What is a Lady Bird Deed?
A Lady Bird Deed (also known as an enhanced life estate deed) is a special type of deed which allows real estate to be transferred to one or more individuals (or a trust) upon your passing. Essentially, it allows you to add a “beneficiary” to the real estate you own.
The benefit of using a Lady Bird deed as opposed to a traditional life estate deed is that you keep the authority over the property during your lifetime. You can mortgage, refinance, rent or even sell the property as you wish. You do not need permission from the “beneficiary.” Whereas, once a traditional life estate is conveyed, you may not sell, mortgage, convey or gift the property without consent of the “beneficiary.”
Why should I use a Lady Bird Deed?
A Lady Bird Deed is an estate planning tool available to name a “beneficiary” on your real estate. A Lady Bird Deed protects your property from probate court by allowing a direct transfer of the real estate to the person(s) you designate or your revocable living trust. This protects your privacy and avoids unnecessary administrative costs.
A Lady Bird Deed is also used in Medicaid planning. If a Medicaid applicant owns a home, it will only be an exempt asset if it is not in a trust. If the Medicaid recipient is the sole owner of the property, without the use of a Lady Bird deed, upon his or her death, the home becomes part of the probate estate. A Michigan Medicaid recipient's probate estate is subject to estate recovery. Estate recovery is when the state attempts to recover expenses spent on long-term care, when the Medicaid recipient dies. In Michigan, estate recovery is limited to assets that are part of the probate estate. Because a Lady Bird deed protects your home from going through probate, it also protects the home from estate recovery.
What if I want to change the beneficiary of my Lady Bird Deed?
The “beneficiary” can be changed at any time, if needed, with the preparation of a new Lady Bird Deed. Keep in mind that the deed is recorded in the local register of deeds office and is not a deed to just keep in your desk drawer to use once you pass. The newly recorded deed, if prepared and executed properly, will effectively cancel the previously recorded deed.
What happens if I do not use a Lady Bird Deed and I pass away as the only owner of the property?
If you are the sole owner of your real property and do not have a Lady Bird deed, your executor or surviving family members would be required to open a decedent's estate with the probate court. Your real estate would be subject to creditor claims and administrative expenses. After claims are paid, your real estate would be distributed according to your Last Will and Testament or to your heirs under Michigan's intestate laws. Your executor might even have to sell the property.
Will my Property Taxes Increase?
There are no tax consequences because there has not been a transfer of ownership. The beneficiary receives the real estate only if you still own it at the time of death. Additionally, the property receives a step-up in basis at your death, avoiding capital gains taxes. Finally, if the beneficiary is a close relative, the property taxes will not be uncapped at death.
Are there any disadvantages to a Lady Bird Deed?
A Lady Bird Deed does not provide the same flexibility as a trust. If your beneficiary dies or if your joint beneficiaries do not get along or have creditor issues, there can be serious consequences. Additionally, your beneficiary may be too young or facing a divorce. Also keep in mind that the beneficiary must accept the property subject to the mortgage and may not be credit worthy.
There are many factors to consider before putting a Lady Bird Deed in place. Call today to speak with one of our attorneys to address your specific questions.
More Estate Planning Information