Reed: Does Lady Bird Deed allow for stepped-up basis?

Sandra W. Reed
Special to the Reporter

Margorie’s husband, Ken, is entering the nursing next month due to advanced Parkinson’s. The couple’s income and asset levels qualify Ken for Medicaid. Their son, John, has read that a Lady Bird Deed would protect his parents’ homestead from being sought by Medicaid for reimbursement for the funds paid for Ken’s care.

Ken purchased the home prior to his marriage to Marjorie, so it is his separate property and, thus, he alone can make the transfer. John wants his father to sign a Lady Bird Deed leaving the homestead to his mother. Ken is worried that, if he transfers the property now, Marjorie will lose the stepped-up basis she would get if he left the home to her in his will. Should Ken sign the LBD?

Sandra Reed

What is a Lady Bird Deed?

A Lady Bird Deed (LBD) is a deed in which the owner transfers the property to someone else with the owner retaining two rights: (1) the right to live in the property for the rest of his or her life; and (2) the right to sell the property during his or her lifetime.

Does the Lady Bird Deed protect from Medicaid reimbursement?

John is correct that the LBD protects against Medicaid reimbursement. Medicaid in Texas is limited to seeking reimbursement for the recipient’s probate estate alone. The LBD takes the homestead out of the probate estate, thereby preserving it.

What is a stepped-up basis?

Generally, when any real property sells, the IRS collects capital gains tax on the difference between what the seller paid for the property initially plus monies expended for improvements — the basis — and the fair market value, usually determined by the selling price.   However, when an individual dies owning real estate, the basis to the person who inherits the property gets raised to the value of the property on the owner’s death, the stepped-up basis.

Does property transferred by Lady Bird Deed get the stepped-up basis?

Fortunately, property transferred through a Lady Bird Deed is eligible for the stepped-up basis. The Lady Bird Deed doesn’t create a completed transfer for federal tax purposes until the life tenant — in this case, Ken — dies. As a result, the remainder beneficiary – in this case, Marjorie — will receive the stepped-up basis upon Ken’s death.  

Sandra W. Reed practices Elder Law in Somervell County, handling probating of estates, drafting of wills, trusts, powers of attorney and deeds as well as estate and Medicaid planning.  She lives on beautiful Chalk Mountain and can be reached at 254.797.0211; 817.946.2809 or at sreed@kbzlaw.com.