A Michigan Lady Bird deed carries a distinct set of tax consequences: no federal gift tax when you record it, no Michigan estate or inheritance tax when you die, a full stepped-up basis for your beneficiary that can erase decades of capital gains, and inclusion in your federal gross estate that rarely produces an actual tax bill. The trade-off that catches families off guard is Michigan property tax uncapping at your death, which can push the annual bill up sharply unless a family exemption applies.
Property Tax Uncapping When You Die
Michigan caps annual increases in a property’s taxable value at the rate of inflation or 5 percent, whichever is less. Over years of ownership that cap often creates a wide gap between taxable value and market value. When ownership changes hands, the taxable value uncaps and resets to the state equalized value, which usually means a noticeably higher tax bill.1Michigan Legislature. Michigan Compiled Laws 211.27a
Recording the deed itself does not uncap the property. Because you keep the unrestricted power to revoke the deed or sell the home, the state does not treat the recording as a completed transfer, and the cap stays in place for the rest of your life.
Your death is different. When the beneficiary takes title, that is a transfer of ownership, and uncapping generally follows. On a home that has appreciated significantly over many years, the annual increase can run into the thousands.
Michigan law exempts certain transfers between close relatives from uncapping, including transfers to a spouse and some transfers to children and other relatives.2Michigan Department of Treasury. Transfer of Ownership Guidelines Whether a specific Lady Bird deed transfer qualifies depends on the relationship, the type of property, and the exemption rules in effect when the grantor dies. A beneficiary who is counting on the current tax bill should verify eligibility rather than assume the number will hold.
The Principal Residence Exemption Gap
Michigan’s principal residence exemption removes the local school operating millage from a home occupied as the owner’s principal residence, typically worth hundreds to thousands of dollars a year. A Lady Bird deed creates a specific timing problem.
While you are alive, the named beneficiary has no current ownership interest. The Michigan Department of Treasury has stated that a beneficiary occupying the property while the grantor is still living is not eligible for the PRE, because they are not yet an owner.3Michigan Department of Treasury. Principal Residence Exemption Guidelines This matters most if you move to a care facility or second home and the beneficiary moves in before you die. The home can lose its PRE during that gap, driving up taxes at the worst possible moment.
After your death the beneficiary owns the property outright and can file for the PRE in their own name if they occupy it as their principal residence.
Federal Gift Tax During Your Lifetime
The IRS taxes only completed gifts, and a Lady Bird deed is not one. Because you keep the power to revoke, sell, or name a different beneficiary at any time, nothing is finalized while you are alive. The same retained powers that later pull the property back into your gross estate also prevent the recording from being treated as a completed gift.
The practical result: no federal gift tax return (Form 709) is required when you record the deed, and none of your lifetime gift and estate tax exemption is used up. The beneficiary’s interest exists on paper and can disappear the moment you change your mind.
Federal Estate Tax at Death
When you die, the full fair market value of the property is included in your federal gross estate. Two Internal Revenue Code provisions drive that result. Section 2036 pulls in property where the decedent kept the right to use or enjoy it during life.4Office of the Law Revision Counsel. 26 USC 2036 – Transfers With Retained Life Estate Section 2038 pulls in property where the decedent held the power to revoke or change the terms of the transfer.5Office of the Law Revision Counsel. 26 USC 2038 – Revocable Transfers A Lady Bird deed triggers both.
For most Michigan homeowners inclusion is a paper exercise that produces no tax. The federal estate tax exemption for 2026 is $15 million per individual, following the increase enacted by the One, Big, Beautiful Bill signed into law on July 4, 2025.6Internal Revenue Service. What’s New – Estate and Gift Tax Only value above the threshold is taxed, at rates reaching 40 percent, and a married couple can effectively shelter $30 million between them. Estates below those figures owe no federal estate tax.
No Michigan Estate or Inheritance Tax
Michigan does not impose a state-level estate tax or inheritance tax on deaths occurring after September 30, 1993.7Michigan Department of Treasury. Inheritance Tax Frequently Asked Questions Property passing through a Lady Bird deed faces no state death tax regardless of value. The only death-tax exposure is federal.
Stepped-Up Basis and Capital Gains
The estate inclusion that looks unfavorable actually delivers the biggest financial advantage a Lady Bird deed offers. Because the property is in your gross estate, the beneficiary receives a stepped-up basis equal to fair market value on the date of death.8Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent Every dollar of appreciation during your lifetime is wiped clean for capital gains purposes.
Take a home you bought for $80,000 that is worth $300,000 at your death. The beneficiary’s basis becomes $300,000. If they sell shortly afterward at that price, they owe zero capital gains tax. Had you instead used a regular quitclaim deed to move the property during your lifetime, the beneficiary would take your original $80,000 basis and face tax on $220,000 of gain when they sold. For families who plan to sell an inherited home, that difference is often tens of thousands of dollars.
Michigan Real Estate Transfer Tax
Michigan imposes a real estate transfer tax on most property transfers, calculated at a combined state and county rate of $8.60 per $1,000 of the sale price. Transfers from an estate to a beneficiary or distributee without consideration are exempt, and transfers from an inter vivos revocable trust at the grantor’s death also qualify for the exemption.9Michigan Department of Treasury. State Real Estate Transfer Tax FAQ
A Lady Bird deed operates similarly, and county registers of deeds in Michigan routinely process the death-time transfer without collecting transfer tax. Treatment can depend on how the local register interprets the exemption, so confirming with the county office before recording is a sensible step.
The Mortgage Question
A tax-adjacent worry that comes up often: will recording the deed trigger a mortgage’s due-on-sale clause? Federal law says no. The Garn-St. Germain Act blocks lenders from enforcing due-on-sale for several categories of transfers, including a transfer at the borrower’s death by devise, descent, or operation of law, and a transfer where the borrower’s spouse or children become owners.10Office of the Law Revision Counsel. 12 U.S. Code 1701j-3 – Preemption of Due-on-Sale Prohibitions
A Lady Bird deed transfer at death fits within those protections, and the beneficiary can continue the existing mortgage on its original terms. Recording the deed during your lifetime should not trigger the clause either, because no ownership change has actually occurred.
Medicaid Estate Recovery
One reason Michigan families use Lady Bird deeds is to protect a home from Medicaid estate recovery. Michigan operates a recovery program under MCL 400.112g, which requires the state to seek reimbursement for certain medical assistance paid on behalf of a deceased Medicaid recipient.11Michigan Legislature. Michigan Compiled Laws 400.112g Because a Lady Bird deed transfers the property automatically at death, the home bypasses the probate estate, and Michigan’s program has historically focused on probate assets. Federal law lets states expand the definition of “estate” to reach non-probate assets, so the protection is not absolute.
The related timing concern: transferring property for less than fair market value within five years of applying for Medicaid can trigger a penalty period. A Lady Bird deed is revocable and not a completed transfer during your lifetime, so creating one is generally not treated as a disqualifying transfer. The transfer only becomes final at death, when long-term care benefits are no longer needed. That distinction is central to why the tool works, and it is worth confirming with a Michigan elder law attorney before relying on it.