Lady Bird Deeds: Simple, efficient, but not for everyone By Gregory R. Kish, CELA
Myths and misinformation run rampant with regard to Lady Bird Deeds. What are they, what do they do, and who needs one? I regularly field questions about Lady Bird Deeds, usually because someone has heard the term but does not fully understand how these deeds work. What is a Lady Bird Deed? Put simply, a Lady Bird Deed functions much like designating a beneficiary on a life insurance policy or a bank account; however, a Lady Bird Deed applies to real estate instead of money or stocks. Lady Bird Deeds, also called enhanced life estate deeds, can allow you to maintain full ownership of your home or other real estate while you are alive. They provide for the simple and efficient transfer of the real estate to your designated beneficiaries when you die. Even with a Lady Bird Deed in place, during your lifetime you can sell the real estate and keep the proceeds, mortgage the real estate, or lease the real estate, all without seeking the consent of the designated beneficiaries. Creditors of your designated beneficiaries cannot seek payment of your beneficiaries' debts from the real estate, and if you change your mind about who you have named as the beneficiary on the Lady Bird Deed, you can sign a new deed that changes the designation. A recent change in Michigan law provides that Lady Bird Deeds qualify for the same types of exemptions to uncapping of real estate tax assessments as transfers by will or trust. So, you can use a Lady Bird Deed to transfer your home to your children upon your death without uncapping, provided you meet the other requirements for the exemption. Drawbacks of a Lady Bird Deed Lady Bird Deeds are not for everyone. Unlike your will or trust, a Lady Bird Deed does not offer much flexibility to changing circumstances. Lady Bird Deeds must be updated if one of the designated beneficiaries dies or if other circumstances change. Lady Bird Deeds can also be cumbersome and even breed conflict when naming multiple beneficiaries. For example, if you have five children and want them all to share equally in your estate upon your death, you might think that naming the five children as beneficiaries of a Lady Bird Deed is a good idea. Not so fast. Using a Lady Bird Deed to name your five children as beneficiaries means that all five will need to agree with each other at every step in the administration and sale of the real estate. Co-ownership of real estate among five children does not function as a democracy; they must act unanimously. All five will need to agree on whether or not to sell the home, whether to use a realtor or sell by owner, which realtor to select, what the listing price should be, whether to accept a particular offer or to make a counteroffer, etc. This level of coordination among five people can be cumbersome and exacerbate conflicts between family members at a particularly stressful time in their lives after the loss of a parent. If one or more of the beneficiaries on a Lady Bird Deed has trouble with creditors, his or her interest in the property may be at risk following your death. In contrast, your will or trust probably names one or two people to serve as your Personal Representative or Trustee, centralizing the decision-making and avoiding the need for multiple siblings to act unanimously. Lady Bird Deeds and Medicaid Attorneys find Lady Bird Deeds particularly useful for clients who are receiving Medicaid benefits. Through Michigan's Medicaid Estate Recovery Program, the State of Michigan seeks reimbursement after the Medicaid recipient's death for monies it spent on a person's health care. The Estate Recovery program applies only to probate assets, so avoiding probate also avoids estate recovery. Unfortunately, other Medicaid rules provide that a person's home is only treated as an exempt asset in the Medicaid means test if the home is owned by the person individually and not in trust, so a trust on its own cannot be used to facilitate the non-probate transfer. Practically speaking, a person must own his or her home outside of trust in order to receive long-term care Medicaid benefits. A Lady Bird Deed dovetails with both of these Medicaid rules. When using a Lady Bird Deed, a person can continue owning the home in his or her own name to benefit from the Medicaid homestead exclusion while at the same time avoiding Medicaid Estate Recovery upon death. If the Medicaid recipient's home transfers via Lady Bird deed, the home avoids Medicaid estate recovery and passes to the intended beneficiaries. Is a Lady Bird Deed right for you? A Lady Bird Deeds might serve as one part of your overall estate plan. These deeds are more likely appropriate for simple family situations and Medicaid-related planning. If you have questions about how a Lady Bird Deed might fit in your estate plan and whether a Lady Bird Deed is appropriate for your situation, please schedule an appointment with us. We would be glad to help.
P.S. A "Lady Bird" deed has nothing to do with the homonymous red and black beetle. Rather, an attorney who prepared elder law materials on different types of deeds used a number of popular names to illustrate the different characters involved in his sample scenarios. One of those scenarios involved a transfer of real estate from or to Lady Bird Johnson, and the moniker "Lady Bird Deed" was born.
John A. Scott, P.C. publishes this article to inform interested persons about the estate planning process, our firm, and new developments. If you are seeking legal advice, you should consult an attorney who is familiar with your particular circumstances.