Lady Bird Deeds – Part II
In Part I, I discussed the use of Lady Bird Deeds as a Probate avoidance method to transfer property from the original owners to their family.
There are other reasons that individuals might select a Lady Bird Deed:
Revocable (Living) Trusts
As a part of funding a revocable trust, real property is usually transferred into the revocable trust. Property held in a Revocable Trust which transfers the property to children/family upon the death of the Grantor/Owner will not get the benefit of property taxes remaining capped.
The law requires that the transfer be from individuals, to other individuals (within one degree) to qualify. A revocable trust becomes irrevocable upon the death of the Grantor(s) and is then an entity. Even if the terms of the trust call for an outright transfer of real property to the Grantor’s children, the property will become uncapped.
This may not matter if the property will be immediately sold, or if the property has not been held for very long.
This result will be damaging if the property was purchased long ago and is meant to be held by the children – a family farm or a family cottage. The uncapping of the property tax could force a sale of the property if the children are unable to afford to pay.
This leads to the use of Lady Bird Deeds. The property is transferred out of the trust back to the original owners. It is then transferred by the owners to themselves and their family as joint tenants with full rights of survivorship. At the owners’ deaths, the property will belong to the children, the property taxes will not uncap, and the children will get a stepped up basis in the value of the property for federal tax purposes.
Lady Bird Deeds have become important for Medicaid Planning today.
A married couple is able to claim their homestead as exempt property when one of them enters a nursing home and they apply for Medicaid. In this way, the property may be held and used by the spouse who does not receive nursing home care.
In the last few years, Michigan has gotten on board with the federal mandate for estate recovery. What this means is that the state government is permitted to seek reimbursement for sums expended on nursing home care. Since the marital home was claimed as exempt property, this is the largest asset upon which the states could recover.
In Michigan, it was decided that the estate recovery would only be against the exempt homestead at the death of the second spouse to die, if the property goes through probate court.
Since a homestead is not exempt if it is held in a trust, the real property would pass to the children and/or family through a Last Will and Testament. Since this would go to Probate Court, this would enable the state of Michigan to pursue recovery against the value of the homestead.
The alternative currently used is a Lady Bird Deed. The property is still considered an exempt asset for purposes of Medicaid qualification. Since the property passes to the children and/or family without the need to go through Probate court, the state of Michigan does not then have the ability to recover the value of care.
As with many regulations concerning Medicaid, this could change in the future.