Tuesday, April 23, 2013

Eliminating Unrecorded Deeds

    In past blogs, we discussed the importance of properly funding a Living Trust to ensure that estate plans function as intended. Today's blog addresses a long-standing technique for funding real estate to a trust that has fallen out of favor in recent years, but is likely a part of many long-standing estate plans.
     Holding real estate jointly as husband and wife offers significant protection for the property against the claims of either spouse’s creditors. In the past, attorneys were unwilling to cause their clients to give up this protection with respect to real estate in order to fund a Living Trust while both spouses were alive. To address this issue many attorneys recommended executing a Quit Claim Deed from husband and wife to a Living Trust, but not recording the deed while both spouses were alive. Instead, the client or attorney would put the deed in a drawer (or safe) to record later, if something should happen to both husband and wife. Over the years, many unrecorded deeds were placed in drawers, safety deposit boxes, and safes for Successor Trustees and Personal Representatives to discover. Not only will a creditor's attorney argued that these are completed deeds and therefore the creditor protection of jointly owned real estate no longer exists, but these unrecorded deeds can create a great deal of confusion in the administration of an estate.
     In recent years a form of deed known as a Quit Claim Deed with Reserved Life Estate to Grantor, or more commonly a Ladybird Deed has become more widely used because it reduces the need for unrecorded deeds in estate planning. A Ladybird Deed allows the property owners to establish a lifetime right of ownership in the property, including the right to sell or dispose of the property in any way they choose. If the owners take no other action, at their death the property passes automatically to the person or entity, such as a Living Trust, named in the deed, without the need to pass through Probate. This allows a married couple to retain the creditor protection of jointly owning property while ensuring that their Living Trust ultimately controls the disposition of all their property without the necessity of Probate. This type of deed can also be effective for a single person who desires to avoid probate with respect to real estate, but is not ready to transfer property to children because they may have their own creditor issues or because it is impossible to sell property later without the children's permission.
     In most states (including Michigan), in order to be effective, a Ladybird Deed must contain particular language. For this reason, it is important to seek the advice and counsel of an attorney familiar with property transfers prior to signing any new deeds. Failure to include the correct language may result in unanticipated consequences, including loss of creditor protection, an unexpected transfer of the property, or an unwanted uncapping of the property value for the purposes of determining property taxes.

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