A Quit Claim deed isn’t the same as an Estate Plan
I’ve received questions from readers on numerous occasions about using a quit claim deed. If you are unfamiliar, a quit claim deed is a fairly accessible document which is easy to complete that one uses to transfer their home to another. While they have their place – namely transfers between trusted family members, or from one party to another after a divorce – quit claim deeds are not the best option for trying to avoid probate or passing along property to your loved ones. A quit claim deed does not replace a good, sound estate plan.
All deeds are not created equal. Different types of deeds have different levels of warranty. A deed is used to convey, or transfer, title from one party or parties to another. When you have ‘title’ to something you have ownership. A warranty deed, for instance, contains the highest level of protection for the buyer because it includes significant warranties. One such warranty is a warranty of title which ensures that the person transferring the property is rightfully allowed to do so. Quit claim deeds do not have such a warranty, in fact it is a non-warranty deed. It doesn’t claim the one transferring the property even has the right to do so. A quit claim deed comes without this legal protection. In fact, the property may be transferred with other undisclosed parties involved, a lien, or other encumbrances such as easements, zoning laws, or other claims and the grantor bears no liability in this type of transaction.
If you want to give your home away to your children and want to avoid the probate process, there are ways to do so but a quit claim deed isn’t it. One of the major unanticipated negative consequences to quit claiming your home to your child is that the IRS levies a gift tax on real estate transfers such as this between parents and adult children. This happens when the fair market value is greater than the permitted annual exemption and that can come as a shock and an unwelcomed surprise to parties of a transaction like this.
Transferring a home to a child as a beneficiary in your estate plan, on the other hand, has many benefits. Among them is that, as your beneficiary, they are allowed a ‘stepped up’ cost basis which adjusts the value, or “cost basis,” of an inherited asset when it is passed on after death so the beneficiary’s capital gains tax is minimized. Quit claiming your property during your lifetime prevents this and a significant benefit is lost to your children which would have, otherwise, been theirs.
Other problems can present themselves where a quit claim deed is concerned. Often the grantor asks the grantee to hold on to the deed for a time or until an event occurs. Sometimes folks get antsy and go ahead and record the deed in advance of the agreed-to moment and create problems for that grantor. In cases like this, parents can risk losing their homeowner’s exemption as a result. Deeds can get misplaced too. What if the grantor changes her mind years down the road and the deed has already been recorded? What if the property has been quit claimed to multiple people, or bequeathed to someone else in the grantor’s estate plan? Then we have to get the court involved and this can be extremely costly and time consuming.
How does one avoid these pitfalls? Create an estate plan and not an escape plan. Don’t try to beat the system, work with it. A good estate plan is so much more inexpensive than a court battle. Have an attorney create your estate plan – a will or a trust – and get the best warranty for you – peace of mind that the job is done right. If I can help with that process, I’m here for you.
