Jan 2, 2017
With all the competition for customers (from lawyers and non-lawyers alike) in the estate planning field, it is easy to see why the consuming public has the perception that an estate plan merely consists of a pre-printed form, or a set of forms, and that there is a “standard” method of planning. And it seems like there is always some hot, new technique for estate planning being advocated, often by marketers. It is nearly impossible these days to find an article, or attend a presentation on Estate Planning these days without hearing about the virtues of the “Ladybird Deed,” and why everybody should have one. It is common to have a client call or come in for an appointment, already convinced that they “need” a ladybird deed.
it seems like there is always some hot, new technique for estate planning being advocated, often by marketers.
The reality is that these are actually somewhat complicated real property conveyancing tools. And like all tools, I have often said over the course of my career that estate planning is not a “one-size-fits-all,” proposition. And there is perhaps no better example of this than the “Ladybird Deed.” The truth is that some people may benefit from the technique and many may find it a detriment. In order to appreciate this, we need to discuss what a “Ladybird Deed” is and what it does.
Ladybird: What’s In a Name?
"Ladybird" is a name that caught on from use by a Florida attorney and lecturer whose favorite fictional spouse reference was “Ladybird,” in his examples. The technically correct name is “Enhanced Life Estate Deed."
The reality is that these are actually somewhat complicated real property conveyancing tools. And they are not a “one-size-fits-all,” proposition
Attorneys learn early in law school that property rights in the most of the U.S. can be divided up into different interests, and that the interests can be defined in different ways. The sum total of all the rights held together, is known as the fee title. It is not uncommon to see specific rights be divided (such as mineral, water and wind rights) and conveyed or reserved when the underlying land is conveyed. It is also possible to convey rights that can be measured by the duration of ownership. One such division and conveyance is the traditional “life estate.” Like it sounds, a life estate is measure by the lifetime of the owner of the life estate. Usually.
There is a very real temptation (often by persons unqualified to give estate planning advice) to indiscriminately use Ladybird Deeds
An Enhanced Life Estate reserves or conveys the traditional duration (life of the owner), but also adds an element (usually reserved by the transferor) to in effect, “change their mind,” and convey the fee title of the property away to someone else (or back to themselves).
Ladybird deeds can be very powerful, versatile, estate planning tools. But like any tool, they can be misapplied. Estate Planning is a process involving the careful application and combination of available tools. There is a very real temptation (often by persons unqualified to give estate planning advice) to indiscriminately use Ladybird Deeds. But the deed is just a tool, not a process!
Why Shouldn’t You Use a Ladybird Deed?
The danger in casual use of these deeds lies in viewing real estate conveyances as on-dimensional. There are numerous related risks.
“Uncapping."Michigan’s ad valorem real property tax scheme is based on complex valuation rules. In the late 1990’s Michigan’s Constitution was amended to impose a “cap” on how much real property tax assessments could be increased. This capped value is known as “Taxable Value,” and is subject to a cost of living – based formula, limiting increases. Like so many laws, over time a series of exceptions and exemptions have emerged. Taxable Value, for example, may be “uncapped” when the property is conveyed (remember that there is a conveyance – or perhaps multiple conveyances – involved when a “Ladybird Deed” is created). While there are certain exemptions to this “uncapping” rule when Estate Planning and Family transfers of residential real estate are involved, current Michigan law does not appear to apply such exemptions to the end conveyance accomplished by the Ladybird Deed. So beware!
In order to track the changes of ownership (and therefore “uncapping” opportunities), Michigan has an affidavit filing process (MI Department of Treasury Form L4620 – Property Transfer Affidavit) with local assessors. There is a relatively nominal fine for failure to file the affidavit and perhaps a temptation to ignore filing it. One significant concern is that if the time period between the recording of the conveyance and the automatic conveyance by termination of the life estate is substantial, will this cause issues. The affidavit should be filed, and one of the exemptions invoked, in my view.
Indiscriminate use of a Ladybird Deed may have unintended and undesirable results
Probate Avoidance.Our modern society has evolved with the ability to structure “pay on death” direct beneficiary designations with nearly every type of asset people own today. Michigan is one state where such transfer techniques are plentiful and easy to accomplish. The Ladybird Deed, is such a technique. It is relatively easy to create, and may well result in a probate--avoided transfer. Again, indiscriminate application however, may create undesirable results. This is particularly true where the intended recipients are multiple children. “Joint” ownership of real property may create a whole set of unintended problems of its own.
Medicaid Planning.The so-called Elderlaw planning industry really thrust the use of the Ladybird Deeds into the forefront. They have been a very powerful tool for Elderlaw planning. But a lack of understanding of the tool and the process may well create unintended consequences. The filing of a Medicaid Application is very timing specific. Whether to convey property by Ladybird Deed, directly to a trust, by JTWROS designation, or not to convey at all, should be carefully considered by the planner, in light of all of the client’s circumstances.
What State are You In?Not all States recognize Ladybird Deeds. Since the real estate laws and rules vary by State to State it is wise to consult a knowledgeable specialist in the State where the property is. Some States recognize a "pay on death," or "transfer on death" conveyance.
Ladybird Deeds are a powerful and often desirable planning tool. My objection to them is when they are used in an unconsidered, “knee-jerk” one-size-fits all approach to the planning process as a whole.