“Lady Bird Deeds” – What You Should Know

Recently, many of my estate planning clients have asked questions about Lady Bird Deeds and when it is appropriate to use these instruments in estate planning. Like any planning tool, a Lady Bird Deed can be helpful in some situations, but is not appropriate in all cases. The use of a Lady Bird Deed in the wrong situation can lead to unintended or negative results. What is a Deed? A deed is a legal instrument that conveys an interest in real estate (land and building) from one party to another. There are many types of deeds that are used to accomplish different objectives.
The most common type of deed that people are familiar with is where there is an outright transfer of ownership from one party to the other, such as in the sale of a residence. This most common type of transaction utilizes a "fee simple" deed which is used to convey property from one (or more) owner to another. When Person "A" conveys real property to Person "B" by a "fee simple" deed, Person "B" becomes the owner of the property immediately upon the execution of and delivery of the deed. What and How is a Lady Bird Deed Different? A Lady Bird Deed is similar to "Life Estate" Deed in that it conveys the property to another person but reserves ownership to "grantor" for as long as the grantor is living. For example, if Person "A" conveys real property to Person "B" by a Life Estate Deed, Person "A" would continue to own the property for their life and it would only become Person "B's" property after Person "A" dies. The difference between a traditional Life Estate Deed and a Lady Bird Deed is that in addition to reserving a life estate in the property, the grantor of a Lady Bird Deed reserves the right to sell, mortgage or give away the property during their lifetime. This means that if Person "A" conveys real property to Person "B" by Lady Bird Deed, Person "A" would continue to own the property for their life and would only become Person "B's" property after Person "A" dies and then only if Person "A" has not already sold or given it to someone else in the meantime. When is a Lady Bird Deed Useful? Advisability and use of the Lady Bird Deed arises in situations where people are looking to "avoid probate" and/or engage in "Medicaid planning." A properly drafted Lady Bird Deed can be used to avoid probate in some situations. In many situations, the simplicity of a Lady Bird Deed gets in the way. That is, if a person's estate plan is more complicated than, "when I die, the house goes to Joe," the Lady Bird Deed may not work and actually provide a negative result in a situation involving a more complex estate plan.
In some situations, Lady Bird Deeds can also be used as part of Medicaid planning and, in fact, that is where they first became very popular. A Lady Bird Deed may work well where someone who is currently receiving Medicaid benefits as a way to pass the property at their death without the necessity of probate. This is true because Medicaid policy provides that a Lady Bird Deed is not a "divestment" (transfer of assets that results in a penalty). Note: For a person who is not receiving Medicaid benefits, a Lady Bird Deed does not protect the property from being considered a resource if Medicaid benefits are later pursued. What About a Quit Claim Deed? Before the Lady Bird Deed became popular, clients often believed (or were led to believe) that "Quit Claim" Deeds could provide a beneficial result as part of an estate plan. Simply put, a Quit Claim Deed is a deed which conveys a person's interest in real property to another, but makes no guarantees that the person conveying the property even owns the property to begin with. While Quit Claim Deeds are simple to draft, they are not an answer to every person's estate planning needs with respect to transferring property and avoiding probate. What About the Execution of Deeds and Michigan Real Estate Law? Some individuals forget that transferring ownership in property can have negative consequences with respect to the amount of property tax they pay on their real estate. For example, an individual transferring real estate to certain parties, for instance children as opposed to a spouse, is not "exempt" transfer for property tax purposes and a portion of the property can actually be uncapped in value and the taxable value of a property can be increased based on the transfer of ownership.
In addition, certain transfers invalidate the ability of an individual to claim a homestead exemption in the state of Michigan with respect to their residential property taxes. Conclusion. Despite the perception of some that deeds are simple, legal instruments that can be done with minimal thought or effort, the truth is that there are many tax, Medicaid, and other implications associated with deeds and that choosing the wrong deed or using it at the wrong time, can have significant negative or unintended consequences. As always, the best answer to any question about estate planning and the transfer of real estate will be based on the unique facts of any specific situation and should be analyzed and resolved by consulting with a qualified attorney. If you have transferred real estate in the past as part of your estate plan or are contemplating transferring real estate in the future, please do not hesitate to contact us to discuss your transfer in further detail. REMINDER: Your College Student Needs a Financial and Medical Power of Attorney Form
As we have mentioned in previous emails and other communications from our office, it is important that children, once they reach the age of majority (18 in Michigan), execute a Financial Durable Power of Attorney form and Medical Power of Attorney. A Medical Power of Attorney allows the individual nominated in the document the right to have access to medical records and be involved in medical decision making. A Financial Power of Attorney allows the agent designated to handle financial matters on behalf of the young adult. For students going to school out-of-state, the question arises whether to have legal documents created in the student's home state, the state in which they attend school, or both. While the laws in most states are comparable so that a Power of Attorney created in one state usually will be respected in another, that is not always true. People can have medical events at all ages. Not having appropriate legal documents in place can be a disaster. Of all the legal documents people are advised to create, Power of Attorneys are among the simplest and least expensive, but oftentimes the most important. Please contact us if you have a question or require assistance with creating a Power of Attorney document for your child. Dan A. Penning