During the past 20 years, another weapon in the arsenal of estate planning documents has been more frequently used: “Lady Bird deeds.” 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 who is donee of the power of appointment. This type of deed, according to legend, acquired its nickname when President Lyndon B. Johnson used it to convey property to his wife, Lady Bird Johnson. It is expressly recognized as valid in this state under Michigan Land Title Standard 9.3
Using a lady bird deed allows an owner to retain control of real property during his lifetime, and pass ownership to person(s) 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 their death. After the owner’s death, the default beneficiary need only 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 then apply for a Principal Residence Exemption for property taxes.)
Typically, property owners name themselves as both grantor and grantee in the lady bird deed, and as both donor and done of the power of appointment. In 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, if he or she chooses to do so. 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).
During a grantor’s stay in a nursing home on Medicaid, a lady bird deed is helpful to preserve 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 and default beneficiaries will have to find another way to cover these expenses during the nursing home stay.
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 or encumbrance 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 well with each other. 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 the filing of a partition lawsuit.
A lady bird deed sets up a less flexible arrangement than a trust. It does not allow one person (such as a successor trustee) to sell the property following the owner’s death unless other default beneficiaries give him their power of attorney, and it usually makes no provision for descendants of a default beneficiary who predeceases the donee. However, a grantor may solve these problems by naming as default beneficiary the successor trustee of the grantor’s living trust. When a lady bird deed is used, property taxes will be uncapped upon the death of the donee of the power of appointment, unlike transfers directly into a revocable trust and (after the owner’s death) out of the trust to close family members. This may not be beneficial for property that has appreciated significantly in value over time.