A Ladybird deed is often an ideal estate planning tool for residential property owners who wish to avoid probate while retaining control over their property during their lifetime. Named after former President Lyndon B. Johnson’s wife, Lady Bird Johnson, this type of deed enables property owners to retain the right to use and sell the property without the beneficiary’s consent. But despite its appeal, there are critical distinctions between how Ladybird deeds function for residential versus commercial properties.
In residential estate planning, Ladybird deeds are highly effective because they allow the property to pass directly to heirs upon the death of the original owner, circumventing the probate process. The property owner retains the ability to mortgage or sell the property during their lifetime, ensuring that they are not restricted in their financial decisions. Moreover, since the 2014 amendment to Michigan’s General Property Tax Act, residential properties transferred via Ladybird deed between family members can often avoid the “uncapping” of taxable value, making this deed especially attractive for family-owned homes.
However, when it comes to commercial property, a Ladybird deed might not be the best option. This is due to the fact that commercial property transfers—regardless of whether the transfer is via a Ladybird deed—will trigger uncapping of the taxable value. The reset to the state equalized value (SEV) can result in much higher property taxes for the beneficiary. This misunderstanding often arises because the advantages of Ladybird deeds are so well known for residential properties that many mistakenly assume they apply equally to commercial real estate.
It’s important to understand the specific limitations of Ladybird deeds and how they apply to different types of property. For residential properties, especially family homes, Ladybird deeds can be a straightforward solution to avoid probate while preserving tax benefits. But for commercial properties, the use of a Ladybird deed could result in unintended financial consequences for heirs. As we will see, understanding these nuances is critical in planning for the future.
Commercial Property vs. Residential Property in Estate Planning
When it comes to estate planning, commercial properties and residential properties are treated very differently under Michigan law, particularly with regard to property tax implications and probate considerations.
- Residential Property: Estate planning for residential properties typically focuses on minimizing probate and ensuring that the property passes smoothly to heirs. Tools like Ladybird deeds, joint ownership, and living trusts are commonly used for these purposes. The 2014 amendments to Michigan law further protect residential properties from tax consequences by allowing for transfers between family members without uncapping taxable value.
- Commercial Property: Commercial property estate planning is far more complex, and special attention must be given to tax liabilities, business continuation, and the financial impact on heirs. In Michigan, commercial properties are treated differently than residential properties under MCL 211.27a. A transfer of ownership—whether through sale, inheritance, or even as part of an estate plan—almost always triggers uncapping of the taxable value, leading to a substantial increase in property taxes.
For business owners, commercial property is often a significant part of their overall estate. Failing to properly plan for the transfer of this property can result in unforeseen financial burdens for heirs or successors. This makes it crucial to employ estate planning strategies that take into account not only probate avoidance but also the potential tax implications that come with transferring commercial real estate.
Additional Alternatives for Commercial Property Transfers
While Ladybird deeds are not suitable for commercial property transfers, there are several other estate planning strategies that commercial property owners can use to minimize tax consequences and ensure smooth transitions for heirs:
Living Trusts
As mentioned earlier, one of the best alternatives to a Ladybird deed for commercial property is placing the property in a living trust. A living trust allows the property owner to maintain control during their lifetime while ensuring the property passes to heirs without going through probate. Although the taxable value may still be uncapped upon transfer to the beneficiaries, a living trust offers greater flexibility and can include provisions for managing the property’s tax burden, such as distributing the tax costs among beneficiaries or creating a mechanism for selling part of the property if necessary.
Family Limited Partnerships (FLPs)
Another option for families with significant commercial property holdings is to use a family limited partnership (FLP). An FLP allows family members to jointly own the property while enabling the primary owner to gradually transfer ownership to heirs over time. This gradual transfer can help mitigate the uncapping of taxable value and spread the tax burden over a period of years, reducing the impact of a sudden tax increase. FLPs also provide protection against creditors and allow for business succession planning in the case of commercial properties that are part of an operating business.
Gifting Strategies
In some cases, property owners may opt to gift part of their commercial property to their heirs during their lifetime. By taking advantage of annual gift tax exclusions, owners can gradually transfer portions of the property to heirs without triggering significant tax liabilities. However, it’s important to note that gifting can trigger uncapping of the taxable value, so this strategy should be approached carefully and with the guidance of an estate planning attorney.
Charitable Remainder Trusts
For property owners who wish to leave a legacy while minimizing taxes, a charitable remainder trust (CRT) may be an effective tool. In this strategy, the commercial property is placed into a trust, and the owner can receive income from the property during their lifetime. Upon the owner’s death, the property passes to a designated charity. While this strategy is not ideal for all situations, it can provide tax benefits and allow property owners to make a significant charitable impact.
Additional Alternatives for Commercial Property Transfers
Estate planning for commercial property requires a deep understanding of Michigan’s property tax laws, including the implications of uncapping taxable value. While Ladybird deeds can be an excellent tool for avoiding probate with residential property, they are not suited for commercial real estate due to the significant tax consequences that arise from uncapping. Instead, commercial property owners should explore other strategies, such as living trusts, family limited partnerships, and other creative gifting or charitable arrangements.
In the case of Father and Son, the use of a Ladybird deed would have resulted in substantial property tax increases for Son, creating a financial burden that could have been avoided with more careful planning. By using a living trust or other strategy, Father can ensure that the property passes smoothly to Son without the harsh tax implications of uncapping.
If you’re a commercial property owner in Michigan, consult with an experienced estate planning attorney to ensure that you fully understand the best strategies for passing on your property while minimizing tax liabilities and avoiding probate.
Get Expert Help with Estate Planning for Commercial Property
At Sumner & Associates, P.C., we specialize in helping clients navigate complex estate planning issues, including the risks of uncapping taxable value on commercial property. Our team can help you choose the best tools to protect your property, minimize tax liabilities, and ensure a smooth transition to your heirs.
If you’re a Michigan business owner concerned about how to pass your commercial property to the next generation, contact us today for a consultation. Let us help you protect your legacy while avoiding the pitfalls of rising property taxes.
