Should You have a “Ladybird” Deed?

Twenty-five years ago, I was covering for an astute, senior partner at my first law firm employment. I got a call from the title company questioning a deed he had drafted. His proposed form of conveyance purported to convey all but a "life estate," to her son, while retaining the right of the grantor to essentially change her mind and convey the property to someone else at any time during her lifetime. This seemed to go against everything I had learned in law school about vested life estates, fee interests, remainder interests and all sorts of "future" interests in real property. Knowing the drafter was an experienced real estate lawyer, I gave him the benefit of the doubt and did a little research.

Maybe; Maybe not

Michigan Land Title Standards (Std. 9.3), allows for precisely that type of conveyance. I have used it occasionally during my 30 year career, but up until recently, sparingly. While the deed has been around for many years in Michigan, it has only recently gained popular recognition, particularly as a Medicaid planning tool. However, it really is a more diverse and useful tool, and is becoming increasing popular with estate planners. So much so, that currently, one of several most often asked questions when clients call or come in for estate planning conferences is: "should I have one of those lady bird deeds?" My answer: "Maybe. Maybe not." J

The "ladybird" deed is not a one-size-fits-all" panacea for all of our real property estate planning challenges

The Estate Planning process often lends itself to automation, and generalities. In many cases this is unfortunate, as we really should be looking at each individual circumstance as unique and carefully tailoring our planning solutions to that unique situation. So while I am using "ladybird" deeds more often these days, it is actually making me think more carefully about this particular aspect of planning.

Urban legend is that the "ladybird" deed gained its name because Lyndon Johnson conveyed property to his wife using one. This writer finds it hard to believe that Lyndon was the first to use the technique. The technique involves a property concept known as a "power of appointment," and the concept was surely around before Lyndon was even a gleam in the elder Mr. Johnson's eye. But I am content to let legend be legend. One prominent Michigan Probate Judge has opined that it should really be more properly titled a "Deed subject to Life Estate," which is how it is characterized in the Title Standard. The "ladybird" deed is as close as we can get to a "beneficiary designation," on real property here (a number of states actually have statutorily recognized transfer on death deeds, but Michigan is not one of them). It can be used to effect a transfer-on-death conveyance of real property, either to other individuals, or to a trust. I can see some real utility there.

The Estate Planning process often lends itself to automation and generalities

But, whatever we ultimately call it, the "ladybird" deed is not a one-size-fits-all" panacea for all of our real property estate planning challenges. We still need to examine the goals of the client carefully. And not every consequence of the use of this deed is clear.

I recently wrote about the changes to Michigan's real property tax statute, regarding the "uncapping" of taxable value on the transfer of property. One of the advantages of the "ladybird" deed is that it is really not a transfer. The "transfer" occurs on the death of the grantor. And under the new law, a transfer of residential real property to a party related in the first degree, will not be "uncapped" as long as the transferee continues its residential use. But there are traps here, for the unwary. What if I want multiple children to benefit from the family cottage? Remember, the new law addresses a transfer to a person related in the first degree. It does not say to a trust, or other entity established by the transferor for the benefit of her children.  Indeed, the State Tax Commission has recently confirmed my suspicion that they view this exemption as not applicable to Trusts, LLC's, or to a distribution from Probate! (Bulletin 23, December 16, 2013).

Conveyance of property in Michigan requires that the parties file a "Property Transfer Affidavit" with the County Register of Deeds and the Tax Assessor when a "transfer" occurs. Is a "ladybird" deed a "transfer" requiring the filing of this form (L-4260)? Arguably not. But prudence suggests that filing—with an explanation—might be a good practice. More importantly, is there a Form L-4260 filing requirement upon the death of the grantor? I think there is room in the statutory language to conclude that the answer is yes. So, in our planning, we need to think about who will be responsible to ensure such a filing on a timely basis. Form L-4260 has a box to check for "transfer of that portion of a property subject to a life estate." But a conventional "life estate" is different in that both it, and the remainder interest are vested in their respective owners. There is in fact a transfer or conveyance of an interest in property. It is just an "exempt" transfer under the statute (until the Life Estate expires). Technically, there is not such a conveyance with the "ladybird" deed. Until there is judicial or administrative clarification, the proper approach to this will remain uncertain. My thinking is to be "redundant." Perhaps the best (albeit confusing and to me somewhat inconsistent) approach is to check both the "life estate" checkbox and the "other" checkbox, and insert language indicating that the deed was executed pursuant to Title Standard 9.3.

As use of the "ladybird" deed increases, there are bound to be questions by third parties about whether mortgage provisions (e.g., "due on sale clause") are triggered, as well as other restrictive deed items (P.A. 116 liens, conservation easements, etc.) will be affected. Use of this deed, like any other legal tool, requires thought about its application to the circumstances—both current and future. And the answer to the question is, as always: "Don't try this at home."

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Is Perception Reality?

Recently I heard an ESPN Sports Radio show suggest that "perception is reality" to high school athletes looking at which university to commit to play for. The phrase has stuck with me lately, much like that song you just can't get out of your head.

 

Lately, it seems like we have gotten an inordinate number of client inquiries and telephone calls from people who ask us to do things for them that are simply not legally or practically possible. They have heard it – at seminars, from radio advertisements and programs, and from various "on-air" personalities and want to know if we can do that for them?

 

"These Individuals are making promises they simply cannot keep."

 

The true reality is no. We cannot and – truth be told – neither can the individuals who said they can. These advertisers and sometimes self-created luminaries are making promises they simply cannot keep. They are broadcasting false or at best deceptive information. But because of the power of the airways, and of repetition, they have created the perception that they are "experts." Therefore, what they say must be factual.

 

I am not naïve. The phrase attributed (rightly or wrongly) to P.T. Barnum – "a sucker is born every minute," is certainly no more the case today than in the past. Nor should it come as any surprise that there are many out there willing to embrace that thought and take whatever monetary advantage they can. The world has always had such players and always will. But what is disconcerting to me is some of my fellow professionals have resorted to these methods to create and sustain business.

 

Don't get me wrong. I have no quarrel with seminars (indeed, I conduct them myself on a regular basis). What I object to is that they are not being used as truly educational seminars, but in many cases are being used to "scare" or "high-pressure" attendees into signing up for follow-up sessions or worse, signing so-called legal and/or financial documents at the time of the seminar. Nor do I have a problem with tasteful and accurate advertising. But what we are seeing is the result of a program of consistent but inaccurate statements on radio, television and print media that purports to address the needs of many customers. And while these tactics are not limited to the elderly, they seem to target and attract their particular needs and circumstances.

 

"These tactics appear to unduly target the needs and circumstances of the elderly"

 

Is this phenomenon just perception on my part? I don't think so. Over the past couple years, I have reviewed documents presented in a printed form in a notebook with fill-in-the-blanks provisions, which my new client has told me was done at or immediately following the seminar. I have also reviewed, on a number of occasions, legal documents drafted by an attorney the client has never met (and who, from all indications, had no idea about either what he was doing, or at the very least, the circumstances and needs of the clients). Instead, the consulting, meeting, and document execution was being done by third parties (who—more often than not—were also selling financial products). And time and again, we have clients come into our office who have been told that the "cookie-cutter" documents they bring us to review have provided them some legal protection or accomplished some goal which they clearly and simply do not do! Regrettably, the documents have often been prepared, presented and executed by staff members other than the lawyer who puts his or her name behind them and upon whose perceived expertise has drawn the client in the first place.

 

It is distressing that a number of individuals have been able to create a perception—one of expertise and one of false solution—for their own personal economic gain. It is an illustration of that lately incessant "song in my head:" Perception is Reality.

Am I on a rant? Maybe.

 

"It is our professional obligation to tell our clients what they need to hear—not what they want to hear."

 

But perception is not reality. It is crucial that good, factual, common sense solutions be explained and applied to the legal problems and challenges presented in Estate Planning and in "Elder law" Planning. It is fair, in my view, for professional to charge a fee and benefit economically for their professional advice. It is, after all, what they do for a living. But we are professionals. That means we have an obligation to give more than "cookie cutter" documents and false hope to our clients. It means we must do our homework. It means we must spend personal, one-on-one time with our clients. It means, sometimes, that we must practice proverbial "tough love," and tell our clients, not what they want to hear, but what they need to hear.

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