We see family properties transferred from generation to generation all the time. Sometimes the family attempts to transfer the property on their own. Other times, they use an attorney to draft a deed, but do not provide the attorney any information about their overall estate plan. Many times, quit claim deeds are used without any consideration of the adverse consequences of these types of deeds.
Deeds are typically only one page long and look deceptively simple. A deed may look easy to draft, but it is even easier to mess it up. The words used on a deed can make a huge difference on how real estate is going to be treated for transfer of ownership, probate or title purposes. We regularly see deeds that do not operate as intended.
You may be tempted to draft your own deed because you found the form online, at the register of deeds or at the stationary store. These do-it-yourself deeds are the ones for which, after a death or disability, the family comes to us to “fix”. It’s almost always more costly to repair a bad deed, if it can be fixed at all, than it would have been to pay to have it done right in the first place. It’s like the old Fram oil filter commercial, “Pay me now, or pay me a lot more later.” Today, we are going to discuss some of these unintended property transfer issues that we have seen.
Home unintentionally goes through probate.
Mom or dad prepared and recorded a deed to themselves and the kids. They used just their names, with no other words identifying the type of ownership interest, such as joint tenants. This is probably the most common mistake we see. If you use just the names without any other words describing the ownership interest, it is deemed to be owned as tenants in common. In these situations, it is typically mom or dad’s intent that the property go to the kids after their death without probate. In reality, these deeds invite probate.
Each tenant in common owner owns an undivided percentage interest in the property that they can sell, transfer, gift, bequeath or otherwise convey. Upon an owner’s death, that owner’s fractional share must go through probate to get it out of the deceased’s name. I saw one case in which dad bought his home, deeded it in his and his son’s names, but did not use any additional descriptive words. Dad ended up in the nursing home on Medicaid. After dad died, his 50% interest in the property was probated and the state filed a claim against the estate and received nearly $50,000 to pay back Medicaid. Had dad used a joint tenancy deed or transfer on death deed, the property would not have gone through probate, and the state would not have had any claim against it.
The ex who thought she owned half the property.
In 1952, grandma and grandpa deeded the property to mom and dad, who then obtained a title insurance policy insuring their ownership interest. In 1968, dad and mom quit claim deeded the property to mom and the two boys as joint owners with survivorship. This deed cancelled the title insurance policy in 1974 when mom died, because there was no warranty of title in the quit claim deed. However, because of the joint ownership with survivorship, the boys were now sole owners of the property, without probate. In 1990 after his divorce, son #1 quit claim deeded his interest in the property to his ex-wife. In 2001, son #1 died. Fast forward to 2018; son #2 was still alive, the property was now worth $175,000 and the ex thought she still owned half the property, but did not.
When you own property with someone else as joint owners with survivorship, all joint owners can use it during their lifetimes. However, the last one living owns it all. I call this the lifetime lotto. If you sell or transfer your interest, you cannot sever the original joint owners’ survivorship rights unless all joint owners sign off. When you sell or transfer your interest without all joint owners signing off, the survivorship rights continue to be based on the original joint owners’ lives. When son #1 deeded his interest in the property to his ex, all she received was the right to use the property during son #1’s lifetime and the possibility of owning the whole thing if son #1 survived son #2. Even though son #1 transferred his interest to his ex, the survivorship is still based on son #1’s lifetime. Since 2001 when son #1 died, son #2 has been the 100% owner of the property.
The unintended IRS tax lien.
We saw one case in which after dad died, mom added her three kids on the deed to the family homestead as joint tenants with survivorship. She thought she was doing the right thing. The home had been in family for generations. It was originally the family cottage in the wilds of Fort Gratiot nearly 100 years ago and had 100 feet of Lake Huron frontage. The home was owned free and clear and was worth over $500,000. Daughter #2 who was on the deed as a joint owner did not pay her federal taxes for years, which the IRS does not like too much. We became involved after the IRS placed a huge tax lien on all of the daughter’s real estate in St. Clair County, including mom’s home.
Under the then IRS rules, the lien was for the full value of the property because daughter #2 could conceivably outlive any other joint owner. Working with their CPA tax preparer, we were able to negotiate it down. We had to boot daughter #2 off the deed. Then mom and the other two children joint owners had to take out a nearly $200,000 mortgage on Mom’s home in order to pay off the tax lien, just so Mom could keep her home
The restaurateur who paid off her land contract, but did not own her restaurant.
We had had restaurant owner come to us after she decided to retire and had found a buyer for her restaurant and the real estate upon which it sat. We ordered the title work on the real estate and found that in the last 35 years, the restaurant had been sold on land contract four times. All of the paperwork for the four sales had been handled by the real estate agent or the buyers and sellers themselves. Every land contract was paid off long ago, but none of the four buyers ever received a deed for the real estate.
The title to the real estate was still in the names of the couple who owned the restaurant 35 years ago. He was dead and she was mentally disabled. Thankfully, she named her daughter as her financial power of attorney, who was able to sign the deed to buyer #1. We then recorded the deed along with the husband’s death certificate. We had to locate the family of deceased buyer #1, and had to probate his interest. His appointed personal representative then signed the deed to buyer #2. We were able to locate buyer #2 and buyer#3, who signed deeds to buyer #3 and my client, buyer #4, respectively. Legal fees to clear the title to the real estate were in excess of $10,000.
The couple who thought they owned their home.
When we reviewed the deed for the home of a couple for whom we were implementing a fully-funded trust-based estate plan, we discovered that the home was in two other couples’ names as joint tenants with survivorship. When our clients bought their home 20 years ago for cash, they did not use an attorney. They relied upon the real estate agent and the title company.
What we discovered upon investigation was that before the home was sold to our clients, the real estate agent had sold the home to a young couple and her grandparents. They were ready to close when the sale fell through. When the sale closed with our clients a short time later, neither the real estate agent nor the title company changed the deed from the young couple and her grandparents into the names of our clients. The grandparents were both deceased and the young couple was located in New Jersey. We were able to obtain and record the death certificates of both grandparents, and sent a warranty deed to New Jersey for the young couple to sign. Legal fees were over $4,000 to get the home title into our clients’ names.
What to do?
As you can see, a few words in a deed, such as warrant, quit claim, joint tenants or survivorship, can make a huge difference in the interest you are receiving in real estate. A competent real estate attorney should be able to assist you to make sure your interests are protected, and at a cost much lower than if the deed were to blow up.
By Matthew M. Wallace, CPA, JD
Published edited April 1, 2018 in The Times Herald newspaper Port Huron, Michigan as: Do-it-yourself deeds can be costly