During the past 20 years, Lady Bird deeds have often been used in estate planning. A Lady Bird deed creates a general lifetime power of appointment and names a default beneficiary to receive property upon the death of the owner. This type of deed got its nickname when President Lyndon B. Johnson used it to convey property to his wife, Lady Bird Johnson. It is valid under Michigan Land Title Standard 9.3 (pdf).
The benefits of a Lady Bird deed
Using a Lady Bird deed allows an owner to retain control of property during his or her lifetime and pass ownership to persons of his choice upon his death, outside of probate. It can be used as a simple, inexpensive estate plan for persons whose residence is the major or only asset that may need to be probated upon death. After the owner’s death, the default beneficiary only has to record the death certificate and file a Property Transfer Affidavit with the local assessor. (If a default beneficiary plans to use the property as his or her own residence, he or she should also apply for a Principal Residence Exemption for property taxes.)
How a Lady Bird deed works
Typically, property owners name themselves as both grantor and grantee in the Lady Bird deed, and as both donor and donee (a person who is given a power of appointment) of the power of appointment. This way, married couples retain protection from creditors while both spouses are living. A default beneficiary receives no incidents of ownership until the death of the donee, so the property is also protected during the owner’s lifetime from claims by creditors of the beneficiary. Execution of a Lady Bird deed is not considered a gift subject to federal gift tax, or a divestment subject to penalty for Medicaid eligibility purposes. After signing a Lady Bird deed, an owner may still sell, gift, mortgage or lease the property during his or her lifetime. The default beneficiary receives the property only if the owner still owns it at time of death. The property receives a step-up in basis at the owner’s death, beneficial for income tax purposes (avoiding capital gain). Further, if the default beneficiary is a close relative, as defined in MCL 211.27a(7)(d), property taxes will not be uncapped upon the owner’s death.
What if nursing home care is needed?
During a grantor’s stay in a nursing home on Medicaid, a Lady Bird deed is helpful to preserve his or her residence as an exempt asset under Medicaid eligibility rules, and as an inheritable asset that (under present law) avoids a Medicaid estate recovery lien. But the nursing home resident’s income must be used to pay his or her care costs, so it will not be available to defray upkeep and maintenance expenses for the residence. Default beneficiaries will have to find another way to cover these expenses during the nursing home stay.
Limitations of a Lady Bird deed
Use of a Lady Bird deed is not a preferred method in some situations, such as when an owner is likely to die leaving a sizable unpaid lien on the property. It may be inadvisable where an owner wishes to leave the property to multiple (more than 2 or 3) default beneficiaries, particularly if they do not get along. The reason is that the default beneficiaries will have to work together to sell or dispose of the property following the owner’s death, and disagreements could lead to a partition lawsuit.
A Lady Bird deed sets up a less flexible arrangement than a trust. If the Lady Bird deed names more than one default beneficiary, it does not allow just one of them to sell the property following the owner’s death unless the others give their power of attorney. Furthermore, a Lady Bird deed typically makes no provision for descendants of a default beneficiary who predeceases the donee/grantee. However, a grantor may solve these problems by naming the successor trustee of the grantor’s living trust as the default beneficiary in the Lady Bird deed. If the default beneficiary named in the Lady Bird deed is not a close relative, as defined in MCL 211.27a(7)(d), property taxes will be uncapped upon the death of the donee of the power of appointment. This may not be beneficial for property that has appreciated significantly over time.