A ladybird deed creates a unique combination of present and future interests that allows the grantor to retain control over real property during the grantor’s lifetime while facilitating an automatic non-probate transfer to one or more designated beneficiaries upon the grantor’s death. Michigan cases have unambiguously affirmed the ladybird deed’s validity as “a means to forgo the probate process”¹ while reserving to the grantor “the rights to sell, commit waste, and almost everything else.”²

This article explores the key features of a ladybird deed including the powers reserved by the grantor and effectiveness of the conveyance to one or more designated beneficiaries only upon the death of the grantor. Recent case law and considerations for practitioners to effectively utilize ladybird deeds in their estate planning practices are also discussed.

DEFINING CHARACTERISTICS OF A LADYBIRD DEED

The life estate reserved by the grantor in a ladybird deed is enhanced by an unrestricted power to convey the real property during the grantor’s lifetime.³ This power gives the grantor complete discretion to occupy, use, encumber, or sell the property without notice to or consent by the remainder beneficiary.⁴

Standard 9.3 of the Michigan Land Title Standards refers to the grantor’s interest under a ladybird deed as a “life estate with power to convey.”⁵ It characterizes the lifetime power to convey the property as a power of appointment under Michigan’s Power of Appointment Act.⁶ Put simply, a power of appointment gives the donee the power to dispose of the property. In a ladybird deed, typically the grantor is both the donor and the donee of the power of appointment. Thus, Standard 9.3 provides:

The holder of a life estate, coupled with an absolute power to dispose of the fee estate by inter vivos conveyance can convey a fee simple estate during the lifetime of the holder. If the power is not exercised, the gift over becomes effective.⁷ For advocates of plain language drafting, the examples provided in Standard 9.3 illustrate how a ladybird-type conveyance may be drafted using less obtuse language. For example, a conveyance to the grantor “for her lifetime, to do with as she pleases, but on her death, if not previously disposed of, Blackacre shall be divided between Gerald Rapp and Ivor Sorenson” is a valid gift to the two named beneficiaries.⁸ The use of straightforward language can avoid ambiguity.

In practice, drafting attorneys often cite Standard 9.3 in ladybird deeds. For example, assuming a husband and wife hold fee simple title, the following language conveys a life estate to the husband and wife coupled with an unrestricted power for both or the survivor to convey the property and title to the couple’s living trust on the second death:

Grantors, husband and wife, whose address is ______ convey and warrant to Grantee, themselves, husband and wife as tenants by the entireties, the property described below … for their lifetimes, a life estate, coupled with an unrestricted irrevocable power to convey the property during their lifetimes or the survivor’s lifetime, pursuant to Michigan Land Title Standard 9.3 in effect today or any successor to such Land Title Standard. This life estate granted to and retained by [Grantors] is measured by their respective lives, and terminates upon the death of the last to die of [Grantors]. This power to convey creates a general inter vivos power of appointment, which includes the power to sell, transfer, gift, mortgage, lease, encumber or otherwise convey or dispose of all or any portion of the Property in any manner which [Grantors], or the survivor of them, deems fit, in their sole discretion, without the consent of anyone else during their lifetimes and to retain the proceeds therefrom. If the Property has not been conveyed during the lifetimes of [Grantors], or the survivor of them has not previously conveyed the Property prior to the survivor’s death, then, upon the death of the last to die of [Grantors], the Property shall automatically be conveyed to the then acting Trustee of the [Grantor’s Revocable Living Trust], [dated], as it may be now or hereafter amended, whose address is

_________________________.

GRANTOR’S UNRESTRICTED POWER TO CONVEY: LESSONS FROM CONSERVATORSHIP OF GREER

In an unpublished opinion, the Michigan Court of Appeals recently affirmed the grantor’s unfettered discretion to deal with property subject to a ladybird deed during the grantor’s lifetime.⁹ In re Conservatorship of Greer involved a series of ladybird deeds that conveyed a married couple’s home upon their deaths.¹⁰ The first ladybird deed provided that if the property was not conveyed before their deaths, title would transfer to the couple’s longtime caregiver.¹¹ The husband died and a conservator was appointed for the wife.¹² The conservator executed a second ladybird deed transferring the house on the wife’s death to the couple’s living trust instead of the caregiver.¹³

The caregiver challenged the conservator’s authority to convey the property by the subsequent ladybird deed, arguing the conservator lacked authority to dispose of the protected individual’s real property.¹⁴ The conservator sought summary disposition on the grounds that the grantor retained the unrestricted power to transfer the property in the first ladybird deed.¹⁵ Because the caregiver’s interest could be destroyed by a lifetime conveyance, the conservator argued, the caregiver lacked standing to challenging the conveyance.¹⁶

The probate court granted summary disposition in favor of the conservator.¹⁷ In affirming the trial court, the Court of Appeals held that the powers reserved by the grantor in the first ladybird deed allowed the grantor to deal with the property as if the grantor had remained the sole owner.¹⁸ This included the power to change the identity of the reminder beneficiary without the remainder beneficiary’s approval.¹⁹

Moreover, execution of the second ladybird deed was not a disposition of the protected individual’s real property that required the probate court’s approval.²⁰ The second deed did not change the grantor’s interest in the property. Under both deeds, the grantor retained a life estate coupled with an unrestricted power to convey the property during the grantor’s lifetime.²¹ The second ladybird deed merely changed the identity of the remainder beneficiary. Therefore, the conservator’s execution of the second ladybird deed was not a disposition of the protected individual’s real property and did not require the probate court’s approval.²²

Greer critically restricts the ability of a ladybird deed’s remainder interest holder to challenge the grantor’s lifetime actions concerning the property. In the court’s view, a ladybird deed does not give the remainder beneficiary an enforceable interest in the property until the grantor’s death. Rather, the remainder beneficiary “has no interest in the property until after the death of the grantor.”²³ Therefore, the grantor’s actions are not subject to challenge by the remainder beneficiary.

Subsequent conveyances exercising the power of appointment reserved by the grantor in a ladybird deed have been challenged on the grounds that the power was improperly exercised.²⁴ At common law, a power of appointment could not be properly exercised without an express statement referring to the power.²⁵ The Powers of Appointment Act provides two circumstances in which a power of appointment may be exercised by a later conveyance without a specific reference to the power of appointment.²⁶ First, a specific reference to the power of appointment is not required if the interest conveyed could only be transferred by exercise of the power of ap pointment.²⁷ Second, an explicit reference to the power of appointment is not required if the intent to exercise the power was apparent from the circumstances surrounding the instrument’s drafting and execution.²⁸ Even if not required, drafters of conveyances following a ladybird deed can further solidify the grantor’s authority and reduce the potential for disputes by clearly stating that the grantor is exercising the power to convey reserved in the prior ladybird deed. For example:

This deed is being given pursuant to a Power to Convey reserved in [warranty/quit claim] deed recorded on ______ in liber ____ page _____, ______ county records.

TAX BENEFITS OF DELAYING TRANSFER OF TITLE TO THE REMAINDER BENEFICIARY

A ladybird deed provides several tax benefits. If the property is the grantor’s principal residence, the grantor may retain the principal residence exemption. Because the conveyance to the remainder beneficiary is not effective until the grantor’s death, it is not a transfer of ownership for the purposes of uncapping the property’s taxable value.²⁹ It is important to file a property transfer affidavit at the time of recording and claim an exemption from uncapping. Under the current form of property transfer affidavit, check the exemption for “transfer of that portion of a property subject to a life lease or life estate (until the life lease or life estate expires).” Also, the property’s taxable value will not uncap on the grantor’s death if residential property is transferred to certain family members.³⁰

The remainder beneficiary will receive a step up in basis that will reduce the taxable gain realized on a subsequent sale.³¹ “Step up in basis” refers to the adjustment in the cost basis of an inherited asset to its fair market value on the date of the decedent’s death.³² Since the grantor is both the donor and the donee of the power of appointment contained in the ladybird deed, the property will be included in the grantor’s estate for tax purposes.³³ The beneficiary acquires the property from the decedent “by reason of death,” thereby satisfying the second requirement to receive a step up in basis.³⁴ Therefore, little or no taxable gain should result from a sale of the property promptly after death of the grantor.

USES OF LADYBIRD DEEDS IN ESTATE PLANNING

One of the primary advantages of a ladybird deed is its simplicity. If a client owns a home and no other significant assets, a ladybird deed is all that is required to transfer title upon the client’s death. Another attractive quality of a ladybird deed is the ability to bypass probate. A ladybird deed is a nonprobate transfer under MCL 700.6101.³⁵ If the grantor does not convey the property during his or her lifetime, title to the property subject to a ladybird deed will immediately pass to the designated beneficiary upon the grantor’s death without the need for probate.

A ladybird deed can preserve a client’s eligibility for Medicaid benefits. Medicaid imposes strict asset limits on long-term care benefits. An applicant who attempts to fall within the asset limits by disposing of property for less than fair market value in the five years preceding the application will be subject to a penalty period during which Medicaid will not cover the cost of long-term care.³⁶ Because the grantor retains unrestricted rights to the property, a conveyance by ladybird deed is not a disposition for purposes of Medicaid. Property transferred by ladybird deed is also not included within the grantor’s estate and, as a result, not vulnerable to recovery under current Medicaid rules.³⁷

A ladybird deed allows the grantor to retain more control over the property as opposed to a deed where third parties are added to the title as joint tenants. If the grantor is a joint tenant, the property cannot be sold or mortgaged without the consent of all joint tenants.³⁸ Moreover, the grantor may be liable to the other joint tenant(s) for waste or the reasonable rental value of the property.³⁹ Because both the grantor and joint tenant have a present ownership interest, the property will be vulnerable to both parties’ creditors. A ladybird deed assists the grantor in avoiding these traps and liabilities.

Many practitioners recommend promptly recording the ladybird deed to provide notice of the grantor’s intent and satisfy the delivery and acceptance requirements for valid conveyance of real property. However, at least one court has held that a lengthy delay between execution and recording of a deed does not affect the validity of the conveyance.⁴⁰ In that case, the grantors executed a deed to themselves as trustees of their living trust.⁴¹ The grantors instructed their attorney to record the deed only if the grantors died simultaneously.⁴² The court held the grantors did not place a condition upon the delivery of the deed, but rather delivered the deed to themselves as trustees of their living trust.⁴³ A deed takes effect upon delivery, not at the time of recording.⁴⁴ Therefore, the conveyance to the couple’s trust was valid despite the long delay between the deed’s execution and its recording.⁴⁵

LIMITATIONS OF LADYBIRD DEEDS

Ladybird deeds, like all estate planning devices, are not without pitfalls. The immediate transfer of title to the beneficiary upon the grantor’s death can result in unintended consequences. In a recent Minnesota case, the grantor died; a few days later, the house burned down.⁴⁶ The remainder beneficiary was not an insured under the homeowner’s policy.⁴⁷ The court held that there was no insurance coverage since the remainder beneficiary became the owner immediately upon the grantor’s death.⁴⁸ To avoid this outcome, clients should add the remainder beneficiary as an additional insured to their homeowner’s policy.⁴⁹

Whether preparing a ladybird deed or transferring title to a client’s living trust, it is important to use the correct legal description. Refer to the client’s owner’s policy of title insurance or the last recorded deed. If neither is available, obtain a current title commitment. Relying solely on an assessor’s or tax-legal description may lead to problems if the tax-legal description differs from the legal description in the last recorded deed.

The remainder beneficiary of a ladybird deed still receives an interest in real property, even if that interest is contingent and not presently enforceable against the grantor. All real property interests held by a judgment debtor (including future interests) are subject to claims by the creditor.⁵⁰ Therefore, the remainder beneficiary’s interest will be subject to execution, levy, and sale. As a practical matter, the remainder beneficiary’s interest is unlikely to attract the interest of creditors. The value of the interest would be difficult to determine, and the grantor could divest the remainder beneficiary’s interest and defeat their creditor claims by a subsequent conveyance.

For many homeowners, the simplicity of a ladybird deed is an appealing alternative to a more expensive will or trust. It may also tempt homeowners to draft the deed themselves. Self-drafting increases the likelihood of mistakes that will cause the conveyance to be invalid or fail to capture the grantor’s full intent. For example, an unartfully drafted ladybird deed may create a life estate and a remainder interest without reserving the grantor’s power of appointment. Additionally, an inexperienced drafter may fail to appreciate the potentially significant impact of making individual remainder beneficiaries joint tenants versus tenants in common.

CONCLUSION

A thoughtfully drafted ladybird deed can be a powerful estate planning device. The grantor can retain control over the real property during the grantor’s lifetime. Recent case law has curtailed the remainder beneficiary’s ability to challenge the grantor’s lifetime actions. Upon the grantor’s death, the property will automatically transfer to the designated remainder beneficiary without the need for probate. For these reasons, ladybird deeds are an attractive estate planning tool and often used in conjunction with wills, trusts, and other estate planning devices.