Lady Bird Deed Michigan Lawyers

What are the benefits of a Lady Bird deed?

Benefit #1 A Michigan Lady Bird Deed allows you to avoid probate court.

If a person passes away with real estate titled in their name, the property title must go through the State of Michigan Probate Process. This process is administered through the county court where the person lived. The Probate Process typically takes approximately nine to fourteen months to complete and can cost up to 4-8% of the estate’s value. By using a Lady Bird deed, a person can avoid this process and thereby avoid the delays and cost of Probate Court, regarding the property.

A typical situation could be Dad (Bob) and Mom (Sally) use a Lady Bird deed to transfer their home from themselves (Bob & Sally), back to themselves (Bob & Sally) for their lifetime. After both of their deaths, the remainderman (their children Jack and Jill) are the beneficiaries. All the children need to do is to record their parent’s death certificate with the county register of deeds.  However, during either of Bob or Sally’s lifetime, they could have sold the property and kept the money or borrowed against the property.

Benefit #2 A Michigan Lady Bird Deed protect the owners home from the state’s Medicaid Estate Recovery Program.

If an individual uses Medicaid benefits during their lifetime, the state that provides benefits to the owner has the right to receive reimbursement funds from the owner’s estate after their death. However, the Lady Bird deed avoids this recovery cost in Michigan because Michigan’s Medicaid Estate Reimbursement Program only requires probate reimbursement. Because the deed transfer avoids probate, the property avoids Medicaid recovery.

Benefit #3 A Michigan Lady Bird Deed allows beneficiaries a Step Up in tax basis, regarding Capital Gains tax upon sale.

When a person(s) purchases land, their cost is considered to be the “basis” for the value of that asset, for tax income tax purposes, not property tax purposes. Additional improvements can increase this basis. However, when the property is sold, and the owner experiences in increase in the value and yields more than what was paid, the owner undergoes a gain equal to the spread between their basis (what they paid for it) and what they sell it for. This spread is called a capital gain and it is taxed to the owner after sale of the property on their Federal & State income tax forms. (Primary Domicile has certain exclusions, with exceptions)

With a Lady Bird Deed, the beneficiaries get what is known as a step-up in basis to the value of the property at the time of the owner’s death.

A typical example is: Dad & Mom buy the property in 1990 for $100,000 and then the property sells in 2020 for $400,000, they will have a $300,000 capital gain. With a Lady Bird Deed, the beneficiaries get a step up in basis for income tax purposes to the current value. So, when the beneficiaries sell the property in 2020, their basis is now $400,000 and the property sells for $400,00 and they have a $0 gain and no capital gains tax!

Benefit #4 A Michigan Lady Bird Deed Does Not Uncap Property Taxes, and No Property Transfer Affidavit Needs to Be Filed.

Typically, property taxes are uncapped when there is a “transfer of ownership”, per the Michigan Department of Treasury. However, the exception is the Lady Bird Deed, because the Lady Bird deed does not transfer the property but merely creates a power of appointment and provides a gift in default.

Benefit #5 A Michigan Lady Bird Deed Preserved Medicaid Eligibility

In Michigan, Medicaid considers your assets for the purpose of Medicaid eligibility. However, your Homestead is typically not considered as an asset for Medicaid eligibility purposes, to a certain extent. Using a Lady Bird deed for your homestead should not affect your Medicaid eligibility because you reserve the rights of ownership and the transfer is not treated as a completed gift.

However, Medicaid and the Deficit Reduction Act of 2005 have created a “look back period” and transfers made during that period may create divestment penalties if not property structured. It is important to consult an Elder Care Attorney about your specific situation and the Medicaid rules. It is strongly advised that you do not attempt doing a Lady Bird deed on your own.

Benefit #6 A Michigan Lady Bird Deed Allows You to Preserve Your Homestead Rights and No Transfer Taxes Due

This major benefit allows you to preserve the Homestead Right on your home for Property tax purposes. This means that you will not lose your Homestead exemption on your real estate property tax and taxes will not increase due to a change in ownership on the Deed. In addition, the State of Michigan Treasury will not pursue or collect any property transfer taxes. Michigan has a tax on the transfer of real property equal to ¾ of 1% of the sale price and each county has their own transfer tax.

Benefit #7 A Michigan Lady Bird Deed Provides Creditor Protection for your heirs/beneficiaries

A Lady Bird deed provides creditor protection to beneficiaries. Unlike other common transfers in real estate, a Lady Bird deed does not provide the beneficiary any incidents of ownership in the property until the owner’s death.

Benefit #8 A Michigan Lady Bird Deed Avoids Transfer Tax for Gift Purposes

Since the execution of the Lady Bird deed is not an actual transfer of ownership, there is no gift for federal gift tax purposes.  At the owner’s death, the default beneficiaries take the deceased owners “unexercised power of appointment” and it merges with the beneficiary’s remainder interest to create a full ownership interest in the beneficiaries.  Because the Lady Bird deed does not vest incidents of ownership to any third party, it is not a considered a gift.