Quit Claim Deeds Rarely the Best Choice

I had a client in this week for her annual review of her fully-funded trust-based estate plan. She asked me about other types of planning by acquaintances about which she has become aware, and the issues that may arise as a result of that planning. One type of plan we discussed is the use of quit claim deeds.

You may have heard from others that all you need to do to transfer your property to your kids is to use a quit claim deed. We regularly hear reports that this is recommended by financial advisors, tax preparers, the register of deeds and even some attorneys. We frequently see this type of planning come into our office, which often is a do-it-yourself mini estate plan.

I have seen these scenarios blow up on numerous occasions. And when they do, the result is usually not pretty. They property does not always go to the intended recipients and legal fees eat up a good chunk of the value of the real estate. The cost to fix these blow-ups are typically much, much more than it would have been to do it properly in the first place, and without the use of a quit claim deed. Today, we will discuss some of the pitfalls that may arise with the use of quit claim deeds.

No assurance of any interest conveyed.

I have found that most people who use quit claim deeds to transfer their property, do not even know what a quit claim deed is or does. If you use a quit claim deed to convey real estate, all you are saying is that if you have any interest in the property, you give it to someone else. You do not have to own anything. Anyone can legally give a quit claim deed to anyone else for any piece of property.

For example, you could quit claim deed the Blue Water Bridge to your best friend. But that doesn’t transfer any interest in the bridge if you didn’t have any in the first place. When you use a quit claim deed, you make no promises or warranties that you have any interest in the property you are conveying. With a quit claim deed, if you own 100% of the property, you convey 100% of the property. However if you do not have any interest in the property, you convey nothing. With a warranty deed, you are saying you own the property and are transferring it to someone else.

May lose homestead property tax exemption.

If you quit claim your home to the kids during your lifetime before you move out, you no longer own the home. The kids do. Consequently, since the owner is not occupying the property is his or her principal residence, it is no longer entitled to the 18 mil homestead property tax exemption. This could result in a property tax increase of about 50%. Even if you do not record the deed right away, I have seen the Michigan Department of Treasury assess the non-homestead taxes after the deed was recorded, all the way back to the date the deed was signed.

May lose property tax itemized deduction.

If you itemize deductions on our federal income tax return and include your property taxes, this deduction may be at risk if you deed the property away. When you pay property taxes on property you don’t own, it could just be considered a gift from you to the homeowner or considered rent paid to the homeowner for the use of the property. In either case, gifts or rent are generally not allowable as itemized deductions.

Home subject to claims of kids’ creditors.

If you deed your home to the kids during your lifetime, it is subject to the claims of the kids’ creditors. I have seen situations where parents had to remortgage their home to pay off their kids’ debts. The kids were sued, got a judgment against them and a judgment lien was placed on their home. If the lien wasn’t paid off, they could have lost the home. If your child owns the home, it is their property. As such, it could be considered as part of a divorce property settlement.

The kids have to sign off on the home if sold.

If you have deeded your home to the kids, it’s no longer your property, it’s the kids. As such, if you want to sell the property you need the kids’ permission. And since the property is theirs, they are the ones entitled to the proceeds of the sale, not you. I have seen situations when the parents’ home was deeded to the kids, and the kids refused to sign off unless they got their share of the proceeds of the sale.

May cut off title insurance.

When you purchased your home, most likely you received a title insurance policy. The title insurance policy protects you from future claims from anyone who says they have some interest in or lien on your property and that they had the interest or lien before you bought your property. Most title insurance policies that I have reviewed, have a provision that says your title policy coverage continues after you deed away your property, so long as you give a warranty of title.

The way you provide a warranty of title is by transferring your property by a warranty deed. If however, you transfer your property to your kids (or your trust) using a quit claim deed, you have not given a warranty of title. Your title insurance terminates. So, if somebody claims an interest in your property after the fact, you do not have a title insurance company paying to fix it. You are on your own.

What do you do?

You probably got the hint that I don’t care for quit claim deeds and you would be right. I don’t like quit claim deeds and I rarely use them. About the only time anymore that I will use a quit claim deed is when we need to transfer a partial interest in property such as an easement or an interest in a land contract. In most all other instances, I use a warranty deed. When I am deeding property to a trust, I use a warranty deed and I record it. When I am deeding property from a parent to a child or other relative, I use a warranty deed. In most instances, a recorded warranty deed is better than either a recorded or unrecorded quit claim deed.

One of the main reasons given for the use of quit claim deeds is to avoid probate. If you have a trust, your home generally should be deeded to your trust using a warranty deed. This would allow all of the instructions and protections of your trust to govern your home, as well as avoiding probate after your death. This would also allow your title insurance to remain in full force and effect.

If you want a transfer of your property to take effect upon your death, there is a special warranty deed that you can use. It is a certain type of transfer-on-death deed called a ladybird deed, which does get recorded. The property is owned by you during your lifetime; you have full access. You can do whatever you want with the home during your lifetime, such as selling it, mortgaging it or giving it away to someone else. After your death, it gets conveyed with the title warranted to your loved ones.

So you can have your cake and eat it too. With proper planning and the use of warranty deeds, you can accomplish your goals and objectives, and without all of the pitfalls of quit claim deeds.

By Matthew M. Wallace, CPA, JD

Published edited January 28, 2018 in The Times Herald newspaper Port Huron, Michigan as: Quit claim deeds are rarely the best choice for you

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