Ladybird Deeds Made Simple

Posted on: Friday, September 29th, 2017

The best way to understand a ladybird deed is to think of it as a beneficiary designation on real estate. That is, the property continues to be owned in all respects by the person creating the deed for so long as they are alive, but when they die, if they haven’t otherwise disposed of it, the property will go to the beneficiaries named in the deed.
It was probably about 15 years ago that lawyers in Michigan really began talking about ladybird deeds. But the use of ladybird deeds took off when Michigan passed an “estate recovery” program in 2007, which provided that for people who received Medicaid benefits for long term care (including nursing home) costs, the State could come back after they died and recover the costs of their care from the assets in their estates. Because the law limited the recovery to “probate” assets, and because to become eligible for long term care Medicaid benefits the person is left with almost no assets except an “exempt” homestead, the ladybird deed provided an ideal way to avoid estate recovery. These deeds have worked very well for that purpose in the ten years since the advent of estate recovery laws in Michigan, and their popularity has exploded.
But people should be cautious. Ladybird deeds are not perfect. In fact, unlike many states, Michigan does not have any law to support the validity of these types of deeds. Rather the legal basis for their validity rests on the rather tenuous authority of Michigan’s “Land Title Standards” – a legal resource that is essentially the opinion of a group of lawyers who practice real estate law. While many states have laws that allow for “transfer on death” deeds, Michigan does not.
In addition, the proposition that ladybird deeds are exempt from creditors at death is far from reliable. While they work well to avoid estate recovery claims in the Medicaid context, that result has more to do with the Medicaid rules and laws than with the laws regarding creditor rights. Other creditors may well be able to undo ladybird deeds after death. And of course, Medicaid rules and laws change frequently. Whether ladybird deeds will continue to work as well in the Medicaid context is speculative.
Finally, there are unsettled questions about how ladybird deeds work when someone named as a beneficiary dies before the person who created the deed.
Ladybird deeds are wonderful tools that currently work well in a limited context of Medicaid planning. But the popularity of these deeds has grown so that they are used far beyond that limited purpose. Whether, and for how long, they will continue to meet all the expectations that people now put on them is unclear.