Overview of Lady Bird Deeds in Michigan
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Note: This article is not intended to replace legal advice. Always work with an attorney to develop a Lady Bird Deed, as the language used is critical and there are many legal pitfalls.
A Lady Bird Deed, also known in Michigan as an Enhanced Life Estate Deed, provides a relatively simple method of transferring real property upon death. Lady Bird deeds (LBDs) are often used for gifting the primary residence of a person, known as the “grantor,” to their children or other family members. In many cases, that residence is the grantor’s main asset, and the use of an LBD can avoid the need for a trust. While an LBD needs to be carefully drafted by an attorney to avoid certain legal pitfalls, they are less expensive to develop than a trust.
The LBD names one or more beneficiaries (known also as the remainder owners, or grantees) who will receive the property upon the grantor’s death. However, during their lifetime, the grantor holds an unrestricted power to live in the house, use it as they wish, encumber the property, change the beneficiary, sell or otherwise convey the real estate. This makes an LBD similar to a revocable trust, where the grantor retains the full right to change it at any time during their life.
If the grantor dies and has not changed the beneficiary or conveyed the property, then the property will transfer to the named beneficiary (or beneficiaries). This method of transfer-upon-death keeps the property out of the probate estate, making for a smooth transition from one generation to the next.
Legal authority
While an assortment of laws come to bear on the topic, the starting basis of authority for LBDs stems from the Michigan Land Title Standards, Section 9.3. This standard allows someone to hold a life estate, exercise complete control over it during their lifetime, but to gift it to a named beneficiary if it has not been conveyed by the time the grantor dies. The use of LBDs as a planning technique is well supported by court decisions. In particular, the Supreme Court affirmed the use of LBDs in Department of Health and Human Services v. Rasmer (501 Mich. 18, 903 N.W.2d 800 (Mich. 2017)), noting that a LBD is “… an estate-planning tool to avoid probate.”
Benefits
LBDs are somewhat unique in their operation and provide numerous benefits under the law. These include stepped-up basis, ability to qualify for Medicaid long-term care benefits, and property tax capping if the LDB is drafted correctly.
Stepped-up basis
The beneficiary of an LBD will receive a stepped-up tax basis for the real estate received. The basis will become the fair market value of the property at the time of the grantor’s death. This means that if the beneficiary or beneficiaries sell the property shortly after they receive it, they will not likely have a large tax bill to contend with and can keep most proceeds to themselves. For a further explanation of how the stepped-up basis works generally, see this MSU Extension article on the topic. For more details on the nexus of LBDs and stepped-up basis, see this 2024 Michigan Bar Journal article.
Medicaid
The LBD is a very important tool for many people’s long-term care planning toolbox.
The creation of an LBD is not considered to be a transfer for purposes of Medicaid’s 5-year lookback period. This is because the grantor holds unrestricted rights to use, encumber or sell the property during their lifetime. And if the property is the principal homestead residence of the grantor, it is not considered as a countable asset under the Medicaid rules. In fact, the LBD can be executed before or after any Medicaid benefits have started.
After the grantor’s death, the property will be transferred to the beneficiary(s), and under current rules, will not be “recoverable” by Medicaid. This is because the property transferred through the LBD is technically not considered to be part of the grantor’s probate estate. Therefore, someone can qualify for Medicaid benefits and, using an LBD, can still leave their primary residence to a child, relative or friend.
Property tax
For property tax purposes, the creation of the LBD does not create an “uncapping” event. This is because the initial deed is not considered a transfer (Michigan Tax Tribunal Docket #433005, December 2013). A transfer does not occur until after the grantor’s death, when it passes to the beneficiary. Similarly, if the property is the principal residence of the grantor, the principal residence property tax exemptions will continue to apply.
When the property passes to the beneficiary, if the beneficiary is a spouse or family member, the property will not be considered a transfer, and no uncapping will occur under MCL 211.27a(7)(d).
Under this statute, family members include the grantor or grantor’s spouse’s “mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson or granddaughter.”
However, a word of caution. Currently, there is a question of whether an LBD naming the grantor’s trust will cause an uncapping event, even if the trust grants the property to a qualifying family member under MCL 211.27a(7)(d). To be safe, at the time of this writing, LBDs should be written to go straight to the qualifying family member(s) in order to avoid uncapping. Currently, a bill is in the Michigan legislature that would allow the uncapping exemption to apply also to a grantor’s trust, if the beneficiary(s) are made up solely of qualifying family members.
Agriculture concerns
Lady Bird deeds have potential application in farm estate planning. Due to the complexity involved in farm transfer planning, it is critical to work with an estate planning attorney, ideally one who has expertise with farm businesses. A couple of the important considerations follow.
First, while the grantor of an LBD retains all the control over the real estate that they had before, it would be prudent to connect with the township at hand once the deed is made. That way, the appropriate affidavit for the qualified agricultural property tax exemptions can be filed. In the event that the township authorities consider the LBD to be a “transfer,” this will help ensure that there are no interruptions or confusion related to the exemption.
Second, because of the high value of farmland, the full value of a farmhouse and the land it sits on often might not fit within the Medicaid equity cap. In order to qualify for Medicaid, the total equity of a home that will be considered a “non-countable” asset is capped at $730,000 for 2025 (see this American Council on Aging website for related information). This means that the value of the parcel would need to be determined, and further planning may be needed when the principal residence is associated with farmland. For the contact information of attorneys who work specifically on Medicaid and long-term care planning for farm estates, contact author Chris Bardenhagen at bardenh1@msu.edu.
Other concerns
It is important to keep in mind that with a Lady Bird Deed, the real estate is reachable by the grantor’s creditors. This means, for example, that if mortgage payments aren’t made as necessary, the bank can potentially force a sale. Also, an LBD could potentially trigger a bank’s “due on sale” clause. For these reasons, an LBD might not be ideal for a property that has substantial liens on it.
Finally, consider putting the beneficiary(s) on the insurance policy for a home. Otherwise, once the grantor dies, their insurance will not cover natural disasters or fires that occur between their death and the beneficiary’s obtaining of insurance. This is because the grantor no longer owns the property. Listing the beneficiary(s) on the policy ensures coverage remains in place.
