Ladybird Deeds – An Oft Overlooked Estate Planning Tool

For any of those reading this involved in real estate might point out, there is no specific deed called a “Ladybird Deed,” however, the term Ladybird Deed refers to an estate planning tool which transfers the ownership of property through certain stated events. Therefore, a Ladybird Deed is normally a quit claim or warranty deed with additional language inserted.

Traditionally, Ladybird Deeds were referred to as enhanced life estate deeds. This is because a Ladybird Deed traditionally would reserve the use and enjoyment of property to the current owner or owners (usually husband and wife) and then grants the remainder of the interest in the property to the sons and/or daughters of the owners. Such a mechanism allowed for the transfer of ownership of property outside of the Probate arena thus avoiding the costs associated with Probate.

Apocryphally, the name Ladybird Deed comes from the story that President Johnson transferred property upon his death to his wife via a Ladybird Deed. However, Ladybird Deeds were around long before President Johnson’s death.

The Transfer

The sky is the limit when creating a Ladybird transfer; however, the basic tune remains the same. A grantor retains a life estate and the power to subsequently convey fee interest in the property. The granting power is normally reserved to allow the grantor to gift the, mortgage, lease, or otherwise dispose of the property. The Michigan Land Title Standards recognize the validity of Ladybird Deeds in Standard 9.3. Specifically:

Life estate with power to convey fee. The 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 ineffective.

Therefore, the transfer itself is allowed under Michigan law and as such the use of a Ladybird Deed would be upheld if it complies with the other requirements for a deed to be valid.

The Grantee

The Grantor should give careful thought to the identity of the Grantee. The Grantee is the person who will receive the property on the death of the Grantor. The Grantor must consider the possibility that the Grantee will die before the Grantor (pre-decease). If the Grantee pre-deceases the Grantor should assess whether he wishes to grant the rights in the property to another Grantee or in the alternative to the estate/heirs of the pre-deceased Grantee.

An alternative to naming an individual Grantee is the designation of the Grantor’s trust as the Grantee. This allows the Grantor to allow the Grantee to be kept confidential and allows for the ability to designate alternate beneficiaries without filing new documents with the register of deeds. Further, this avoids the traditional issues with placing the property directly into a trust which requires a certificate of trust, because the property does not transfer to the trust until after the death of the Grantor. The transfer to a trust option would also work for a transfer to a special needs trust or even another revocable trust.

Medicaid

While the Ladybird Deed is an undoubtedly useful tool in the estate planning world, it has also been warmly accepted in the Medicaid planning side of Elder Law. The Michigan Department of Health and Human Services approved the use of Ladybird transfers. The transfer is not treated as a divestment because the Grantor still has an unrestricted interest in the property. Further, as long as the property is a homestead it is still a noncountable asset.

Probate Avoidance and Estate Planning

Ladybird Deeds act in a manner similar to joint accounts, beneficiary designations, and transfers on death and can be used to establish a simple estate plan to avoid probate. However, one should not rely solely on a Ladybird Deed, but also prepare a Will. Technically, a Will is not necessary if the “plan” of a Ladybird Deed, Joint Accounts, and beneficiary designations goes off without a hitch, however, the last thing any of us wants to do is create a mess for our loved ones after we die. Further, the simple fact is this system are very narrow and provide little to no flexibility which could force the entire estate into Probate.

Creditor Protection

Most individuals would be concerned about transferring any interest of their homes and property to another person who could incur major debts and possibly expose the property referenced in the Ladybird Deed to collections efforts. However, creditors cannot attempt to recover any part of their debts from the property transferred under a Ladybird Deed, until after the death of the Grantor. The Grantee has no interest in the property prior to the death of the Grantor because the Grantor retains all rights to alienate the property. This means if the Grantee incurs a large number of debts, the Grantor is well within his or her rights to name a new Grantee prior to the Grantor’s death and that a creditor has no interest in the property until after the death of the Grantor.

However, the same cannot be said of debts incurred by the Grantor.  The Grantor retains full control over the property during his or her lifetime and as such the property is subject to any debts incurred by the Grantor and subject to collections actions. However, in general if only one spouse has incurred a debt the property should be protected because the property is held by the entireties.

Uncapping and Property Taxes

A Ladybird Deed does not trigger the most dreaded of all property tax events an uncapping. Uncapping is defined as the transfer of ownership in a piece of property. Once a transfer occurs the taxing authority resets the basic tax rate to market value, this can lead to a substantial increase in property taxes. The Ladybird Deed avoids this because there is no transfer of ownership until the death of the Grantor. This protects from one of the worries of transferring a piece of property into a trust after it has been owned for a long period of time.

Conclusion

A Ladybird deed can be a very effective estate planning tool, but it is not without potential issues and concerns. The lawyers at Hewson and Van Hellemont, P.C. are here to assist you in creating an estate plan for you and your family. Never attempt to create an estate plan without contacting a lawyer.

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