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I want to give my home to my daughter
after I die but I don’t want the house
to go through probate. Can I sign a
deed now that puts the house in her
name, but then keep the deed with my
other important papers and tell her she
can take the deed and record it after I
die?
Although this approach is sometimes recommended by
well-meaning friends or relatives and in some cases by
attorneys as means of avoiding probate while still
maintaining complete control of the property during your
lifetime, there are significant disadvantages to this estate
planning strategy and better ways to achieve your
objectives.
One obvious problem is that the deed could be lost. In that
case, if you still owned the home at the time of your death,
your home would pass according to the terms of your will, if
you had a will, or, if you did not have a will, then it
would pass to your heirs according to the laws of
intestacy. In either case, the home would have to go
through probate and it may or may not be inherited by your
daughter. A less benign possibility is that the deed
could be found by someone who was not happy with your
decision to give the house to your daughter and that person
then destroys the deed. As estate planners we unfortunately
see situations where family members or other trusted persons
have betrayed that trust and tried to enrich themselves at
the expense of others. It is also possible that your
daughter could find the deed before your death and record it. This would give
her legal title to your home and prevent you from changing
your mind about whether to give the deed to her.
There is also the problem that if the deed is not delivered
to your daughter until after your death it could be
challenged as an “incomplete gift”. In order for a gift to
be effective to transfer title to property the property must
be delivered to other person. If the deed was in your
possession at the time of your death, then no delivery has
occurred, and thus at the time of your death legal title
would still be in your name. At the time of your death, any
property that you own in your name becomes part of your
estate and is distributed according to your will or, if you
did not have a will, to your heirs according to the laws of
intestacy. As in the example in the previous paragraph, this
means that the home would be subject to probate and may or
may not be inherited by your daughter.
Unrecorded deeds also raise issues concerning property
taxes, including when the “transfer of ownership” takes place, when the
taxable value is "uncapped", and the effect of the transfer on the
principal residence exemption (sometimes referred to as the homestead
exemption).
There is a 2006 decision from the Michigan Tax Tribunal
that illustrates the property tax problems that can occur
with unrecorded deeds. The Tax Tribunal decided that under
the Michigan property tax laws, where a deed from a parent to a child was recorded
after the parent’s death but was signed by the parent several years earlier, the
relevant date for property tax purposes was the date the deed was signed, and
not the date the deed was recorded. The parent should have filed a Transfer Affidavit
with the tax assessor’s office within 45 days of the date the
deed was signed. When a Transfer Affidavit is filed, the tax assessor
reevaluates the property tax status to determine whether a "transfer of
ownership" has occurred that would cause the taxable value of the property to be
"uncapped" - to be increased up to the "state equalized value" (SEV). If you look at your tax
statement you will see that both the SEV and the taxable value are listed.
If your property value has risen
significantly since you bought it the difference between the
taxable value and the SEV could be quite large.
Prior to December 31, 2013 a deed from a parent to his/her child was considered
a "transfer of ownership" and would cause an uncapping of the taxable value.
In the 2006 case the Tax Tribunal decided that a "transfer of ownership", and
thus an uncapping of the taxable value, occurred when the deed was signed and
not when the deed was recorded. The result was an increase in the property
taxes retroactive to the date of the deed. In your case, since you would
be signing the deed after December 31, 2013, the deed would not cause an
uncapping of the taxable value as long as the property was used for
residential purposes.
Another property tax problem that can arise from
holding an unrecorded deed is that if you sign a deed transferring complete
ownership to your daughter (as opposed to adding your daughter as a joint owner) your right to claim the principal residence
exemption on the property would terminate as of the date of the deed. Non-homestead property is
taxed at a higher rate. If the deed was not recorded until some years
later the tax assessor could
retroactively increase the tax rate on the property back to
the date on the deed. However if your daughter also resided in
the home as her principal residence with you after the date of the deed
she could file a new Principal Residence Exemption affidavit. In order
for the exemption to be retroactive she would have to file a
request with the local Board of Review, but there is a limit
on the length of the retroactive period.
If you signed a deed that simply added your daughter as a joint owner with you
and the property continued to be your principal residence, your property would
retain the principal residence exemption. Upon your death you daughter
would become the sole owner of the property and if she continued to occupy the
property as her principal residence she could file a new PRE affidavit and the
exemption would continue.
A better way to achieve your objective of avoiding probate
and still retaining control of your property during your
lifetime is to execute a “Ladybird deed”. The deed creates a special type of life estate; you
not only retain the exclusive right to possession during
your lifetime but your also retain complete control to sell
or mortgage the property. You do not need the consent of
the person you have named as the holder of the remainder
interest. If you still own the property at the time of your
death, it will then pass automatically to that person.
The unrecorded “deed in the drawer” sounds like a simple and
inexpensive estate planning strategy, but it can have
unintended consequences. Other estate planning strategies
should be considered in order to achieve your objectives.