Attorney & Mediator
Attorney & Mediator

LADY BIRD DEEDS ARE BACK !!

Clients are always interested in how to transfer their property to their heirs without the need to go through probate court at the time of their death. Another goal is to assure that the property taxes on long held real property do not uncap upon the transfer to the next generation.

For a period of time, we have been unable to accomplish both of these goals using a Lady Bird or enhanced life estate deed. This is due to the fact that while the amendments to the property tax laws had provided for transfers by jointly held property and transfers by a revocable trust to pass to the next generation without uncapping the taxes, it did not provide for the same result specifically for enhanced life estate deeds. Because of this, the state of Michigan and all local assessors would uncap property if held under a Lady Bird or enhanced life estate deed when the original owners died.

The law has now been amended to include Lady Bird or enhanced life estate deeds. The application of the law is retroactive to December 31, 2014. Therefore, these deeds are now effective for a transfer to the next generation upon the death of the original owners who die on or after January 1, 2015. The property will transfer without the need for probate and the property taxes will not uncap.

This is great news for clients who are not interested in a trust and have worked out most of their post-death transfers using beneficiary designations and transfers on death. They now can take advantage of a Lady Bird Deed to transfer their property to their children leaving little or nothing to run through the probate process.

Lady Bird Deeds

By now, you have heard your friends and neighbors talk about Lady Bird Deeds.  You are wondering if this is something you need to investigate.

First, many individuals think it is a simple easy way to do estate planning by executing a Quit Claim Deed putting other family members on their property.  It may be quick and easy, but it isn’t a good idea.

If you make others joint owners of your property, you are giving them valuable property rights.  They become a co-owner with you.  So, what is the downside?

As a co-owner, their creditors could pursue your property.  For instance, if your co-owner (usually a family member) got into an automobile accident which exceeded his or her insurance, the injured parties could come after your property.

Next, once an individual is a co-owner, you need their permission to sell your property.  This can become a genuine problem for parents who desire to sell vacation property.  The kids who are co-owners decide that they do not want to sell the family cottage.  This stops the sale.

The better approach is a Lady Bird Deed.  This transfers real property from the owners to themselves and others as joint tenants; however, they retain a life estate and the right to sell.  This fills the gaps outlined above.  The owners still have control over the property and the right to sell it until their deaths.  Since they have the right to sell, a co-owner’s creditor is unable to force a sale of the property.

The execution of this document also eliminates the need for the property to go through Probate Court.  When the original owners of the property pass away, the property is owned by the other joint tenants by operation of law, immediately upon the owners’ deaths.

This may be an important tool that you need in your estate plan

Lady Bird Deeds – Part II

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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.

Medicaid Planning

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.

Lady Bird Deeds – Part I

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What is a Lady Bird Deed? A Lady Bird Deed is a Quit Claim Deed from the owner of property, to him/herself and others – usually close family members.  It reserves a life estate to the owners and the right to sell without asking the permission of the family members. Why do people use them? Real property left to family through a Last Will and Testament will go through the Probate Court process.  Many individuals do not want their family to be forced to use this process due to cost and time expended on the process.    Therefore, owners sought a manner to transfer their property to their family (usually children) without using the probate process. Years ago, it was common for individuals to execute a Deed from themselves to their children – but they would not record it.  It was to be kept with the Will and other documents, to be recorded at the death of the owners.  This often created problems as the deed would be lost or destroyed. The next phase of probate avoidance style deeds was a Quit Claim Deed from the owner to him/herself and the children as joint tenants with rights of survivorship.  This accomplished the goal of having the property pass to the children upon the death of the owner. There were, however, draw backs with this type of arrangement.  The children were actual joint owners during the lifetime of the original owners.  Therefore, when the original owners wanted to sell the property, it was necessary to obtain the signature of every one of the joint owners on the transfer documents.  Additionally, if one of those individuals did not want the property sold, the original owner was blocked from selling. Now, owners are using the Lady Bird Deed.  It accomplishes the goal of removing the matter from Probate Court and it gives the right to sell to the original owner. Under a Lady Bird Deed, the property actually transfers at the death of the original owners.  It therefore gets a stepped up basis for federal tax purposes.  In other words, the children’s “purchase price” is the date of death value, not the amount their parents paid for the property. Additionally, under the Property Tax changes in Michigan, the transfer at death to the children prevents the property from uncapping the property taxes. To summarize – the Lady Bird Deed accomplishes the following:

  • Avoids the Probate process
  • Leaves the property to family without a trust
  • Gives the owner the right to sell during his/her lifetime without interference of children
  • Children get a stepped up basis (fair market value at owner’s death)
  • Property taxes are not uncapped
  • All children have to do is to file a death certificate

 

What is a “Lady Bird Deed”?

Many individuals would like their family members, usually children, to receive their real property upon their death.  Additionally, they would prefer that the property not go through Probate Court.

Often, they will simply add their children’s names on to the deed; however, this may not be a good idea.  If the children are added as joint tenants, they will have rights in the property and the parent will not be able to sell the property without the permission of the children.

A better solution is the “Lady Bird” Deed.  Another name for this is the Enhanced Life Estate Deed.

This type of deed transfers the property to themselves and their children.  The difference is that they retain (hold back) a life estate and an ability to sell the property at any time.

Why is this better?  The parents still own the property and can sell or give it away at any time without any interference from their children.  If they still own the property at the time of death, the property will pass to the children.

This avoids probate court.  It avoids an increase in the taxable value for property tax purposes (the so called “pop up”) and it avoids capital gains because the children do not receive any value until the parents pass away.  Therefore, the children still get a stepped-up basis for income tax purposes.

For individuals that do not want to have their property in a trust, yet want to avoid Probate, the Lady Bird Deed is a convenient and easy manner to transfer real property to the next generation.