Is a Ladybird Deed right for me?

A Ladybird Deed is a deed whereby you, as Grantor, convey your property to yourself for your lifetime by the granting of an enhanced life estate, and then you can choose the beneficiary of your property after your death.  When a Ladybird Deed is used, you can choose to transfer your property to your trust or to one or more individuals, upon your death.  The creation of an enhanced life estate has the benefit of allowing you as the original owner, or Grantor, to sell or mortgage or otherwise encumber your property during your lifetime.  You therefore retain full control of the property during your lifetime, and if you decide that you no longer wish to transfer your property to your named beneficiary, you can revoke the Ladybird Deed at any time and transfer the property back into your individual name.  If you do not exercise your right to revoke the deed or sell the property during your lifetime, then the property will be transferred to your named beneficiary upon your death.  Probate will also be avoided by use of a Ladybird Deed.  Michigan recognizes Ladybird Deeds pursuant to Standard 9.3 of the Michigan Land Title Standards.  Public Act 497 of 2012 provided that beginning December 31, 2013, a transfer of residential real property does not result in uncapping if the transferee is related to the transferor by blood or affinity to the first degree and the use of the residential real property does not change following the transfer.  Some practitioner’s are of the opinion that this property tax uncapping exemption extends to a ladybird deed[1], however, the State Tax Commission guidelines do not specifically clarify this and practitioner’s are awaiting further guidance in this regard.

Medicaid applicants and those seeking to gift a property during their lifetime can also benefit from a Ladybird Deed. As the beneficiaries of a Ladybird Deed do not take ownership of the property until the death of the Grantor(s), it is not considered a gift for federal gift tax purposes, and the Grantor is not subjected to the Medicaid penalty period[2].  Also, the beneficiaries take the property at a stepped up cost basis when they take ownership at the Grantor(s) death. This benefits the beneficiaries by greatly reducing or eliminating any capital gains tax that must be paid on the income produced by the sale of the home. However, if the property is sold prior to the death of the Medicaid recipient, Michigan can seek estate recovery, i.e. the life estate value of the home will be required to be paid towards their care.

Ladybird Deed vs. Joint Tenancy

The question in many people’s minds is whether to use a Ladybird Deed or use a deed creating a joint tenancy.  When the owner of a property creates a joint tenancy with his children[3] during his/her lifetime, probate is avoided in addition to property taxes remaining uncapped.  While the guarantee of property taxes remaining uncapped is a distinct advantage of a joint tenancy deed over a Ladybird Deed, there are other considerations that should be carefully addressed when deciding which type of deed to use.  A joint tenancy should only be created if the joint tenants do not, or are unlikely to, experience any solvency issues during the lifetime of the Grantor as the property could be then be subjected to collection procedures of any potential creditors if solvency of any of the owners was to become an issue.  A Ladybird Deed does not subject the property to this same risk.  In addition, there are estate and gift tax consequences for adding a joint tenant to the property, whereas this concern is alleviated by the use of a Ladybird Deed.  The use of a Ladybird Deed provides the Grantor full control of the property during his/her lifetime, whereas the creation of a joint tenancy can be problematic if family issues arise.  This can cause particular anguish to family members if there is a dispute over the use of the property and in regard to payment of taxes, upkeep of the property etc.

A Ladybird Deed is an estate planning technique that should be discussed carefully with your attorney.  Your title insurance company and mortgagor should also be advised that you are considering such a transfer.  Please feel free to contact us if you would like to discuss this topic in more depth and find out if it is right for you and your loved ones.

[1] Provided that the remainder of a property is transferred to a beneficiary related by blood or affinity after the termination of a life estate, and provided that the use of the property remains the same.

[2] If you were to gift the property to avoid it being considered as a “countable asset”, then you would be subject to a penalty period during which you would be ineligible for government aid.  The length of the penalty or “disqualification” period depends on the total amount of the gifts made within the 5-year period and also the state’s “penalty divisor”. 

[3] Property taxes also remain capped if a joint tenancy is created between a Grantor and his spouse father or mother, father or mother of the spouse, son or daughter, adopted son or daughter, son or daughter of the spouse or siblings.