestead. Also, since the beneficiary of the property is not getting a warranty of title the beneficiary/grantee should not sign a general warranty deed (warranty of title from prior owners) when subsequently selling the property. As a result, the grantee cannot take advantage of the protection of the grantor’s title insurance policy or sue prior owners in the chain of title; and
2. Transfer on death deeds cannot be signed by an agent under a power of attorney (unlike Ladybird deeds).
3. Beneficiaries of transfer on death deeds must survive the grantors by 120 hours;
4. If the beneficiary of the deed is on public benefits, then such public benefits (Medicaid, food stamps, Section 8 housing, etc.) would likely be jeopardized;
5. In these times where consumers are told to do-it-yourself, consumers will likely use these deeds more often – even though if they are unaware of the consequences or differences.
Ladybird Deeds (Enhanced Life Estate Deeds):
The Ladybird Deed also transfers property at the death of the grantors avoiding probate. The advantages of the Ladybird Deeds are as follows:
1. You can change your mind and deed the property back to yourself;
2. Property tax rates and all exemptions should remain as they were since the property is still owned by the grantor until death (similar to transfer on death deed);
3. Step-up in basis (if property has appreciated) upon death of grantor since property is held until death resulting in less capital gains taxes (similar to transfer on death deed);
4. Doesn’t affect the public benefits of grantor since not effective transfer during lifetime of grantor (not a penalized transfer like the deed of gift could be) and could avoid successful estate recovery (the claim of the state for Medicaid benefits advanced);
5. Unlike the transfer on death deed, grantor can give a warranty of title which is better for grantees and there should be no waiting period (if properly prepared) to insure title;
6. Can be signed by agent under durable power of attorney; and
7. No 120 hour survival requirement.
Disadvantages of Ladybird Deed:
1. There is no statutory form (thus more likely to be reviewed by the title company and possibly not accepted by the title company if not properly drafted);
2. Sometimes (if the grantor wants to sell the property during lifetime) title companies sometimes require the grantees to also sign;
3. Unlike a deed of gift where property is immediately transferred, transfer on death deeds and Ladybird deeds cannot indicate what happens if grantee (beneficiary) dies first (unless a trust is named as the beneficiary);
4. Similar to transfer on death deeds, one must be careful in the event the grantee is disabled or on public benefits at the death of grantor (a trust could be named as grantee to sole this potential problem) to avoid loss of public benefits.