Ladybird deed vs. asset protection trust for protection of homestead

Originally published by Michael Cohen.

Although there are numerous ways to protect your home from the claim of the state Medicaid agency (Health and Human Services Commission) if you receive Medicaid assistance (most typically for care at home or in a nursing home or other facility that accepts Medicaid, drug costs, etc. that the state has paid), one of the more common questions is whether a Ladybird Deed or an asset protection trust is better and when you should use either (if you have inadequate assets or income or long-term care insurance to be self-insured).

The homestead is usually the most valuable resource that does not count as a resource (provided the equity is less than $572,000 in Texas if you are single – no limit if you are married) for Medicaid eligibility purposes (Medicaid is “means-tested” – it looks at your resources before there is eligibility for the government to help pay your care costs, etc.). However, the state has a right to be reimbursed to the extent Medicaid benefits have been advanced after the death of the Medicaid recipient. The homestead is the most common resource that the state makes a claim against to get reimbursed. As a result, most Medicaid recipients want to protect their home for their heirs. The rules vary from state to state on whether there is merely a claim (as in Texas) or a lien and whether the state only makes claims against resources that pass by your Will (probate) or by intestacy (without a Will) or whether the state can pursue its reimbursement however the homestead passes (Texas only has claims if the property passes by Will or intestacy). A Ladybird Deed is an enhanced life estate deed (whereby the property owner retains the right to occupy, sell, mortgage or lease the property and even the right to change who gets the property at death). Since the property owner retains all rights until death, it is not considered a disqualifying transfer (Medicaid has a five (5) year “look-back” period as it presumes transfers were purposefully done to reduce the assets so that the government would pay for care costs, drugs, etc.). Furthermore, since the homestead passes by deed and not by Will or intestacy at death, this protects the heirs from a successful claim for estate recovery by the state. Texas is in the minority of states that allows a Ladybird Deed. Therefore, if one is about to apply for Medicaid or is already on long-term care Medicaid, a Ladybird Deed should be considered if there is equity in the homestead. It should also be mentioned that even an agent under a Power of Attorney can sign the deed (unlike transfer on death deeds) if the Power of Attorney document grants such authority – although one should recognize that title companies look at self-dealing issues.

Although the Ladybird Deed is often the easy, quick and relatively inexpensive option to protect the homestead for heirs from a successful Medicaid claim, there are a couple of negatives: (1) the law could change; and (2) if the Medicaid recipient sells the homestead during his or her lifetime, then the proceeds become “countable” and subject to “spend down” to get to the Medicaid eligibility resource limits. Thus, if you want the flexibility of selling your homestead without having to “spend down” the cash without adverse tax consequences, then an asset protection trust should be considered especially if an application for Medicaid is not on the immediate horizon since that type of trust is subject to the five (5) year look-back period. However, if you establish such a trust and deed your homestead into the trust and there is need to qualify for Medicaid sooner than anticipated (less than five (5) years), then the homestead can be given back (to undo any transfer penalty) and a Ladybird Deed can then be signed to protect the home. If interested in hearing our radio show podcast on this topic click here or you might consider attending one of our free estate planning workshops by clicking here.

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