Quitclaim Deed – Beware of the Risks

What is a Quitclaim Deed?

A quitclaim deed is also called a non-warranty deed. And for good reason. For instance, when you sign or receive a quitclaim deed, there is no guarantee provided that the property title is clean and free from any liens or other ownership interests.

A quitclaim deed doesn’t even ensure the person has the legal right to sell or transfer the property. Consequently, a quitclaim deed is the least safe form of title transfer, while a warranty deed is the safest.

When is a quitclaim deed most commonly used?

Most Common Uses and Risks of a Quitclaim Deed:

• Taxes  
  • You transfer or add someone to your deed; you have gifted that portion of the ownership. You now must file a gift tax disclosure on your tax return.
  • If you transfer or add someone to your deed and die first, they are subject to capital gains tax on the difference between your original purchase price and the value at the time of your death.  
• Family
  •  “My mother already transferred the house to me.” I can’t count the number of times I heard those words. If you quitclaim your deed to your children, you no longer own your home. Meanwhile, they might have other ideas of where you might live one day.
  • Your home (actually their home now) is subject to a future divorce proceeding as an asset they own.
• Insurance
  • Your homeowner’s policy must now list each owner as an “additional insured,” or any future claims may be excluded from coverage. 

Joint Tenancy and Quitclaim Deeds

If two or more people purchase property and hold the title together, they are considered ”joint tenants.” Consequently, by law, the title passes to the surviving tenant. However, when the survivor dies, there must be a Probate proceeding to pass the title to another person, regardless if the survivor had a Will.

For this reason, a surviving parent might add one or more children to the deed by quitclaim. Interestingly, people often think it is a “quick” claim deed. Certainly, it is quick, no question. However, the issues that can result are anything but quickly resolved.

You should use this type of deed with extreme caution. Therefore, unless you transfer your ownership to your corporation or LLC or add your spouse to the title, there are much better alternatives that avoid the liability, tax, insurance, and future ownership risks outlined above.

If you are selling or purchasing property, use a warranty deed. Further, if you wish to pass your property to your children or another person as your death, use an estate plan. In conclusion, if you want to avoid the above Probate and taxes, ensure your estate plan is a Living Trust.

Living Trusts

At the end of your life or incapacitation, they risk Probate if you have property, investments, or bank accounts in your name.

• A Will = Probate. The rule is that no one can legally sign your name. Therefore, all assets in your name are subject to the Probate process, which averages 18 months and is costly.
• A Living Trust avoids Probate.
• Your financial accounts, life insurance policies, and deferred compensation accounts can name your Living Trust as beneficiary, subject to essential tax considerations.
• A Living Trust estate plan includes Health Care and Financial Power of Attorney documents. It also consists of a Last Will and Testament.
• A Will is necessary for the guardianship of minor children. It also transfers assets in your name out of Probate.
• A Living Trust contains a No Contest provision and beneficiary Asset Protection clauses.

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Tom Tuohy is the founder of Tuohy Law Offices.

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