Legacy Law Blog

When it comes to estate planning, Michigan residents have a unique and highly effective tool at their disposal – the Lady Bird Deed.

This special type of property deed can simplify the transfer of real estate, help avoid probate and offer several other valuable benefits. In this post, we’ll break down how Lady Bird Deeds work, explore their pros and cons and give examples to help you decide if it’s the right choice for your estate plan.

What is a Lady Bird Deed?

A Lady Bird Deed (also known as an enhanced life estate deed) allows a property owner to transfer their property to beneficiaries upon the owner’s death, while still retaining full control during the owner’s lifetime. This means the owner can continue to live in, sell, mortgage or make any changes to the property—without needing the approval of the beneficiaries.

For example, let's say you, Peter, own a house in Michigan and you have two children, Paul and Mary. With a Lady Bird Deed, you can name Paul and Mary as beneficiaries who will own the home upon your death. However, you still have the right to sell the house, take out a loan against it or even change the beneficiaries without consulting them.

Fun Fact: The deed is named after Claudia Alta “Lady Bird” Johnson, the former first lady and wife of U.S. President Lyndon B. Johnson. While the name sticks, its connection to the Johnson family is more anecdotal than legal. Interestingly, Michigan is one of only a few states where this deed is available (along with Florida, Texas, Vermont and West Virginia).

How Can the Lady Bird Deed Benefit You and Your Family?

Why has the Lady Bird Deed become so popular in Michigan? Here are some of its most significant benefits:

1. Avoiding Probate

One of the main reasons people choose a Lady Bird Deed is that it bypasses probate, the legal process that occurs after someone dies and involves the distribution of their assets. Probate can be time-consuming, expensive and stressful for your family. A Lady Bird Deed helps your property automatically transfer to your beneficiaries without going through probate.

For example, if Peter passes away, Paul and Mary would automatically inherit the home, without waiting months for probate to finish. This can save the family time, money and stress.

2. Medicaid Planning

Lady Bird Deeds can be a useful tool for those considering Medicaid, especially for long-term care planning. In Michigan, properties transferred via a Lady Bird Deed are not subject to Medicaid estate recovery. This means that the state cannot seize the property to recoup Medicaid benefits after the owner’s death.

For instance, if Peter was receiving Medicaid assistance and used a Lady Bird Deed to transfer his home to Paul and Mary, the state of Michigan wouldn’t be able to claim the house to recoup payment of those Medicaid benefits, allowing Paul and Mary to take title to the house free and clear.

3. Control During Your Lifetime

The specific wording in the Lady Bird Deed allows the owner to maintain complete control over the property during their lifetime. The owner may still sell, mortgage or change the beneficiaries as the owner wishes.

For example, if Peter wanted to sell his home in the future to move to a different state, maybe retire to Florida, he could do so freely—without needing to consult Paul or Mary—because the Lady Bird Deed allows him to retain full control over the property.

4. Capital Gains Tax Savings

When the owner of the property passes away, the beneficiary receives a step-up in basis, which means the property’s cost basis is adjusted to its current market value on the date the owner died. This helps beneficiaries save on capital gains taxes if they decide to sell the property later.

For example, if Peter bought his house years ago for $100,000, and it is worth $300,000 when he passes away, Paul and Mary receive the home at the $300,000 value. If they sell it for that amount, they won’t have to pay capital gains taxes on the $200,000 increase in value.

5. No Uncapping of Property Taxes

In Michigan, when a property is transferred to a new owner, the property’s tax assessment can be “uncapped,” which may result in higher property taxes. However, with a Lady Bird Deed, if the beneficiary is a close relative like a child, the property taxes will not be uncapped, lowering property taxes for the beneficiary.

Potential Pitfalls of the Lady Bird Deed

While a Lady Bird Deed offers many advantages, it’s not the right fit for everyone. Here are a few potential limitations and downsides to consider:

1. Limited to Real Estate

A Lady Bird Deed only applies to real estate. It cannot be used for other assets like bank accounts, retirement funds or vehicles. So, if you want to pass on a variety of assets, you’ll need to use other estate planning tools like a trust or other beneficiary designation.

2. Not Ideal for Complex Estates

If your estate involves multiple properties, complex financial arrangements or needs to account for special circumstances (such as caring for a disabled family member), a Lady Bird Deed might not be enough. In these cases, a revocable living trust or other advanced planning techniques might be better suited to your needs.

3. Creditor Claims

Once the Lady Bird Deed beneficiary receives the real estate after the owner’s death, that interest could be subject to the beneficiary’s own creditors. This means if Paul or Mary have significant debts, their creditors may be able to make a claim on the property.

4. Simplification Can Be Misleading

The simplicity of a Lady Bird Deed can sometimes lead people to believe it solves all their estate planning concerns. It’s important to remember that it only covers the real estate, and you likely need additional planning for other assets, taxes and potential health care needs.

Is the Lady Bird Deed Right for You?

A Lady Bird Deed could be a great choice if you as the property owner want to:

• Avoid probate and ensure your real estate passes smoothly to your loved ones
• Protect your property from potential Medicaid estate recovery
• Retain control over your property while you’re alive
• Save on taxes for the property itself and for any capital gains
• Simplify your estate planning if your main concern is real estate

However, it’s important to consult with an experienced estate planning attorney to ensure that a Lady Bird Deed aligns with your overall goals. Every estate is unique, and what works for one person may not work for another.

With the right planning and guidance, a Lady Bird Deed can provide peace of mind knowing that your real estate will be transferred smoothly to your loved ones, and that you have retained the flexibility to make decisions during your lifetime.