Is a Quit Claim Deed the Best Option for Your Family?
Rather than completing a legitimate estate plan, so many parents opt to execute Quit Claim Deeds (QCD) to transfer properties to their adult children. They will either transfer 100% ownership interest to the child or just put their child’s name on the deed to their house in an attempt to make things easier for their child or children by eliminating the need for the property to be probated at death.
The issue is that many of these people are not educated in the ramifications of such a title transfer and later down the road, the family learns that utilizing a $250.00 QCD was much more expensive than anticipated.
Here are a few of the key points to think about when considering QCDs as a form of estate planning (for purposes of simplicity, I will be using the example of a parent deeding their property to their adult child- other familial relationships may have different repercussions than the ones considered below- homestead issues may also affect the outcome in many scenarios):
Capital Gains Tax
When parents quit-claim their home to their adult child, the child's newly acquired property is considered to have been acquired at the same price the parent paid for the house (or a portion thereof).
For example: let's say 30 years ago Abuela Fulanita purchased her home at $50,000. Today the house is worth $400,000. Fulanita feels that her son, Fulano, should be the one to receive her home after she passes. In order to avoid having to probate her home at her death, Abuela Fulanita quit claims the property to Fulano.
In this scenario, after Abuela Fulanita passes away, if Fulano sells the house for $400,000, Fulano will have to pay capital gains tax on $350,000.00.
Conversely, if Fulano were to inherit Abuela Fulanita's home after she passed away, Fulano would be considered to have acquired the property at $400,000 (the value of the property today). So if Fulano chooses to sell the property, there will be no capital gains tax owed if he sells it for $400,000.
Control & Inheritance by Others
If a parent deeds their property to their adult child and the child dies before the parent, the child's ownership interest may pass to the grandchildren or even to the child's spouse (this all depends on how the deed is worded). At this point, the parent is at risk of losing all control of what goes on with the property.
Also, if the parent simply adds the child's name to the property, and at some point in the future wants to move and sell the house, the child will have to agree and sign off on all sales contracts (again, depending on how title is held).
Another cause for concern in this scenario is the exposure the property will have with respect to the child's creditors. Once the child is the joint owner of the property, the property is at risk of being caught up in the child's creditor claims- this would include issues with tax liens, bankruptcy, and even law suits arising from car accidents that your child is involved in.
When applying for Medicaid or other needs based government assistance programs, Medicaid will look back 5 years to investigate whether the applicant has given away money or assets in order to become eligible for benefits. Quit claiming property is considered a gift and may automatically disqualify the parent from obtaining these kinds of need-based benefits.
If a parent's only property is his or her home, and that property is deeded to an adult child, probate may be effectively avoided. However, if there are other assets held in the parent's name- the estate will still have to go through probate.
Florida actually has a simplified probate proceeding called "Summary Administration" which is relatively inexpensive and may be processed faster than a typical formal probate proceeding. In this case, the costs and disadvantages of using a QCD during the parent's lifetime seem greater than the advantage of avoiding probate.
All in all, there are many things to consider when weighing the pros and cons of using a quit claim deed to avoid probate. One of the most important considerations is whether the adult child/beneficiary is planning to sell the property at the death of the parent. If the child plans on keeping the property indefinitely for whatever reason, a QCD may be okay (yearly property taxes may be calculated based on the price the parent paid for the property in this scenario). However, if the child will in fact be selling the property, a QCD is likely not the answer.
The safest way to go is to ensure that you and your parents visit an attorney to discuss these issues. There are many contingencies that can change the outcome in some of the scenarios described above. Encouraging your parents (or your adult child) to execute a thought-out estate plan is just as important as making sure your estate plan is in place.
To discuss the issues described above or to get started on your estate plan, please call our office at (305) 860-8338 to schedule a call or a consultation. We are ready to educate you and walk you through our process.