Planning

Using a quitclaim deed to transfer property tempts many away from creating a comprehensive estate plan. To some, quitclaim deeds sound simple and easy. However, the repercussions of a quitclaim deed can be serious, negatively affecting the original property owner and those to whom they deed the property.

Before transferring property by a quitclaim deed, consult an experienced attorney like those at Church Church Hittle and Antrim. Our firm has broad knowledge in many practice areas, including real estate and estate planning.

What Is a Quit Claim Deed?

A deed is a legal document used to transfer ownership of real property. There are several types of deeds, including:

• General warranty,
• Special warranty,
• Specific purpose, and
• Quitclaim.

General warranty deeds provide several guarantees, including:

• The seller can legally convey the property;
• No undisclosed liens or encumbrances exist on the property; and
• The seller will fix any title defects.

When you transfer property by a quitclaim deed, you convey whatever interests you have in the property. You also promise no liability, leaving the transferee little to no legal recourse.

What Can Go Wrong with a Quitclaim Deed in Estate Planning?

If you use a quitclaim deed in your estate plan, many issues can arise, affecting you and whomever receives the property. The specific repercussions depend on when the deed goes into effect and whether you retain any interest in the property.

Effects on Transferor

A quitclaim deed is not risk-free for the transferor, particularly when the transferor:

• Has a mortgage on the property,
• Transfers the property to someone with creditors, or
• Does not file a gift tax return.

These risks generally apply to a living transferor but may carry over to their estate.

Mortgage

Because a quitclaim deed only releases a person’s interests in a property, it leaves a mortgage alone. Transferring mortgaged property may trigger a due-on-sale clause, forcing the transferor to pay off the outstanding mortgage balance.

Creditors

A transferor who transfers property to a transferee with outstanding debt may expose the property to the transferee’s creditors. Depending on the circumstances, creditors may collect on the transferee’s interest in the quitclaimed property.

Taxes

Quitclaim deed transfers frequently qualify as gifts for tax purposes. The transferor risks criminal and civil liability if they do not pay taxes on the gift.

Effects on Transferee

Quitclaim deeds may affect the transferee’s ability to:

• Sell the property,
• Qualify for certain benefits, and
• Profit from the sale.

The transferee also risks inheriting any defects in the property.

Sales

A quitclaim deed quits title insurance, which protects against defects in the property’s title, such as outstanding debts.

When a sale involves a lender, they typically investigate the title. If the lender discovers defects, it may force the owner to pay off outstanding debts on the property they had no part in creating and pay for title insurance.

Benefits

Means-tested benefits include government programs you only qualify for with limited income or assets, like:

• Medicaid,
• Supplemental Nutrition Assistance Program (SNAP),
• Supplemental Security Income (SSI),
• Housing assistance programs, and
• Similar benefits.

You may become ineligible based on owning quitclaimed assets.

Additionally, quitclaimed assets may prevent you from qualifying for scholarships, grants, special loans, and loan forgiveness programs.

Profits

Taxes on home inheritance are structured differently than gifts, based on your transferred tax basis. Your tax basis is used to calculate capital gains or losses. Your basis is the amount you have invested in the property—typically, the purchase price and the value of specific improvements.

When you gift property, you transfer your tax basis to the recipient. If the new owners sell, they pay tax based on your basis.

Consider a home purchased for $50,000 now worth $500,000. The buyer has a basis of $50,000. If the buyer gifts the home to their child, who subsequently sells it for fair market value, the child must pay taxes on a capital gain of $450,000—the difference between the original basis and the sale price.

If the buyer transfers the property to the child when they die, the property gains a stepped-up basis. Instead of the original $50,000 basis, the property’s new basis is its fair market value at the time of the buyer’s death. The new basis would be $500,000, allowing the child to bypass capital gains taxes. The child would still be required to pay any applicable sales taxes.

What Can You Use Instead of a Quitclaim Deed?

Putting your home in a trust may help you accomplish your goals better than a quitclaim deed. Through a trust, you can control when the asset transfers and what rights your beneficiaries have. Additionally, you can provide a stepped-up tax basis, maintain your title insurance, and avoid creating or perpetuating title defects.

Consult CCHA Law

Quitclaim deeds have their place in property law, but they are rarely used in the estate planning context. Before transferring property through a quitclaim deed, contact CCHA Law to learn more about whether a trust or another estate planning tool may better help you accomplish your goals.