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Why a Lady Bird Deed Escapes Medicaid Recovery in Michigan
The claim made for a Lady Bird deed is that it keeps a home out of probate, off the Medicaid ledger, and under the property tax cap all at once. Each of those results has a statutory reason, and the reasons are more specific than the marketing. Knowing where each one comes from is what lets a family rely on the deed rather than hope about it.
The Medicaid result rests on a definition. Under MCL 400.112h(a), the estate that Michigan’s Medicaid estate recovery program may reach means all property and other assets included within an individual’s estate that is subject to probate administration under Article III of the Estates and Protected Individuals Code. Property that never enters probate is outside that definition.
The Probate Estate Is the Whole Reach
Michigan’s recovery program was established under MCL 400.112g to comply with the federal requirement in section 1917 of Title XIX, and it operates against the estate as the state defines it. The state chose the probate estate. A home that passes at death by operation of a recorded deed, rather than through a personal representative, is not administered under Article III and is not within the definition.
That is the mechanism, and it is worth stating as a mechanism rather than as a feature. A Lady Bird deed reserves a life estate to the owner with the power to sell, mortgage, or revoke, and names a remainder beneficiary who takes at death. The remainder passes by the deed. Nothing about it is administered in probate, so nothing about it is in the estate the program may reach.
The same definition explains why an ordinary life estate deed behaves differently on the Medicaid side. A life estate given away without the retained powers is a completed transfer during life, and transfers during life are analyzed under the eligibility rules and the lookback rather than under recovery. Our Michigan Medicaid planning page covers that separate analysis.
What the Statute Says About Planning Around Recovery
The recovery statute is candid about estate planning, and the candor is worth reading before relying on any device. Among the hardship provisions the department was directed to define, MCL 400.112g(3)(e)(iii) requires a rebuttable presumption that no hardship exists if the hardship resulted from estate planning methods under which assets were diverted in order to avoid estate recovery.
That presumption operates on hardship waivers, which are requests to excuse recovery from an estate the program can otherwise reach. It does not enlarge the definition of the estate. A Lady Bird deed does not ask for a hardship waiver, because the home was never in the recoverable estate to begin with, and the presumption has nothing to attach to.
The other hardship exemptions the section names are worth knowing for the families who do face recovery. They include the portion of a homestead’s value equal to or less than 50 percent of the average home price in the county at the recipient’s death, and the primary income-producing asset of survivors, such as a family farm or business. The department may not pursue recovery where the cost exceeds what is recoverable or where recovery is not in the state’s economic interest.
The Subdivision Written for a Retained Life Estate
The property tax result comes from a subdivision written for exactly this deed. MCL 211.27a(7)(d) addresses what happens when a life estate the transferor kept for themselves ends, and it says that the resulting transfer of the remainder is not a transfer of ownership, provided the person taking it is one of the relatives the section lists and the home stays out of commercial use. The subdivision has applied since December 31, 2014, and without it the end of a life estate would reset the taxable value like any other change of hands.
A Lady Bird deed is a retained life estate, and the remainder passing at death is the expiration the subdivision describes. Where the beneficiary is on the list and the use stays residential, the taxable value does not reset. Where the beneficiary is a niece or a friend, it does, and the deed’s other advantages remain while that one does not.
Nothing has to be filed to claim the exemption, but it can be tested. An assessor or the Department of Treasury may ask the remainder beneficiary to prove the relationship and the residential use, and the answer is due within 30 days on pain of a $200 fine. A copy of the recorded deed and a birth or adoption record are the usual proof, and both are simpler to gather while the parent is alive than after.
What the Deed Leaves Untouched
A Lady Bird deed changes what happens to one parcel at death. It does not change eligibility for benefits during life, because the owner keeps full control of the property and the retained powers are what make it not a completed gift. A family that expects the deed to reduce countable assets for an application has misunderstood which side of the ledger it works on.
Nor does it govern anything the owner holds outside the deed. Bank accounts, vehicles, and any real property not conveyed pass under a will or a trust or by intestacy, and whatever enters probate from those sources is within the recoverable estate under the same definition.
The deed’s value is exact. It keeps one property out of the probate estate, and Michigan’s recovery program reaches only the probate estate. Everything else in a plan has to be handled by everything else in the plan. If that is where your situation sits, call us at (800) 525-6386.
When the Language of the Deed Decides the Result
Whether a particular deed carries the retained powers that make it a Lady Bird deed, rather than an ordinary life estate, is a question of its language, and the two produce opposite Medicaid results. We prepare and review Michigan Lady Bird deeds at Neumann Law Group as part of our Michigan estate planning practice across Northern Michigan and statewide. Call our office at (800) 525-6386, or contact us online, and we will talk it through with you.