Benefits of Using a Lady Bird Deed

A Lady Bird deed, also called an enhanced life estate deed, is an estate-planning tool that allows a property owner to retain broad control of real estate during life while naming one or more beneficiaries to receive the property at death. Here are a few of the main benefits that a Lady Bird deed could provide:

Probate avoidance

One common estate-planning goal is to avoid probate, which can add time, cost, and public court involvement to transferring assets after death.

A Lady Bird deed can transfer the covered real estate directly to the named beneficiaries at the owner’s death, outside probate. Unlike a revocable trust, which must be created and funded to hold the property, a Lady Bird deed can provide probate avoidance for a particular parcel through the recorded deed itself.

However, a Lady Bird deed covers only the real property described in the deed. This means probate avoidance for things like bank accounts, investment accounts, vehicles, business interests, or other assets must be accomplished through different means.

Lifetime control and flexibility

Unlike an ordinary life estate deed, a Lady Bird deed generally allows the owner to retain broad power over the property during life. With a properly drafted Lady Bird deed, the owner generally retains the right to live in, sell, lease, mortgage, or otherwise manage the property without the future beneficiaries' consent. The owner may also expressly reserve the right to change the beneficiaries or revoke the deed’s future-transfer arrangement, and a properly drafted Lady Bird deed will include these reserved powers.

This flexibility can make a Lady Bird deed attractive for a property owner who wants to preserve lifetime control while still planning for a simple transfer at death.

Property-tax and income-tax considerations

Creating a properly drafted Lady Bird deed generally does not itself constitute a present transfer of ownership for Michigan taxable-value purposes. As a result, executing the deed during the owner’s lifetime generally does not itself cause property-tax uncapping.

At the owner’s death, whether the property’s taxable value remains capped depends on the identity of the beneficiary, the use of the property, and the applicable Michigan transfer-of-ownership exceptions. To ensure your Lady Bird deed can accomplish your goals while meeting current statutory requirements, an experienced attorney should review your specific property, situation, and goals.

Additionally, a Lady Bird deed may also preserve a basis adjustment at death. Because the owner retains substantial rights in the property during life, the property is generally included in the owner’s federal gross estate. It receives a basis adjustment to its fair market value at death. This can reduce—or, if the property is sold soon after death, potentially eliminate—capital-gains tax attributable to appreciation during the owner’s lifetime. The actual result depends on federal tax law, the property’s value, and sale circumstances.

Medicaid considerations

A Lady Bird deed generally is not treated as a completed gift or divestment when it is signed because the owner retains broad control over the property. It therefore generally does not create a transfer penalty for purposes of Medicaid’s five-year look-back rules at the time of execution.

A primary residence may also be an exempt asset for Medicaid eligibility purposes, subject to applicable home-equity limits and other program rules. A Lady Bird deed does not itself make a nonexempt asset exempt, and it does not eliminate the need to consider Medicaid eligibility, lien, recovery, and long-term-care planning separately.

Under Michigan’s current probate-estate-based Medicaid estate-recovery framework, property passing at death under a Lady Bird deed generally avoids probate and therefore is generally outside ordinary estate recovery. However, this result may not apply in every situation, so an experienced attorney should review your specific situation and plan.

Is a Lady Bird deed right for you?

A Lady Bird deed may be a practical solution when the goal is to retain full lifetime control of Michigan real estate while arranging for a direct, nonprobate transfer at death. But it is not ideal for every situation and often serves as only one piece of the estate planning puzzle.

Before signing a Lady Bird deed, it is important to review the existing title, mortgage terms (including any due-on-sale clause), property-tax status, homestead exemption status, insurance coverage, intended beneficiaries, and overall estate plan with an experienced estate planning attorney.

Conclusion

A Lady Bird deed can be a flexible and cost-effective way to transfer Michigan real estate outside probate while preserving the owner’s control during life. Used thoughtfully, it may also offer important property-tax, income-tax, and Medicaid-planning advantages. If you are considering a Lady Bird deed for your home or other Michigan real estate, contact Jabbour Law today to schedule a free consultation!

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