“I don’t have to worry about probate because I have a quit claim deed.” You have probably heard this statement from family or friends or have said it yourself.
You may attempt to do your own mini estate plan by having a quit claim deed of your home from yourself to your children or others with instructions to record the deed after your death. This deed could have been drafted ten, twenty or more years ago. Very often this deed is kept in your dresser drawer so that it could be easily found after your death. If you did not seek counselling from a knowledgeable estate planning professional before your deed was prepared, you may not accomplish your wishes.
Unfortunately, these deeds often never get recorded. If your deed is not recorded, it can be lost or mislaid or never found. Often times it is suspected that a family member who had access to the house and who would have received a smaller share of your estate if the deed was recorded, entered the house and destroyed the deed. If the deed cannot be found, what you want to happen does not happen, and your home ends up going through probate anyway.
Your deed beneficiary could also find the deed and record it before your death so that he or she would still get your home if you change your mind. You would have to sue your child to void the deed after it has been recorded.
You may have given your intended beneficiary a copy of your unrecorded deed. If you change your mind or have a falling out with your beneficiary, you could destroy the deed with the intent that the house go in accordance with your will. If your beneficiary has a copy of the deed, he or she could then record the copy of the deed with an affidavit stating that the deed was lost and could still end up owning your house.
Also, if you use a quit claim deed to transfer property to family members, you may void your title insurance protection that you may have had when you purchased your home. If in the future, a lien or defect on the title to your property is discovered, your family may have to pay off the lien or file a quiet title lawsuit at their own expense to clear the title to your property. This is an expense that would have been covered by your title insurance.
Next is the question about the validity of the deed itself after your death. Deeds are generally considered effective upon delivery to the person receiving the property or upon recording at the register of deeds office. If the deed is not delivered to the person receiving the property nor recorded before your death, there is an argument that that deed expired with you and is no longer effective to transfer the property after your death.
In order to avoid this situation, you may have delivered the deed during your lifetime to a third party trustee who holds the deed with instructions to record the deed after your death. This could be a problem for several reasons. Sometimes the family does not know about the deed and does not inform the trustee of your death, then your deed never gets recorded. The deed also may get lost, destroyed or mislaid when it is being held by this third party. Sometimes the trustee may have died and his or her files could be put in storage or get destroyed.
There are several ways to avoid the pitfalls of the dresser drawer deed. Firstly, just don’t do it! Keep your home in your own name. Have detailed instructions in your will and probate your home in accordance with those instructions. Although you would have probate fees, your home would be distributed in accordance with your instructions and probate for simple estates can generally be concluded within a year.
Secondly, if you wanted to avoid probate and have beneficiary protection from divorces, remarriage and other creditors, you could have a revocable living trust into which you deed your property. The trust would have specific instructions as to how you want your property distributed after you are gone.
One more method to avoid the pitfalls of the dresser drawer deed and avoid probate is to record a transfer-on-death deed. The transfer on death deed that I use most often is what is called a ladybird deed. With a ladybird deed, you deed your home to your beneficiaries, but retain a life estate in the home and retain the right to sell, convey, transfer, mortgage, etc. With a ladybird deed, there is no current transfer of any interest because it takes effect only upon your death. You have the ability to revoke the transfer at any time. Your beneficiaries of your deed have no interest at all during your lifetime and the property vests or transfers to them only upon your death.
Since the transfer is effective at death and not considered a current transfer of any interest in your home: 1) the transfer-on-death deed does not uncap the property for property tax purposes; 2) your home is still an exempt asset for Medicaid; 3) your home is not subject to Medicaid estate recovery; 4) your home is still your homestead for homestead property tax exemption; and 5) your home is still your principal residence for federal income tax capital gains exemption.
A transfer-on-death deed is basically a revocable beneficiary designation for your home. Since the beneficiary designation is revocable, you can change your mind and change the deed at any time.
When contemplating any type of deed, do not try to draft it yourself. It is too easy to mess it up. Consult with a knowledgeable real estate attorney. And if you are thinking of using a deed for estate planning purposes, your attorney should also have a working knowledge of estate planning, Medicaid rules, income taxes and estate taxes.
By: Matthew M. Wallace CPA, JD
Published edited June 24, 2012 in The Times Herald newspaper, Port Huron, Michigan as: Dresser drawer deeds: Dangerous documents