Should You Have a "Ladybird Deed" ?

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.

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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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