The “Lady Bird” Deed

Many people own real property that they would like their family members to receive upon their death. One familiar method is to add the family members’ names onto the deed. This may seem like an easy way to avoid probate, but it is fraught with problems. A better approach is the “Lady Bird” Deed. The “Lady Bird Deed” is also called a “Transfer on Death Deed” or an “Enhanced Life Estate Deed”.

How it works:

The owners ( “grantors”) deed the property to whomever they want,usually their children (“grantees”) but reserve for themselves a life estate coupled with the ability to sell the property at any time. This is called an “enhanced life estate”. In layman’s terms, this means that:

• The grantors still own the property;
• The grantors can sell, give away, or mortgage the property at any time;

but if the grantors never dispose of the property, the house will pass directly to the grantees after the last grantor passes away.

The Lady Bird deed has many virtues:

• It may avoid the “Estate Recovery” law, where the State of Michigan can make claims against assets of nursing home patients who start receiving Medicaid benefits after September 30, 2007.
• It does not result in capital gain problems. This is because they will not receive any value until the last grantor passes away. They take it at the stepped-up basis – not the grantors’ original basis. A “stepped-up” basis is the value of the property on the day of the last grantor’s death.
• It does not open up the property to the grantees’ creditors during the grantors’ lifetimes, because the grantees have no interest until the last grantor has passed away, and only then if neither grantor disposed of the home. For example, if a grantee is sued during a grantor’s lifetime, no one can place a lien against the grantee’s interest in the grantor’s home, because the grantee has no present interest in the grantor’s home.
• It allows the grantors to sell, give away, or mortgage their home at any time, versus a regular life estate where they would not be authorized to do so.

Adding a name onto a deed as “Joint Tenants with Rights of Survivorship” (JTWROS) has been used for decades to avoid probate. However, this technique can create problems. Traditionally, JTWROS means that the last person alive receives 100% of the property. If a sale of the property is desired, everyone on the deed has to agree to sell. One person can refuse to sell and the property will not be sold. In addition, it is considered a “gift” under the Medicaid program, which can result in months to years of no Medicaid benefits that would otherwise be available to patients in a nursing home.

Finally, many accountants and lawyers believe and advise their clients that it creates capital gain for the grantees dating back to when the grantors signed the deed.