A common question I get asked is what is a “Lady Bird” Deed and do I need one?
First, a quick background.
Quit Claim Deeds
Most folks are familiar with what a Quit Claim Deed is. It is a deed that is used to add or remove someone from record ownership of real estate. A typical use would be parents deeding an interest in their property to an adult son. The problem with a Quit Claim Deed is that it is irrevocable once it is recorded, and can create some awful legal messes. If the child should end up in a financial problem, go through a divorce, get sued or die before the parents - not only will the Quit Claim Deed have failed it’s intended purpose, the parents may be paying thousands of dollars, or more, to fix an unnecessary problem. Couple this with a larger or blended family, and the use of a Quit Claim Deed to avoid probate can have disastrous results.
Life Estate Deeds
Therefore, some attorneys began drafting a Quit Claim Deed with a retained “Life Estate Interest” for the parents (sometimes called “Life Lease”). This works much like a regular Quit Claim Deed - but the parents have the continued right to live in the house, provided they pay the taxes, insurance and maintenance on the property. Once they both are going, the property title passes to the child or children named in the deed. But like a regular Quit Claim Deed, these Life Estate Deeds are irrevocable. That means you can’t change your mind.
Lady Bird Deeds
About 20 years ago, we started seeing the use of Lady Bird Deeds here in Michigan. These deeds are also called “enhanced life estate” deeds. The urban legend is that they were devised by the lawyers for Lady Bird Johnson before she died, to allow her Texas ranch to pass to her children. The deed is almost identical to a Life Estate Deed, with one crucial difference: you can change your mind about it anytime right up until your death. It is basically a revocable Life Estate Deed. This is intended to protect the parents should any of the bad things occur as detailed above: financial problems, divorces, lawsuits or out of order deaths.
An enhanced life estate deed (the Lady Bird deed), lets you:
- avoid probate of the property
- keep the right to use and profit from the property for your lifetime
- keep the right to sell the property at any time
- avoid making a gift that might be subject to federal gift tax
- avoid jeopardizing your eligibility for Medicaid
Then a Lady Bird Deed sounds terrific, right? Not really. First, Michigan courts have never really decided whether a Lady Bird Deed is legal here in Michigan. They are used, and I have handled several real estate transactions involving such a deed. But it is quite possible that a Michigan court could invalidate their use, particularly as an asset protection tool.
Second, the Michigan State Tax Commission has decided last year that the creation and recording of Lady Bird Deeds should be subject to property tax uncapping when the parents die. Creation and recording of a Lady Bird Deed will not uncap the property taxes immediately upon filing, but the Lady Bird Deed uncaps the property taxes when the grantor dies. That means the for property taxes, the taxable value of the subject property becomes the same as the state equalized value. Why this is bad is that the same transfer completed through a simple trust would not have uncapped the property taxes - and thus could save the children significantly on future property taxes.
The irony here is that Michigan legislature has revised our property tax laws twice in recent years to protect cottages and other real estate from uncapping when transferred to your children through an estate plan. The Tax Commission's decision to not extend this protection to Lady Bird Deeds has received some criticism.
Lady Bird Deeds potentially have a place in some Michigan estate plans. A client that might be widowed, own just their primary residence, have a very uncomplicated family situation, and expects their child to immediately sell their home might consider such a deed. However, it is essential that anyone contemplating their use sits down and allows a knowledgeable attorney to review everything about your family, your real estate interests, and creates a comprehensive plan that takes a variety of factors into account.