I come from a long line of financially conservative people whose philosophy is, don’t spend more than you have to. That’s not a bad philosophy, but it’s not always the best philosophy. Such is the case with using quitclaim deeds for estate planning, rather than a will or trust.
When someone signs a quitclaim deed, they are transferring the title of real estate to someone else. It’s fast and easy and involves a lot less money than the cost of creating a trust or having that property go through probate.
But there are inherent problems with using a quitclaim deed. It provides zero buyer protection. There are no warranties or guarantees about the title to the property. It merely states that the seller transfers any ownership interest to the buyer. Sounds nice, but it can create mega problems especially if the transfer is to a family member. For example:
# 1
Eric inherits property from a deceased parent. He doesn’t want the cost of probate, so he transfers the property to himself using a quitclaim deed. Later, he puts the real estate up for sale and accepts an offer. But during the due diligence process, the title company discovers that the property was transferred without probate. The title company informs Eric that the title is unmarketable because no title insurance company will issue a title policy without probate closing orders.
# 2
Sam quitclaims property to his daughter Megan making her a joint tenant with rights of survivorship (JTWROS). Later she has a life trauma such as a business failure, bankruptcy, car accident or a divorce. Megan’s judgement creditors run an asset search and discover her name on the quitclaim deed as JTWROS. The creditors foreclose on Megan’s half of the property and Sam loses half of the real estate. By adding Megan’s name to the property, Sam became subject to Megan’s creditors.
# 3
Bill adds Sarah’s names to a property title using a quitclaim deed but he doesn’t tell the insurance company. The insurance company discovers the addition of Sarah’s name and invalidates the property insurance policy because of insurable interest issues. Insurance companies have to know who to pay in case of a claim.
# 4
Trying to avoid probate, Christine uses a quitclaim deed to add her daughter Rachel to the property title. Later, Christine decides to sell the real estate but discovers the title insurance policy is no good because of the quitclaim deed. Christine has to purchase another title insurance policy so the sale can go through.
All these issues can be experienced whether the person using the quitclaim deed is naming a relative or some other individual. But let’s look at some specific problems that can arise by naming a child.
- Naming a child on a deed to property that has a mortgage is almost always a violation of the due-on-sale clause, which would allow the lender to require a refinance of the property after the title transfer is complete.
- When a quitclaim names a child on the deed, the real estate becomes an asset for the child and must be disclosed on any application requiring financial reporting. For example:
Sam adds his adult child, Bill to a quitclaim deed. Bill’s son Kevin files an application for federal student aid. Because Bill’s name is on the quitclaim deed, Kevin is required to list the property as a parental asset. Even though Bill’s name is on the deed, everyone considers the property as Grandpa’s. If Kevin doesn’t list his dad’s ownership in the property, Kevin and Bill have inadvertently committed loan fraud.
- Using the same example, when grandpa Sam added his son Bill to the deed, it became a reportable transaction to the IRS and Sam has to file a gift tax return, IRS form 709. Failure to report carries a list of penalties.
- And to go one step further, when the son, Bill, one day sells the property, he will have to pay more in capital gains taxes than if he inherited the property at Sam’s death. When you receive ownership in property from someone while they are living, your cost basis is what they paid for it. If you inherit the property at their death, you get a stepped-up cost basis meaning your basis is the value of the property on the date of death of the deceased.
Quitclaim deeds are a quick, easy, cheap way to transfer the title of property. But if you’re using them for estate planning, it may end up costing you and your heirs much more than if you had done estate planning the right way from the beginning.
Disclaimer
This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors, all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investment Partners at 1-888-777-0970 or email us at info@alhambrapartners.com.
