Posted on: Thursday, December 20th, 2012
I am presenting on ladybird deeds at the upcoming State Bar Solo and Small Firm Institute, September 19-21. Still time to sign up. Following is an abbreviated version of what I will be covering.
A ladybird deed is an odd duck that serves as a valuable estate planning tool in limited situations, but which plays a much more important role in Medicaid post-eligibility planning.
Basically, a ladybird deed allows the owner(s) of real estate to designate a beneficiary on the property, with all the same characteristics as a beneficiary designation on a life insurance policy or bank account; including the power to encumber or sell the property without the consent or participation of the named beneficiary(ies).
A ladybird deed is sometimes referred to as an “enhanced life estate” deed. Other states use ladybird deeds or some statutory variance of it sometimes called a “transfer on death” deed or affidavit.
I don’t know where the name came from. The name is curious, to be sure. Is it named after Ladybird Johnson or something else?
Source of Law
We recognize ladybird deeds in Michigan primarily because Michigan Land Title Standard 9.3 says this arrangement is valid under Michigan law.
The Land Title Standard is thin on detail, and there some important questions about these deeds remain unclear. Most notably, the question of grantee vesting is not addressed by the land title standard.
A recent unpublished Michigan Court of Appeals case addressed the best way to subsequently convey land subject to a prior ladybird deed.
In Estate Planning
Ladybird deeds can serve as simple tools in simple estates with simple schemes to provide clients with a clean result.
In Medicaid Planning
Although ladybird deeds have been used by some planners for decades, the explosion of their use is clearly a function of the role they play in post-eligibility Medicaid planning.
After a client (or the spouse of a client) becomes eligible for Medicaid, where there is an exempt homestead, a ladybird deed can be used to avoid probate and therefore the specter of estate recovery (Because estate recovery currently only reaches probate assets).
Further, and of equal importance, because the ladybird deed does not convey anything of value (it is merely a beneficiary designation) the execution of a ladybird deed is not divestment. Accordingly, the ladybird deed can be created before or after the Medicaid application is filed, and it does not matter that it is done during the look-back period.
Clearly the ability of people to avoid estate recovery simply by executing ladybird deeds is a thorn in the side of those who expect the estate recovery program to generate revenues. Accordingly, planners must be realistic about the future of this planning tool, and need to advise their clients about the prospects that the law may change in the future.
Legislation currently pending would eliminate the probate only aspect of Michigan’s estate recovery program, and therefore eliminate the benefit of ladybird deeds in Medicaid planning. But even if this law is not passed, it would not be surprising for the Department of Human Services to implement policy that seeks to reach property passed by ladybird deed.
A Michigan probate court opinion out of Wayne County, written by a highly respected Probate Judge, the Hon. Milton Mack, and which is published in the Quinnipiac Probate Journal holds that an unsecured creditor of the state cannot reach the value of property that passed by operation of a ladybird deed, and further, that the execution of a ladybird deed is not subject to the Fraudulent Conveyance Act. This author knows of know contrary authority.