Ladybird deeds have gained popularity as a way for an owner to maintain property in his or her name but pass it along to a beneficiary at their death. This method avoids probate, is an alternative to transferring property to a trust during the owner’s lifetime, and is useful for someone who needs to apply for Medicaid benefits.
So what’s new with ladybird deeds? The law was recently changed to provide that property passing to certain persons through a ladybird deed will not experience a tax increase, also referred to as uncapping, when the transfer occurs at the original owner’s death. These certain persons include the former owner’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter.
Prior to this change, children inheriting property through a ladybird deed from a parent would experience an increase in taxes at the time of transfer (their parent’s death). The taxable value of the property would increase to match the assessed value. This uncapping, depending on when the property was purchased and its value, could result in a big tax burden for the inheriting children. The consequence would be a financial hardship for children wanting to hold on to the property rather than sell it. This is especially beneficial for families that want to keep a cottage or other special property in the family for generations.
Although this is great news, there is one caveat to consider. In order to avoid uncapping, the residential property being transferred cannot be used for a commercial purpose. The update to the statute ties the meaning of commercial purpose to a business use or a use that is intended for profit. This leaves some questions as to whether renting property to just cover expenses would be a way to avoid the label of a “commercial purpose.” The statute does say that renting the property for less than 15 days in one year is specifically excluded as a commercial purpose.
There have been changes to the statute on uncapping for several years in a row. Be sure to discuss these concerns with an attorney assisting with your planning and even stay in contact with him or her to check on the changes to the tax implications as the years go on.