Michigan is one of the few states that allows the use of “ladybird deeds,” which are also known as enhanced life estate deeds. This planning tool allows for a property owner’s real estate to be transferred to a designated individual or a trust after the property owner’s death without going through the probate process.
Benefits of a Ladybird Deed
The ladybird deed has several benefits which make it a great planning tool for many clients.
- Unlike a regular life estate deed, the ladybird deed allows you to maintain full control over the property during your lifetime. You can still rent, sell, gift, refinance or mortgage the property if you wish, without consent from or notice to the individuals or trustee you have designated to receive the property after your death.
- A ladybird deed allows you to designate beneficiaries to receive the property after your death without adding them as current owners of the property. This protects the property from creditors of a property “beneficiary” if they were to get sued, divorced or develop financial issues.
- After your death, no probate estate will need to be opened with the probate court to transfer the property, saving money and protecting privacy, which provides peace of mind for many clients.
- Where a ladybird deed removes the need for a Medicaid applicant to open a probate estate, their home is protected from estate recovery – the government’s ability during the probate process to recover from the probate estate the applicant’s long-term care expenses that were paid by Medicaid. If there is no probate estate, the government cannot recover the Medicaid expenses.
Complications of Ladybird Deeds
While a ladybird deed works well for many clients, clients should be aware of the drawbacks:
- If you wish to obtain a mortgage or refinance an existing mortgage, the bank or credit union will often require that you undo the ladybird deed prior to closing on the loan. After the loan closes and documents are recorded, you can record a new ladybird deed to reinstate the probate avoidance, but it is an additional cost.
- Your homeowner’s insurance policy should be updated to add the beneficiary on the ladybird deed as an additional insured or loss payee. If the homeowner’s insurance policy does not include your beneficiary (whether an individual or your trust), the policy may not cover a claim, such as storm damage, that arises after your death but before the new owners purchase their own homeowner’s policy. A ladybird deed does not benefit from the same grace period after death that a probate estate might have under most insurance policies.
- Depending on your insurance company, such additional insured or loss payee may also be named on any insurance claims paid out during your lifetime, even if they are not yet owners of the property. This is not a problem if the beneficiary of the ladybird deed is your own trust that you control, but this is not recommended if the beneficiary is another individual. Some clients may determine that probate for their beneficiary is more acceptable than the client losing a portion of insurance proceeds to a family dispute during their lifetime or a beneficiary avoiding probate but losing the value of the property to a claim that arises immediately after death.
- While the ladybird deed does not uncap your property taxes at the time that the ladybird deed is recorded, you should consult with a Michigan attorney regarding the property tax consequences at your death. Results will vary depending on the named beneficiary (and state law at the time of your death).
A ladybird deed is a great solution for some homeowners, but you should understand the complications of ladybird deeds as well. To learn if a ladybird deed is right for you, contact your Warner estate planning attorney or Sara Nicholson at snicholson@wnj.com.
