With a Lady-Bird deed, the grantors give the property to the grantees (beneficiaries) but retain for themselves not only a life estate (the right to use the property during their lifetime), but the right to sell, give away, or mortgage the property at any time. In other words, during their lifetimes, the grantors have kept all rights to the property and the ability to do anything they want with it; even if that means that the named grantees/beneficiaries will have nothing left. Anything that is left at the death of the grantor(s) will pass directly to the grantees.
Tax Benefits of a Lady-Bird Deed
Because, the grantors still own the property and rights associated with it, no present interest has been given so there will not be any uncapping of property taxes or loss of homestead tax benefits. At the time the grantees are added to the deed it is not necessary to file a gift tax return because no present interest has been given and the grantors continue to own the property. Because no ownership was transferred during the life of the grantor(s), under Section 2036 of the IRS code, the property subject to the Lady Bird Deed is included in the estate of the decedent for estate tax purposes. This means that the grantees (except in the year 2010) receive a stepped up basis on the death of the last grantor. This means no capital gains tax on the transfer of the property.
How A Lady-Bird Deed Can Benefit Michigan Medicaid Applicants
In applying for nursing home assistance from Medicaid, the nursing home resident can keep his/her home as an exempt asset and still qualify. If a Lady-Bird deed is used, that home, under current Michigan Medicaid regulations, can avoid the "Estate Recovery" law. This Estate Recovery law allows the State of Michigan to make claims against probate assets to reclaim amounts paid by the state for Medicaid care.
Addition Benefits of Lady-Bird Deeds
We frequently advise our clients to be very careful about adding others on their assets as joint owners. This is sometimes done to simplify transfer after death and avoidance of probate or for ease of administering the asset during life. A joint property, however, is subject to the creditors of and claims against joint owners. This means that the property may be included in a divorce settlement of the joint owner or may have liens placed against it for the debts of the joint owner. With a Lady-Bird Deed the property is not subject to the grantees' creditors during the grantors' lifetimes because no interest has been passed until the last grantor has passed away, and only then if neither grantor disposed of the property.
The Lady-Bird Deed can be used in most states. Here in Michigan, we use them successfully, but if you are from another state, you will need to check with an attorney in your area. Medicaid Recovery is different in Michigan than in most states and we actually expect that the state will be more aggressive in the future in attempting to recover amounts paid for care from the estate of a Medicaid recipient.
You should talk with an experienced attorney in your before using any type of estate planning and asset preservation techniques because none work in all circumstances.