A controversial topic in Michigan estate planning is the use of a “lion cub” deed as a method to transfer property to others while accomplishing three major goals simultaneously: probate avoidance, property tax uncapping, and minimizing Medicaid divestment penalties. The typical model of a lion cub deed has a parent (“lion”) retaining a 99% interest in the property while conveying a 1% interest to the child (“cub”), but the arrangement is a joint tenancy with full rights of survivorship as opposed to tenants in common. A sample deed created to memorialize this arrangement between a married couple and their son may look like the following:
- The Grantors, MUFASA and SARABI, husband and wife, whose address is 123 Pride Land, Monroe, Michigan 48161, quitclaims a 99% interest to Grantees, MUFASA and SARABI, husband and wife, as tenants by the entirety, whose address is 123 Pride Land, Monroe, Michigan 48161, and a 1% interest to SIMBA, a single man, whose address is 123 Pride Land, Monroe, Michigan 48161, as joint tenants with full rights of survivorship.
A lion cub deed does not have to be a 99%/1% split, but could be a 90%/10% split, a 60%/40% split or any other proportion. You can even have what is called a “reverse lion cub” deed where the grantor retains only a 1% interest and the grantee receives a 99% interest. The reverse lion cub deed may be used for Medicaid divestment reasons as explained later on.
A lion cub deed or reverse lion cub deed tries to capture the best of both worlds: a joint tenancy where the property avoids probate proceedings and property taxes do not uncap, but also an uneven transfer of property to minimize divestment penalties. Unlike a tenancy in common where each owner owns a specific amount (e.g. four owners with 25% each) and each owner’s share would pass to their own heirs instead of the other owners, a joint tenancy with full rights of survivorship redistributes the deceased owner’s share automatically without having to go through the probate process. In a lion cub deed situation where the “cub” gets only 1%, the “lions” have the protection of knowing that the consequences of debt collection efforts and marital property claims in divorce proceedings against the “cub’s” interest in the property is significantly minimized.
This blog will explore the details related to a lion cub deed.
MICHIGAN COURTS HAVE HELD THAT JOINT TENANTS CAN HOLD PROPERTY IN UNEQUAL PROPORTIONS
Some estate planning practitioners contend that it is impossible to convey a joint tenancy in unequal proportions, but this uneven conveyance is actually supported by case law. The Michigan Court of Appeals held in Ledwidge Estate, 136 Mich App 603 (1984) that the common-law requirement of unity of title necessary to create a joint tenancy has been abolished by statute. In that case, John Ledwidge and Veronica Ledwidge (brother and sister) conveyed the property by quit-claim deeds in 1968 to themselves “as joint tenants with full rights of survivorship and not as tenants in common”, a 1/4 interest to be in Veronica and a 3/4 interest to be in John. In 1979, John Ledwidge, by quit-claim deed, conveyed a 1/6 interest in the property to himself and Veronica, using the same language as in the 1968 deeds. John Ledwidge died and his interest in the farm was not treated as an asset of his estate. Veronica Ledwidge died in 1982. The children of John’s deceased brother became aware of the deeds and petitioned the court to reopen the estate, claiming that John owned a divided 7/12 interest in the land at the time of death because the 1968 and 1979 conveyances should have been treated as tenants in common, not joint tenants, due to the unequal ownership interests. The probate trial court and the Michigan Court of Appeals disagreed, finding that the Michigan Legislature changed the legal requirements for joint tenancy. Under the common law, the written instrument of conveyance had to produce unity of time, title, interest, and possession in order to create a joint tenancy. However, in 1955, the Legislature abolished the requirement of unity of title in creating a joint tenancy by enacting MCL 565.49. The Michigan Court of Appeals interprets MCL 565.49 “to mean that rigid adherence to the requirement of the four unities in creating a joint tenancy is not warranted where such adherence will defeat the intent of the grantor(s).” Id at 606. Furthermore:
- “Petitioners cannot prevail even if the 1969 deed failed to create a true joint tenancy. The language used in the deed “as joint tenants with full rights of survivorship and not as tenants in common” does not create a “mere joint tenancy”, but creates something more…Deeds to “joint tenants with right of survivorship, and not as tenants in common” convey a moiety to the joint tenants for life with remainder to the survivor in fee; neither grantee can convey any interest in the fee estate and thus deprive the other of the right of survivor-ship. Even if we were to conclude that the unequal interests of John C. and Veronica Ledwidge negated the unity of interest required for a joint estate, this conclusion would have no effect on the right of survivorship. The 1969 deed was intended to create full rights of survivorship in both John and Veronica. This right of survivorship is not an incident of a simple joint tenancy, but a remainder which cannot be defeated by the act of the other joint tenant.” Id at 606-607. [internal citations deleted].
As long as the intent of the parties is clear, a lion cub deed with any proportional interests for the joint owners has been found to be valid under Michigan law. More importantly, the death of an owner in a joint tenancy with full rights of survivorship does not cause the property to pass through probate.
LION CUB DEEDS PREVENT PROPERTY TAXES FROM “UNCAPPING” WHEN NEW JOINT TENANTS ARE ADDED
In 1994, Michigan voters adopted Proposal A, a constitutional amendment, that provides the annual increase in the taxable value of real property is limited at 5% or the rate of inflation, whichever is lower. This means that residential tax bills will show that property tax assessments are “capped” at the taxable values even though the state equalized value (SEV) is usually much higher, especially when the property has been owned for a long period of time. However, when the owner’s property transfers after death, the taxable value “uncaps” and the assessment increases suddenly to the SEV for the new owner. This can result in a nasty surprise to the new grantee that realizes the property tax rate is no longer comparable to what his or her parents were paying. The General Property Tax Act provides that “[u]pon a transfer of ownership of property…, the property’s taxable value for the calendar year following the year of the transfer is the property’s state equalized valuation for the calendar year following the transfer.” MCL 211.27a(3).
However, the General Property Tax Act excludes a number of property transactions from triggering uncapping events. One exception is creating a joint tenancy where the original owners still retain an interest. Uncapping does not occur from “[a] transfer creating or terminating a joint tenancy between 2 or more persons if at least 1 of the persons was an original owner of the property before the joint tenancy was initially created and, if the property is held as a joint tenancy at the time of conveyance, at least 1 of the persons was a joint tenant when the joint tenancy was initially created and that person has remained a joint tenant since the joint tenancy was initially created. A joint owner at the time of the last transfer of ownership of the property is an original owner of the property.” MCL 211.27a(7)(i).
In Klooster v City of Charlevoix, 488 Mich 289; 795 NW2d 578 (2011), the Michigan Supreme Court held that joint ownership of real property prevents uncapping when one of the joint tenants die and his or her interest in the property is conveyed to the surviving joint owner(s). In Anderson v Chocolay Township, Docket No. 433005 (issued December 18, 2013), the Michigan Tax Tribunal ruled that the unequal joint tenancies created by Lion Cub deeds did not constitute an uncapping event under MCL 211.27a. As a result of this taxpayer victory, Michigan residents can take advantage of the tax benefits of a lion cub deed in their estate planning considerations.
REVERSE LION CUB DEED CAN MINIMIZE MEDICAID DIVESTMENT PENALTIES
In 2011, a Medicaid rule change in Michigan requires the individual’s share in jointly owned real property to be counted. BEM 400, pg. 12. This means that if an individual executed a classic joint tenancy deed adding another co-owner to their property, then a 50% interest in the property would be created in the new co-owner. Under Medicaid’s 5-year lookback rules, if this transaction occurred in the five years prior to applying, then the property transfer would constitute a divestment of 50% of its value where the grantor would be penalized. For example, if an owner of real estate worth $500,000.00 recorded a quit claim deed adding his son as a joint tenant with full rights of survivorship three years before applying for Medicaid, then he would have been considered to have divested $250,000.00 and will be penalized for it.
However, in a reverse lion cub deed, the owner would execute a quit claim deed adding his son as a joint tenant with full rights of survivorship while receiving only 1% interest in the property. The owner would still be penalized for the divestment if it occurred within the last five years, but the divestment penalty would only be $5,000.00 on 1%, not $250,000.00 on 50%. This scenario is much more manageable given the cost of nursing home care and still allows the owner to create a joint tenancy to cause the property to avoid probate and property tax uncapping.
OUR SKILLED LAWYERS CAN HELP YOU DECIDE IF A LION CUB DEED SHOULD BE PART OF YOUR OWN ESTATE PLANNING
There are a lot of considerations that come with considering a lion cub deed and whether or not it is the best fit for your situation. If you have any further questions or require legal representation, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.