By: Monaghan, P.C.

Michigan is one of only a small number of states that recognize the use of a Lady Bird Deed (also known as an Enhanced Life Estate Deed) as a method of transferring real property title upon the death of the property owner and avoid the complexities of the probate process.  While not a substitute for a complete estate plan, a Lady Bird Deed may be a tool worth considering depending on your specific situation.

What Is a Lady Bird Deed?

A Lady Bird Deed is a specific type of Quit Claim Deed in which the owner of real estate transfers a contingent ownership interest in the property to a designated beneficiary while retaining an enhanced life estate. The ownership interest of the beneficiary does not vest until the death of the property owner.

The enhanced life estate retained by the owner means that the owner retains full control of the property during their lifetime. This includes the ability to sell or mortgage the property, give the property as a gift, and to amend or terminate the Lady Bird Deed as needed. The beneficiary does not have an ownership interest in the property unless the property owner dies while the Lady Bird Deed is still in effect.

Advantages of Lady Bird Deeds

Flexibility

A Lady Bird Deed has a few very desirable potential benefits for a real estate owner. One of the major advantages, as stated previously, is that the owner retains full control of the property during their lifetime, including the right to sell or transfer it. The owner, during his or her lifetime, can change provisions of the Lady Bird Deed (such as the designated beneficiary) or terminate the deed.

 Avoiding Probate

Another major advantage of a Lady Bird Deed is that it helps to avoid the court-supervised probate process. Probate is the legal process through which the court ensures that your debts are paid and your assets are distributed in accordance with Michigan law when you die.  Avoiding probate saves time and expenses such as executor fees and inventory fees, and also maintains the privacy of financial details of the estate.

Cost Effective Estate Planning Option

While a Lady Bird Deed is not a substitute for a comprehensive Estate Plan, it may be a viable option if the only major asset you own is your home or another piece of real estate. The deed can accomplish the same outcome as a Living Trust in that it will help your family avoid the probate process, but a Lady Bird Deed is generally much less expensive to have drafted than a Living Trust for those with only one major asset.

Tax Benefits and Risk Mitigation

Tax benefits are another potential advantage of transferring property through a Lady Bird Deed. Beneficiaries who inherit property through a Lady Bird Deed may receive a stepped-up tax basis, which avoids payment of significant capital gains taxes. A Lady Bird Deed also may avoid property tax uncapping of the transferred property in some situations.

In addition to potential tax benefits, a Lady Bird Deed may also be a viable option to mitigate risk that might arise through alternate methods of gifting property to your heirs. If you were to add your child as a co-owner on the deed to your home, for example, they would gain an immediate ownership interest in the property. This could put the house in jeopardy if your child goes through bankruptcy, divorce, or another lawsuit.  Using a Lady Bird Deeds reduces this risk because the beneficiary’s ownership interest is only realized upon your death, meaning that during your lifetime your home would not be exposed the risks as stated above.

Lastly, if you are anticipating receiving Medicaid benefits in your lifetime, the use of a Lady Bird Deed may protect your assets from the Michigan Estate Recovery Law which allows the state to seek reimbursement from your estate while it is in probate for the Medicaid benefits paid during your lifetime.

Alternatives to Lady Bird Deeds

While there can be benefits to using a Lady Bird Deed, there also are disadvantages to this method of real property transfer. Issues with a Lady Bird Deed may arise if you want to be able to dictate when your beneficiary receives the property (such as at the age of 30).  If you have a lot of assets aside from just your home, a trust may be more practical in keeping your estate out of the probate process.

To decide if a Lady Bird Deed is a good fit for your estate plan, it is highly recommended to discuss your financial and personal circumstances with a Michigan estate planning attorney with the skill and knowledge to help you decide whether a Lady Bird Deed, living trust, or another approach is the best strategy for your circumstances, goals, and family.

Talk With Our Michigan Estate Planning Attorneys

Monaghan, P.C.’s estate planning attorneys assist individuals and families with all aspects of Michigan estate planning. Contact us today at (248) 642-5770.