The Use of Lady Bird Deeds to Convey Life Estate Interests in Land

The Use of Lady Bird Deeds to Convey Life Estate Interests in Land

One of the most common requests from clients to probate practitioners is when an individual, upon their passing, wishes to transfer ownership in real property outside of probate proceedings while preserving present control and use of the land.  The utilization of certain deeds as an estate-planning tool to accomplish that goal – affectionately known as “Lady Bird” deeds – is available only in a few states, including Michigan.  This type of quitclaim deed is named after President Lyndon Johnson’s wife, “Lady Bird,” because the former President was thought to have once used this type of deed to convey some land to her.

Essentially, a Lady Bird deed conveys an enhanced life estate that reserves to the grantor the rights to sell, commit waste, and mortgage the property during their own lifetime. By allowing the grantor to transfer ownership of the property to another during their lifespan, while still retaining the right to hold and occupy the property, the transferor may use it as if they were still the sole owner.

To accomplish this function, the drafter adds the designation to the deed to convey real property to a contingent beneficiary specifically identified on the deed. There can be one or several grantors and beneficiaries; therefore, spouses can convey their interests together to their children, grandchildren or other individuals outside of the immediate family.

Michigan has provided married couples special protections for their home. For instance, if one spouse were to be sued, the property would continue to be a protected asset.  However, to maintain that protection, the property needs to be held in a deed jointly in both spouse’s names as tenants by entirety. This designation may cause an issue if the property is deeded directly into a trust during the lifetime of the spouses. Such an action may be done with good intentions, however, legally it removes the asset protection that Michigan has granted married couples for their home. The solution may be to utilize the Lady Bird Deed. It allows spouses to hold as tenants by entirety during their lifetimes, and then pass to their beneficiaries upon death without probate; which is like a beneficiary designation, but for your home.  As a result, the property remains held in the individuals’ names while they are alive. When they pass away, it avoids probate and transfers ownership to whomever they have named as a beneficiary, which could be a family trust.

The main attraction is to attain probate avoidance, both for tax benefits, and in situations where Medicaid benefits are involved. These types of deeds can provide many of the other advantages of other commonly used deeds in estate planning (such as traditional life estate deeds or deeds to the beneficiaries established as joint with rights of survivorship) without the loss of control that accompanies those other approaches.

Where Medicaid planning is involved, if a person is receiving Medicaid benefits and owns a home that is an exempt asset, under most circumstances, the use of a Lady Bird deed for a transfer will not be treated as a divestment for Medicaid purposes. There are also clear tax advantages, other than simply avoiding the IRS Gift Tax, which typically applies to donors of real property. Upon execution and recording of the deed, there will not be an “uncapping” of the real property taxes upon transfer of ownership under the Michigan General Property Tax Act (MCL 211.27a).  However, there is some disagreement amongst practitioners about whether the filing of a transfer affidavit with the local assessor’s office is required at the time that the deed is recorded, or only when the life estate tenant dies. Safe practice suggests the former.

At the crux of the issue is the definition of “transfer of ownership” in the State’s general property tax statute cited above. A transfer of ownership does not include a transfer of that portion of property subject to a life estate, retained by the grantor, until expiration or termination of the life estate itself. Some legislative commentators argue that a Lady Bird deed is not an actual transfer as defined in the statute. With the specific life estate exemption, the best practice may be to file a property transfer affidavit with the appropriate box marked on the form. When the assessor reviews the recorded deed, they will have a corresponding affidavit to refer to. Thus, the property is not uncapped until the grantor dies without transferring the property. At that time, a property transfer affidavit is filed, and the property is uncapped for tax evaluation purposes.

Whichever method is used, the Lady Bird deed can be a very cost-efficient way of transferring property to beneficiaries without the property having to go through probate or triggering a present-day tax event for the grantor.

John D. Gwyn focuses his practice on the representation of community associations, management companies and developers with a particular emphasis on real estate and commercial litigation. He has handled many types of community association related matters including assessment collections, lien foreclosures, bylaw violations, civil rights defense and creditor bankruptcy matters. Mr. Gwyn has gained experience in community association law over the years through his representation of condominium and homeowners associations, as well as individual homeowners, in matters involving real estate, contract, and construction defect litigation issues. His extensive litigation and transactional background provides him with the experience necessary to handle even the most complex legal issues that neighborhood associations may encounter. He may be reached at (734) 261-2400 or jgwyn@cmda-law.com.

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