29 Aug Estate and Elder Law Planning Using Lady Bird Deeds – Part 5 Unresolved and Contentious Issues
Although much has been written about Lady Bird Deeds, there still persist many unresolved issues and differences of opinion. For example, The Fund has been clear about not insuring title when a life tenant under a Lady Bird Deed reconveys the property to himself or herself or to a related party, such as a revocable living trust, without joinder of the remainderman. However, there is no authority one way or the other, if such reconveyance is valid if the deed contains specific language authorizing such reconveyance. Since a Lady Bird Deed allows gratuitous language in it, such as “without any liability for waste,” why not the power to reconvey? The Fund’s position regarding reconveyance language in a Lady Bird Deed back to the life tenant is to disregard such language and require the remainderman to execute the deed as well. The Fund’s reasoning is based on the potential for litigation by the remainderman and/or a judgment creditor of the remainderman. Also, there is the possibility that the original conveyance or reservation in the conveyance might fail as it is too broad and inconsistent with the grant. Once again there is a lack of legal precedent which creates uncertainty and disagreement among the Fund and its members.
Another issue involves judgments recorded against the remainderman. The Fund’s position is that any judgments recorded against the remainderman will be insured on a “case by case basis.” While nothing has been written to give any guidance, Pat Jones has informally offered some clarification. ‘If it is a simple money judgment, the Fund will insure over it. For larger judgments, the Fund will want to confirm that the sale or mortgage to a third party is truly bona-fide.”
Those who practice in the area of Elder Law typically use Lady Bird Deeds for single applicants for Medicaid planning with both homestead and non-homestead property. The Department of Children & Families (DCF) does not consider the creation of a Lady Bird Deed as a transfer of assets. See (ESS Manual 1640.0613.01). However, will DCF consider a later transfer of the retained life estate to the remainderman as an uncompensated transfer of assets with an attendant penalty period? Although the ESS Manual 1640.0551 states that life estates are freely transferrable, will this section apply to Lady Bird Deeds? If so, this interpretation would effectively nullify any transfer penalty for real property since a Lady Bird Deed could be used first, followed by a transfer of the life estate.
While The Fund has opined that the nature of a Lady Bird Deed is that of a vested remainder subject to divestment, would the result change if the deed contained the language, “The remainder interest created in this deed shall not vest in the remainderman until the death of the life tenant”? The obvious purpose of this type of planning is to avoid future judgments against the remainderman from attaching to the property as when a revocable living trust is used. Once again, in absence of some authority, the Fund would still probably require the judgment to be cleared prior to insuring title.
CONCLUSION
While the use of Lady Bird Deeds can be effective in certain types of estate and elder law planning, its use has several drawbacks as well as title insurance issues. In the absence of statutory, case law and regulatory authority, several open and contentious issues remain to be resolved. Therefore, practitioners should consider other options before using a Lady Bird Deed. Also, if insurable title is important, an attorney should check with The Fund before drafting a Lady Bird Deed.