The Lady Bird Deed as an Estate and Medicaid Planning Tool

The Lady Bird Deed as an Estate and Medicaid Planning Tool

Article by Lindsay Cummings

Transferring real property to a family member or trust without considering all of the consequences can have a major impact on your estate plan and Medicaid planning. It is important to consider whether a transfer will avoid probate, receive a step-up in basis, increase your real property taxes, or even affect your Medicaid eligibility. There are many ways to transfer property to avoid probate, or not uncap the property’s taxes, or not be subject to gift tax, but the one way to accomplish all of these goals is to use a Lady Bird Deed. But what is a Lady Bird Deed (also known as an “Enhanced Life Estate Deed” or a “Deed subject to a Life Estate”)? A Lady Bird Deed is a deed that works much like a beneficiary designation, but for real property. A Lady Bird Deed essentially transfers real property on the death of the owner to either other individuals or to a trust; however, during the owner’s lifetime the owner retains a right to sell, lease, mortgage or change the deed. As opposed to a standard warranty or quit claim deed, where the property transfers upon the recording of the deed.

This article’s focus is on the benefits of transferring real property via a Lady Bird Deed from an owner to another individual, such as a family member(s). The Lady Bird Deed has become a popular tool for the following reasons:

  1. Avoid Probate: A Lady Bird Deed can be an effective tool for an individual to transfer real property and avoid probate. For example, an elderly person who owns real property can transfer that property to a child and keep the property out of probate upon their death.

  2. Not a Lifetime Gift subject to Gift Tax: When an individual transfers real property using a Lady Bird Deed the transfer is not complete until the death of the owner, so it is not a gift that is subject to gift taxes.

  3. No Uncapping of Property Taxes: On December 22, 2015, Governor Snyder signed PA 243, which allows a real property owner to retain a life estate in the real property and transfer it to a family member(s) upon his or her death, without uncapping the property’s taxable value. For this exemption to apply, the property must not be used for any commercial purpose following the transfer.

  4. Medicaid Eligibility: In order to qualify for Medicaid, an individual cannot transfer property without receiving fair market value during the prior five years before the Medicaid application. For example, if an individual transferred real property to his or her son or daughter a year before his or her Medicaid application then he or she may not be eligible for Medicaid benefits. However, with a Lady Bird Deed the owner retains control of the property so it is not considered a transfer under the Medicaid rules. The Lady Bird Deed essentially allows an individual to transfer his or her real property and avoid Estate Recovery, while remaining eligible for Medicaid.

  5. Avoids Michigan Estate Recovery: If a Lady Bird Deed is used correctly, a Medicaid recipient can transfer real property upon his or her death to a family member(s) and the State of Michigan cannot file a claim against the real property for Medicaid repayment.

  6. Step-Up in Basis: When the real property transfers upon the death of the owner, the property obtains a step-up in basis. Meaning, the beneficiaries can then sell the real property on the death of the owner and not pay taxes on the proceeds.

As stated above, the Lady Bird Deed has become a popular tool for all of the reasons noted, but it is not a tool that should be used in every circumstance. It is important to contact your attorney to discuss your personal situation to determine the best way to title/deed your real property to plan for the present and future.

Posted on April 22, 2016
Tagged as Elder Law, Estate Planning , Real Estate