A ladybird deed, also known as an enhanced life estate deed, is a transfer of real property to a prospective grantee while reserving a life estate for the grantor. This deed also reserves power for the grantor to unilaterally convey the property during his lifetime and effectively defeat the grantee’s interest. While the prevailing myth regarding the namesake of the deed is that it is named after First Lady Claudia Alta “Lady Bird” Johnson, it actually derives from a Florida attorney who made up fictional people to explain how an enhanced life estate deed works.
The authority in Michigan law for a ladybird deed is based on the statutes regarding power of appointment. According to Michigan Land Standards 6th Edition, Standard 9.3, “[a] holder of a life estate, coupled with an absolute power to dispose of the fee estate by inter vivos conveyance, can convey a fee simple estate during the lifetime of the holder. If the power is not exercised, the gift over becomes effective.”
An example of text in a ladybird deed roughly looks like this:
“Grantor, RICHARD ‘RICH’ LANDOWNER, of 123 Anystreet, quitclaims to Grantee, RICHARD ‘RICH’ LANDOWNER, of 123 Anystreet, reserving for himself a life reserving for herself a life estate coupled with an unrestricted power to sell, convey, mortgage, lease or otherwise dispose of the property described above in fee simple during their lifetime, pursuant to Michigan Land Title Standard 9.3, which creates a general intervivos power of appointment, without joinder by the remaindermen, and to keep any and all proceeds derived therefrom. IF RICHARD ‘RICH’ LANDOWNER has not conveyed the property prior to her death, the property is conveyed to LUCIUS ‘LUCKY’ LANDOWNER, of 456 Anystreet.”
While it appears that Richard simply gave the property to himself, what actually happened is that he created for himself a life estate in the property and created a contingent interest for Lucius. As long as Richard lives, he is free to sell the property to someone else, give the property away as a gift, encumber the property with mortgages and liens, rent the property to tenants, and even execute a brand new ladybird deed defeating Lucius’s contingent interest in favor of someone else. Lucius does not have any tangible rights to the property until Richard’s death when the contingency becomes vested.
What is the point of the ladybird deed? It is a very powerful estate planning tool that could have many benefits depending on your situation:
- Probate With Respect To The Property Is Avoided: After the owner’s death, the grantee only has to record the death certificate at the Register of Deeds and file a Property Transfer Affidavit with the local tax assessor. No probate proceedings are necessary for the property which saves time and money (however, the decedent might own other real or personal property that requires probate administration).
- Not Subject To Gift Tax: A transfer pursuant to a ladybird deed is not subject to the federal gift tax since it does not actually transfer during the grantor’s lifetime. However, the grantee will realize taxable gain upon receipt of the property and must pay taxes based on the property’s fair market value from the date of the grantor’s death.
- Protects Property From Medicaid: The execution of a ladybird deed is not considered a divestment of property for the purposes of Medicaid eligibility. Additionally, once the property is transferred upon death to the grantee, it also avoids a Medicaid estate recovery lien. There have been recent attempts in the Michigan Legislature to include ladybird deed property under estate recovery which have, thus far, failed. New developments in this area of law should be watched closely.
There are some disadvantages to ladybird deeds that must be considered:
- Does Not Fit All Estate Plans: If your primary residence is your greatest asset and you have two or more children, it might not appear to be a fair division to give the house to one child through a ladybird deed and the remaining property to another child which may pale in comparison to value. It is possible to execute a ladybird deed naming more than one child as the contingent grantee, but that child might find a rather undesirable situation co-owning the property with multiple people. What if everyone doesn’t agree to sell? Who gets to live there? Are they all now responsible for the mortgage left on the property? The success or failure of this plan depends on the family dynamic and financial circumstances at play.
- The Contingent Grantee Might Predecease You: The possibility can’t be ruled out that the next-in-line owner will die first and the gift will fail. It does not automatically convey to the grantee’s descendants by right of representation. Probate proceedings may be required.
- Property Taxes May “Uncap” – Generally, Michigan real property owners benefit from a cap imposed on the amount of their property taxes in that they can only increase a certain amount in any given year regardless of appreciation in the property value. Certain transfers of property (e.g. to close family members) may retain this cap. However, certain conveyances will “uncap” the property taxes and subject the new owner to significant real estate taxes that the previous owner did not have to pay. This is not the optimal estate planning tool if uncapping is an issue.
If you have questions about whether a ladybird deed is the appropriate solution for your situation, contact the estate planning and property attorneys at Kershaw, Vititoe & Jedinak PLC.