Lady Bird Deeds in Michigan

Over the past few decades, Michigan estate planning attorneys have increasingly used Lady Bird Deeds as a valuable estate planning tool. In addition to becoming popular among estate planning attorneys, Lady Bird Deeds have captured the attention of Michigan residents, making Lady Bird Deeds one of the most commonly discussed topics in estate planning meetings. 

This article is designed to provide a broad, general overview of Lady Bird Deeds, including how they work, what they do well, and what they don’t do well. 

What is a Lady Bird Deed?

A Lady Bird Deed, also called an “Enhanced Life Estate Deed”, is a special type of deed that allows property owners to automatically transfer their real estate to their named beneficiaries upon the owner’s death. 

Unlike a traditional Life Estate Deed, a Lady Bird Deed ensures that the property owners retain full control of their real estate during their lifetime. In other words, there are no restrictions imposed on the property owners during their lifetime. The owners can continue to live in the home, sell the home, mortgage the home, and even change the beneficiaries down the line if they change their minds.

Currently, only a handful of states allow Lady Bird Deeds. These states include Michigan, Florida, Texas, West Virginia, and Vermont. 

What are the advantages of Lady Bird Deeds? 

Lady Bird Deeds may be an attractive estate planning option for a number of reasons:

1. Control During the Owner’s Lifetime

By using a Lady Bird Deed rather than a Life Estate Deed or another form of immediate transfer, the property owners retain full, unrestricted control over their property during their own lifetime. As mentioned above, this means that the owners can continue to live in the home, sell the home, mortgage the home, and change the beneficiaries at any time.

2. Avoiding Probate

Real estate transferred by way of a Lady Bird Deed completely avoids post-death administration through the probate court system. A Lady Bird Deed transfers the real estate to the beneficiaries automatically without the costs, time, and energy of probate. 

3. Avoiding Medicaid’s Estate Recovery Program

Medicaid planners often use Lady Bird Deeds to ensure that the applicant’s home isn’t reachable by Medicaid’s Estate Recovery Program after the applicant’s death. Real estate transferred via Lady Bird Deed is not subject to Medicaid estate recovery, meaning that the state cannot recoup Medicaid benefits from the value of the home after the applicant’s death. 

4. Favorable Tax Treatment

Lady Bird Deeds can also provide favorable tax treatment for the beneficiary. Upon the owner’s passing, the beneficiary receives an automatic step–up in basis, allowing the beneficiary to save on capital gains taxes if they sell the property after the owner’s passing.

When the beneficiary is a close relative of the owner, like a parent, child, grandchild, or sibling, Lady Bird Deeds can also be used to ensure that the property’s tax assessment doesn’t become “uncapped”, which would result in increased property taxes owed by the beneficiary. 

What are the disadvantages of Lady Bird Deeds? 

Although Lady Bird Deeds offer a number of advantages, they also have a handful of important limitations:

1. No Control After the Owner’s Death

After the owner of the real estate passes away, the named beneficiaries become the outright owners of the real estate. This means that the beneficiaries will have the right to do whatever they’d like with the property — regardless of the wishes or desires of the former owner. 

2. Lack of Management

Sometimes the beneficiary or beneficiaries may need help managing the property after the owner’s death, regardless of whether they’re going to keep the property or ultimately sell it.

For example, I’ve worked with many clients who want to transfer their real estate to a single beneficiary, but the clients have indicated that the beneficiary will need assistance with paying the mortgage and property taxes, maintaining the property, and selling the property once they decide they’d no longer like to live there. 

Additionally, I’ve worked with many clients who want to transfer their real estate to multiple beneficiaries who intend to sell the property, but the clients suggested that it would be difficult to get all of the new owners to agree on the terms, timing, and price of the sale.

In both of these examples, a Lady Bird Deed alone was not enough to accomplish their goals, and we had to utilize the strength of other estate planning tools, like trusts, to meet their needs. 

3. No Creditor Protection for the Beneficiaries

As discussed above, after the owner of the real estate passes away, the named beneficiaries become the outright owners of the real estate. This means that once the beneficiaries receive the real estate, their new interest could be subject to the beneficiaries’ creditors. A Lady Bird Deed offers no creditor protection to the ultimate beneficiaries.

4. Only Works for Real Estate

Critically, a Lady Bird Deed only works to transfer real estate. A Lady Bird Deed cannot be used to transfer other assets such as bank accounts, retirement funds, investment accounts, vehicles, or even the personal property located in and on the real estate. To pass on other assets, the owner will need to use other estate planning tools to plan for those assets.

Conclusion

Overall, Michigan’s Lady Bird Deed is an invaluable estate planning tool that can be an important part of your estate plan. However, Lady Bird Deeds have a number of important drawbacks and considerations.

It’s important to consult with an experienced estate planning attorney to see how a Lady Bird Deed might best be used as part of your plan. 

If you’re interested in discussing Lady Bird Deeds or other estate planning tools, please call Kimball & Wells for help. Our firm specializes in estate planning, and we pride ourselves on creating lasting, meaningful relationships with our clients. We are located in Grand Rapids, and we offer a free consultation to discuss how best to achieve your goals. We’ll advise you on the best and most cost-effective means to make sure you and your family are cared for. To get started, call us at (616) 317-8489 or click the “Contact Us” link on our website.

Wyatt J. Wells
Kimball & Wells, PLLC
Wyatt@kimballwells.com
(616) 317-8489