How a Ladybird Deed Can Protect Your Home From Probate
Avoiding probate is a priority for many people, and understandably so; they don’t want their family, already grieving their loss, to be confronted with administrative difficulties in settling their estate. Estate planning tools, such as living trusts, that can pass assets directly to loved ones without the involvement of the probate courts are increasingly popular. A so-called “ladybird deed” is one such option, allowing ownership of a home to pass to intended beneficiaries outside of probate after the homeowner’s death.
What is a Ladybird Deed?
A ladybird deed (or lady bird deed) is a type of quitclaim deed that is also known as an “enhanced life estate deed”—but those descriptions will need a little bit of unpacking for most people.
A quitclaim deed is a deed that transfers from one party to another whatever ownership interest the first party has in a piece of real estate. If the first party no longer has an interest in the property, the second party takes nothing. For instance, if you owned a house and sold it, then later quitclaimed your interest in the property to your brother, your brother would have no legal right to the property.
A life estate allows one party, the life tenant, to use and occupy property for the remainder of their life, after which ownership of the property passes to another party or parties, called remainder beneficiaries. The person transferring the property, called the grantor, is also often the life tenant. A key feature of a life estate is that the life tenant has no right to sell or transfer the property. If you owned a house and transferred a life estate in the house to yourself, with a remainder interest in your two children, you could live in and use the house just as an owner would, but you could not sell it without the remainder beneficiaries’ permission.
A ladybird deed combines features of a quitclaim deed and a life estate. It creates a life estate in the property for the grantor, with a remainder interest in a person or persons that the grantor chooses. Unlike a regular life estate, however, the life tenant has the right to mortgage, sell or transfer the property at any time. The remainder beneficiaries do not need to consent to, or even be aware of the transaction. Upon the life tenant’s death, the ladybird deed transfers to the remainder beneficiaries whatever ownership interest the life tenant still had in the property.
What does this mean in practical terms? If Tom and Ann own a home, they can sign a ladybird deed that says essentially, “We, Tom and Ann, quitclaim our home to ourselves for the remainder of our lives. We can sell, mortgage, lease, rent or do whatever we want with our home during our lives. However, if we still own the home when the last of us dies, we give the home to our children Sally and James.”
What Are the Advantages of a Ladybird Deed?
A ladybird deed has many advantages aside from keeping a piece of real estate out of probate. It is quick, relatively simple, and inexpensive. It gives the grantor much more flexibility and control over the property during their lifetime than would an ordinary life estate or creating joint ownership (joint tenancy) with their intended beneficiaries.
In joint tenancy, ownership of real property passes to surviving joint owners on the death of one joint owner. One joint owner cannot sell, mortgage, or transfer the property without the permission of the others. What’s more, property held in a joint tenancy is vulnerable to the creditors of the other joint tenants. With a ladybird deed, creditors of remainder beneficiaries cannot reach the property unless and until the remainder beneficiaries have a present (rather than contingent) interest in the property.
Other benefits of this enhanced life estate deed include protecting assets from Medicaid in the event the life tenant enters a nursing home and needs financial assistance to pay for care. Transferring property via ladybird deed is not considered an impermissible divestment of assets for purposes of qualifying for Medicaid.
Ordinarily, property owned by a Medicaid recipient during their life is subject to “Medicaid recovery” after their death—essentially, Medicaid gets paid back for benefits paid from the estate of the beneficiary. With a ladybird deed, the property does not become part of the probate estate, so it is not subject to “Medicaid recovery” after the grantor’s death. The Michigan Department of Health and Human Services, which administers Medicaid in Michigan, has approved the use of these deeds.
Property owners who qualify for a homestead exemption continue to be eligible for the exemption after executing a ladybird deed. That is because the deed does not officially transfer ownership until the life tenant’s death. And because these deeds are not deemed transfers of ownership for the purposes of calculating property tax, a transfer via ladybird deed will not require the property to be reassessed or lead to “uncapping” of its taxable value.
Ladybird deeds have benefits for the remainder beneficiaries, as well. This type of deed is considered an incomplete transfer for tax purposes, since it does not pass to the remainder beneficiaries until the death of the life tenant (who is often the grantor). As such, the remainder beneficiaries receive a step-up in basis. “Basis” is the amount of capital investment in property for tax purposes. If you bought a piece of real estate for $50,000, that would be your basis in the property. If you later sold the property for $250,000, your capital gains would be $200,000: the difference between the sale price and your basis.
If your child inherited the property for which you paid $50,000, they would not inherit that basis, but would take as their basis the fair market value of the property at your death. If that value was $250,000, and your child turned around and sold the property, they would have virtually no capital gains and thus, no capital gains tax. The same would be true if the property transferred to them via a ladybird deed.
Disadvantages of an Enhanced Life Estate Deed
It might seem that ladybird deeds are the perfect solution for someone who wants to avoid probate. While they are an excellent option in many circumstances, they are not perfect. For one thing, they are available in only a small handful of states. Michigan is one of them, but if you own real estate outside of Michigan or those few other states, you will need to seek another way to transfer it.
Ladybird deeds also apply only to real property; if you have other assets, transferring your real property by this type of deed may not be enough to keep the rest of your estate out of probate. An experienced estate planning attorney can help you decide whether a ladybird deed is right for you or whether there are other estate planning devices that might serve you better.
If you have questions about Michigan probate or ladybird deeds, we invite you to contact our law office to schedule a consultation.