A lady bird deed (or ladybird deed), also called an enhanced life estate deed, is an estate planning tool that avoids probate and accomplishes other estate planning objectives. It is not like a common deed that transfers fee title to real estate, but rather it is a special method of transferring real property after death. Whether it is a good option for your estate plan depends entirely on your own personal circumstances. Making that determination requires assistance from an experienced Michigan estate planning lawyer.
In a lady bird deed, the grantor transfers property to a contingent grantee, while reserving a life estate and the lifetime power to convey the property for the grantor. In other words, the document gives a conditional interest in real estate to the beneficiary, while retaining lifelong use and control of the property for the grantor.
If the grantor exercises the power to sell or transfer the property to someone other than the beneficiary, the beneficiary’s conditional interest terminates. However, if the grantor does not exercise the transfer power, the beneficiary inherits ownership of the property on the grantor’s death. In some estate plans, the property transfers to a trust, rather than directly to the beneficiary. Since the property transfers automatically on the grantor’s death, it does not go through probate.
Lady bird transfers can be used by individuals or married couples. The grantor(s) may designate multiple beneficiaries in a lady bird deed, but that does complicate the situation and requires addressing additional legal considerations.
Before you decide that a lady bird transfer is right for you, it is essential to consult with an experienced estate planning attorney. The document can be designed in several different ways, depending on your circumstances. In addition, a lady bird transfer is not a complete estate plan. Other documents, often including a will, are necessary to create an estate plan that addresses all aspects of estate planning.
Avoiding probate is a primary concern of many individuals and married couples. Creating an estate plan that avoids probate saves the substantial costs and time of the probate process. Another benefit is that the financial and property details of the decedent do not become public when property does not go through probate.
A lady bird transfer also allows the grantor to retain full use and control of the property, including the ability to mortgage or sell the property at any time. In addition, while the grantor is alive, the property has some protection from creditors of the beneficiary.
A properly-drafted lady bird deed may provide some tax protection for the beneficiary in several different ways. First, after the grantor’s death, when the property transfers to the beneficiary, the tax basis of the property increases to the value at death. That can save capital gains tax adding up to a substantial amount. In addition, a lady bird deed also does not qualify for gift tax treatment at the time of execution.
Finally, with respect to taxation, a lady bird transfer can avoid property tax increases for certain family members, if the transfer is accomplished in accordance with exemption provisions in Michigan law. You may refer to our discussion of taxable value uncapping in our blog article on cottage trusts, under the section titled “A Cottage Trust Can Save on Property Taxes Long Term,” for additional details about this property tax issue. Like a cottage trust, a properly-drafted lady bird deed may avoid property tax uncapping in specific situations.
For all these reasons, a lady bird deed may be a good option for some estate plans. For individuals whose home is their only major asset or those planning for Medicaid coverage of long-term care costs, a lady bird deed provides benefits that other real property transfer methods do not.
In some situations, a lady bird deed is not the best or most flexible option for addressing concerns that arise in transferring real estate after death. Using a lady bird transfer becomes complicated when there are multiple beneficiaries, such as children, even if they are adults. It also might not be a good option if you have minor children.
Unlike certain types of trusts, a lady bird deed does not protect beneficiaries who have financial management problems (and therefore creditors) or substance abuse issues, when the beneficiary receives the property outright after the grantor’s death. In addition, if protecting your family property from claims of divorced or divorcing spouses of children is a concern, a lady bird deed might not be the best option.
Finally, if a beneficiary receives needs-based government benefits, such as Medicaid or SSDI, the beneficiary’s eligibility for the benefit may be adversely affected if they inherit property outright through a lady bird deed.
If you think a lady bird deed might be a good estate planning option for your circumstances, it is essential that you talk with an experienced estate planning attorney before you take any action. Your home likely is the most important asset you own. You should never do anything that could conceivably jeopardize your home ownership or risk a problematic transfer to a beneficiary without talking to a knowledgeable lawyer. Using a form or online service for any estate planning document can have disastrous consequences.
In my practice at Ager Law Office, I help individuals and families with all aspects of real estate and estate planning, including lady bird deeds. From my Ann Arbor office, I serve clients throughout Washtenaw County. If you’re interested in discussing lady bird deeds or talking about a new estate plan or updating your existing plan, call (734) 649-0784, send an email to firstname.lastname@example.org, or use the online contact form.