“Lady Bird Deeds – What Are They and Why Should I Care?”

LADY BIRD DEEDS – WHAT ARE THEY AND WHY SHOULD I CARE ?

Michigan, and most other states, recognize what are commonly called “Lady Bird” or enhanced life estate deeds.  These are deeds that are typically drafted for estate planning purposes, designed to place title to certain described real property in the name of another person(s) once the Grantor(s) is deceased.  (If the Grantor is a husband and wife, who typically own real property as tenants by the entireties, for example, title usually remains in the name of the survivor until the second spouse to die passes away).  These deeds have been approved under the Michigan Land Title Standards and remain an estate planning staple.

The name erroneously comes from what is commonly thought to be what former President Lyndon Johnson did with his Texas ranch, where he wanted to remain in control of it until he passed away and then wanted to deed it to his wife, “Lady Bird” Johnson (thus the name).  In reality, the concept came from a Florida estate planning attorney in the 1970’s who came up with the concept and simply used “Lady Bird” Johnson and the Johnson  family to illustrate how the concept would work.

Under a Lady Bird deed, the Grantors typically convey the property to themselves,  retaining an enhanced life estate that allows them to sell, mortgage, pledge as collateral, convey, rent, or basically do anything they want with the property, as long as they are alive.  Thus, they could “convey” it to themselves one day and sell it the next. The remainder interest is then conveyed to someone else, typically a child or children.  If property is owned by a husband and wife, they typically deed it to themselves as tenants by the entireties, so as to preserve the entireties protection afforded to them by ownership in such fashion.  Upon the death of the first spouse, the surviving spouse then owns the property by operation of law.  If they do nothing further to change how title is held, then the named Grantees (again typically their children) will receive title to the premises upon the death of the surviving spouse.

Since title to the Grantees does not pass until after death of the Grantor(s), there is no Medicaid divestment issue.  Also, as it is a transfer upon death, there is a step-up in basis to the date of death value, so that if the property is subsequently sold, the tax burden (long or short term gains) will typically be greatly diminished.   Further, if the transfer is made to a person of a certain relationship to the Grantors (like their children for example), there should be no uncapping for real estate taxes, and the property should be assessed for real property tax purposes at the same rate as before (adjusted for inflation, limited to 5% per year), while the Grantor(s) were alive.

Thus it is a win-win-win situation from the Grantors and Grantees standpoint.  From the Grantors perspective, they always remain in control of the property until they are gone.  From the Grantees standpoint, they get a step up in basis (thus minimizing capital gain taxes due upon sale) and may retain the same assessed value as the property had when their parents owned it, thus keeping the real estate taxes in check. This is especially important for recreational or vacation properties, such as the family cottage, where real property tax uncapping can make the cottage unaffordable for the kids, going forward.

In order to evidence the transfer, you simply must record with the local county Register of Deeds a certified copy of the death certificate(s) of the owner(s).  You should also notify the local tax assessor and submit the requisite Property Transfer Affidavit, citing the requisite exemptions to property tax uncapping (if applicable) found therein.   Failure to timely notify the assessor of the transfer could subject the new owners to a $200 fine.

Using Lady Bird deeds in conjunction with other estate planning tools can potentially almost eliminate the need for Probate of one’s estate.   If other assets are jointly held, you make pay on death designations as to bank and credit union accounts (or make them joint with one or more of the kids), name others as beneficiaries of life insurance policies and retirement accounts, you may very well eliminate the need for Probate altogether, or be able to deal with the remaining assets via the Small Estate procedures I have recently written on.   If done properly, you can, effectively, get most of  the same benefits of placing property into a trust, without the high cost of doing so.

Keep in mind that some of these other concepts, like joint ownership of bank accounts with the kids, for example, can be fraught with problems and have other financial ramifications that you may not like.   If, for example, the child gets into financial trouble, files for bankruptcy, etc. , you could find the account is wiped out.  The child could also take out all of the money in the account, as a joint owner.  Finally, if a child was simply put on the account for convenience purposes, to assist the parent with their banking needs, and this was not made known in some fashion, then the child could very well take the position, upon death of the parent,  that these are his/her funds,  to the detriment of his/her other siblings.   

If you have questions about Lady Bird Deeds, need such a deed prepared,  need legal assistance in regard to preparing a suitable estate plan or in handling a real estate transaction, please contact the estate planning and real estate attorneys at Damon, Ver Merris, Boyko & Witte, PLC.  Call us at (616) 975-9951. We are here to help you.  Larry A. Ver Merris  / April 2, 2018.

While this posting originates from a law office, none of the contents should, in any way, be considered legal advice. If you have not signed a retention letter describing the legal services to be provided and the amount to be paid for such services, you are not a client of this firm.