People with Minimal Assets Still Have Planning Options

Most people’s largest asset is their home. But even with modest means, your clients still have plenty options about what to do with their home after they pass.

The best option depends on several factors, including the state in which they live, their financial situation, relationship with heirs, health and mental capacity.

A common solution for people with significant assets and a home is a Living Trust. That’s often done to avoid probate and maintain more privacy when leaving their home to heirs. And moving assets into this type of trust can be expensive and time consuming.

For clients who don’t qualify for a Living Trust, other deeds are simple and cost effective.

Some states allow people to establish a Transfer on Death Deed. Others use a Lady Bird Deed, known as an Enhanced Life Estate Deed in some states. A third alternative is the Life Estate Deed. All three deeds allow your client to avoid probate and recovery of assets on a Medicaid claim. Each has benefits and drawbacks.

Transfer on Death Deed

This type of deed allows your client to designate a beneficiary upon death like bank and securities accounts. These states and Washington, D.C. allow a Transfer on Death Deed:

 Alaska Arizona Arkansas California
 Colorado District of Columbia Hawaii Illinois
Indiana Kansas Maine Minnesota
Missouri Montana Nebraska Nevada
New Mexico North Dakota Ohio  Oklahoma
Oregon South Dakota  Texas Utah
Virginia Washington West Virginia Wisconsin
 Wyoming      

 

An important option of a Transfer on Death Deed is to designate a contingent or alternate beneficiary. This keeps the property out of probate if the beneficiary dies before your client. A contingent beneficiary isn’t an option with a Ladybird Deed or Life Estate Deed.

Your client can transfer the real estate to another person but continue to reside on the property during their lifetime. They can also lease, mortgage and sell it. They receive the proceeds when they sell the property. They can terminate the transfer of the remaining interest to the beneficiary before their death.

A downside of a Transfer on Death Deed is the conveyed interest is subject to claims against your client’s estate for two years after their death. Also, the person receiving the property must survive them by 120 hours, or the property passes through your client’s estate. Your client also must have the legal capacity to sign the Transfer on Death Deed. A power of attorney or other legal representative can’t sign it on your client’s behalf.

Ladybird Deed

This type of deed provides the same benefits of a Transfer on Death Deed. Your client can transfer real estate to a beneficiary to avoid probate while continuing to use the property in their lifetime. They can cancel the transfer before their death. However, a Ladybird Deed doesn’t have the same survival restrictions and estate claims.

A power of attorney can sign a Ladybird Deed on behalf of the grantor, even if they lack the mental capacity or have a disorder. This is useful in Medicaid planning.

A Lady Bird Deed is only authorized in Florida, Michigan, Texas, Vermont and West Virginia.

Life Estate Deed

This type of deed avoids probate and isn’t hard to create. But the life estate tenant must share key ownership rights with a co-owner.

Your client — the grantor — and the grantee own an interest in the property when the deed is signed. Your client is the “life estate owner.” The grantee, or the “remainderperson,” owns a future or remainder interest.

When your client does anything significant with their ownership interest, the co-owner must consent. This type of deed isn’t easily undone. Once the grantor dies, the grantee fully owns the property.

One advantage of the Life Estate Deed is it starts the clock on five-year look back periods for things such as Medicaid eligibility. Among disadvantages, it’s irrevocable and can open the property to creditors of the “remainderperson.”

Ultimately, the decision between these deeds depends on why your client wants to transfer the property. If they want to avoid probate while still having full control over their property, a Transfer on Death Deed or Lady Bird Deed might be the best choice. If they’re concerned they may have to apply for Medicaid in the relatively near future, a Life Estate Deed might be best.

In any case, be sure to inform your clients of the differences before they choose one of these deeds as part of their estate plan. An estate planning attorney can also help your client make the right choice and avoid surprises.

Finally, whatever option they choose, it’s important to register the deed in the county in which they reside.

Charlie Goldsmith

Charlie Goldsmith 

Senior Advisor, Charitable Estate Planning
American Heart Association
303-981-6617
Charles.Goldsmith@heart.org
Heart.org/Network

 

AHA Professional Advisor Network Member Perks

If your client is charitably inclined and would like to explore using real estate as a non-cash way of funding a gift to their favorite charity we provide helpful brochures that explain this process in laymen terms.