“I want my house to go to my kids after I die, but want to avoid probate. Can’t I just sign a deed now that transfers the house to the kids and keep it with my other important papers along with instructions to record the deed after I am gone?”
You have probably heard this from family or friends or maybe even from an attorney. I am asked this question all the time. Although this advice may be a well-intentioned attempt to avoid probate while maintaining control during your lifetime, like many other do-it-yourself estate plans, it often results in unintended consequences.
Deed can be lost. Unfortunately, these deeds oftentimes never get recorded. Because you did not record your deed during your lifetime, it can be lost. mislaid or never found. All too frequently, 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.
Deed may be recorded early. Your deed beneficiary could 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. Or you already gave the deed to your loved one to hold for safe-keeping to be recorded after your death. Then the deed was recorded so he or she did not have to worry about it later.
Deed can cause property tax increase. Any transfers brought about by recording the deed before your death could result in the uncapping of the taxable value of your home to the current state equalized value or the loss of your 18 mil homestead property tax exemption. The loss of your homestead exemption results in about a 50% increase in your property taxes.
And even if the deed is not recorded until after your death, assessors, the Michigan Department of Treasury and the Michigan Tax Tribunal have taken the position that the transfer of ownership took place when the deed was signed and assessed back taxes, interest and penalties to that date.
Last week, I attended the annual statewide Probate and Estate Planning Institute co-sponsored by the Probate and Estate Planning Section of the State Bar of Michigan and the Institute for Continuing Legal Education. One of the presenters informed the conference attendees of a new state auditing program in which deeds recorded within the last six years are being examined and deed dates are being compared with dates on the Homestead Exemption and Property Transfer Affidavits. When there are differences in the dates, they are issuing back tax assessments.
Difficulty getting deed back. If you have given your intended beneficiary your unrecorded deed to hold for safe-keeping and you change your mind or have a falling out with the beneficiary, you may not get the deed back without having to file a lawsuit. If you don’t get the deed back, you would not be able to destroy it with the intent that the house go in accordance with your will.
Undelivered deed expires with you. Next is the question about the validity of the deed itself after your death. A deed is generally considered effective upon delivery of the deed and acceptance of that delivery. The two most common ways of delivery and acceptance are handing it to the person named in the deed receiving the property or upon recording at the deed at the county register of deeds office.
If your deed is not delivered prior to your death, then that deed would expire with you because it was an uncompleted gift. Your deed is no longer effective to transfer the property after your death. Your loved ones may be able to argue that it was your intent to transfer the property after death with the deed. In such instances, your deed may be considered a “will” and have to be probated as such.
Deeds in trust or escrow ineffective if delivered after death. You may have delivered the deed during your lifetime to a third party trustee or escrow agent who holds the deed with instructions to record the deed after your death. Although these types of arrangements are used all the time and are valid for delivering a deed during your lifetime, there may be problems if used to deliver a deed after your death.
The deed could be considered void upon your death as an uncompleted gift. The deed could be considered a “will” and need to be probated. Sometimes your family does not know about the deed and does not inform the trustee or escrow agent of your death, then your deed never gets recorded. The deed also may get lost, destroyed or mislaid when it is being held in some file storage facility. Sometimes the trustee or escrow agent may have died and his or her files could be destroyed or transferred to someone who is unaware of the arrangement.
Undisclosed unrecorded deed may be considered Medicaid fraud. When you apply for Medicaid to pay for your long-term care in a nursing home, you are required to disclose all of your assets and how they are titled. Failure to disclose an unrecorded deed could result in temporary or permanent ineligibility for Medicaid to pay for your nursing home long-term care expenses.
Avoiding the pitfalls of unrecorded deeds. 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.
Secondly, if you want to avoid probate and have beneficiary protection from divorces, remarriage and other creditors, you could have a fully-funded revocable living trust based estate plan. You record a deed for your property into your trust. Your trust would have specific instructions as to how you want your property distributed after you are gone.
A third option to avoid the pitfalls of the unrecorded deed and avoid probate is to record a transfer-on-death or ladybird deed during your lifetime. With a transfer-on-death deed, you stay in control of your home during your lifetime and your beneficiaries only get it after you are gone.
With proper planning, your home is: 1) not uncapped for property tax purposes; 2) still an exempt asset for Medicaid; 3) not subject to Medicaid estate recovery; 4) still your homestead for homestead property tax exemption; and 5) still your principal residence for federal income tax capital gains exemption.
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 and elder law, income taxes and estate taxes.
By: Matthew M. Wallace, CPA, JD
Published edited June 23, 2013 in The Times Herald newspaper, Port Huron, Michigan as: Not recording a deed is a bad idea