Warning: When Not to Sign Over Your Deed

Transferring the deed to your home is a simple matter. Generally, you just have to find the current deed to your home, then get the right deed form to write up your new deed to convey to another party, and take the document to a notary. Then your signature can be notarized and the deed can be filed.

But it’s best not to rush in. Some homeowners later regret signing over their deeds.

Let’s look at reasons not to transfer deeds too quickly — and how best to proceed when you do.

Deed Dos and Don’ts

Let’s consider some good reasons to sign over your home to somebody else. And then some good reasons to think again before you sign that precious paper away. Also, we’ll note what your other options could be.

Some parents give their homes to people near and dear to them. Or maybe, facing financial stress, they hand a deed to someone who promises to save them from a mortgage default.

Before we go on, it’s worth noting that the IRS is very interested in property transactions. For example, there’s a gift tax when real estate is freely given. Even if the gift qualifies as exempt from tax, reporting a transfer of assets is important.  

OK, let’s move on to the big reasons you might want to pass your house deed to someone else.

Want to Avoid Putting Your House Into Probate After You Pass Away? Consider This.

Probate can be your friend. If you bequeath (will) your home to loved ones, and they receive it through probate when you die, they’ll have the so-called stepped-up tax basis. That’s a great advantage to have. The rise in your property value during your time of homeownership won’t count as taxable gains.

In contrast, if you quitclaim the home to your loved one while you’re alive to keep the home out of the probate court after your death, here’s the rub. Quitclaiming or giving someone a home is a taxable event. And we’ve all seen how homes can rise in value. Again, with the step up in tax basis that leaving your home in a will offers, none of the value gain will be taxed if your child inherits the house.

Key IRS Provision: The Internal Revenue Code’s Section 2036 says if you’ve kept a life interest in the property (which comes down to things like decision-making power and the prerogative to keep living there), the home would still go to probate. You might have passed the deed along, but it wasn’t necessarily a completed gift. Think of it as the tax code saving you from your own mistake.

So, are you thinking of staying in the home but transferring its deed? If so, what if the person to whom you give the deed later runs into unexpected legal or financial stresses, medical hardship, or divorce? Then, the home you’re still living in could be at risk of claims, lawsuits, or liens.

As you can imagine, there are better ways around probate. We’ll talk about them in a moment.

A “Pocket” Deed? Forget About It.

If you’re thinking of giving a deed to someone close to you to hold just in case something happens to you, know the risks:

  • Unrecorded “pocket” deeds go missing.
  • Passing a deed for someone to hold means giving away your future options to tap the value of your home.
  • A later attempt to record an unrecorded deed creates tax issues.

A quitclaim that someone holds onto is legally known as an uncompleted gift. Your estate will need to figure out if you really delivered the gift and your recipient legally accepted it (see the Key IRS Provision note above). So the probate court is likely to be brought into the mix, despite your intentions.

Say you give your adult child a deed to pocket, and they record the deed during your life (to be on the safe side). Then, you could lose any property tax homestead exemption you might have.

Unrecorded deeds may be forgotten, only to show up when someone else has the home. That’s an example of the monster coming out from under the bed known as the pocket deed. Refresh your knowledge on unrecorded deeds and the law.

Someone with a pocket deed could unexpectedly die before you do. Life throws a lot of curve balls. So there are many potential pitfalls here; these are just a few.

Give Up Your Deed for Mortgage Relief? No Way.

If you are concerned about mortgage default, try to work out a payment plan with your mortgage company. If you can’t, seek additional help promptly, from trusted sources. Call a housing counselor at 800-569-4287 if you have a Fannie or Freddie (“conventional”) loan. If you have an FHA loan, call the FHA.

Foreclosure “rescue” businesses might look official. Their letterhead might even be mistaken for a legitimate bank or government program. But it’s safer for you to be the one initiating the conversation with your mortgage servicer.

Other companies might promise a loan modification to reduce your monthly burden. But check the fine print. Watch out for title transfer language. Watch out for quitclaims generated by someone other than yourself.

 Scammers may ask for your signature to quitclaim your deed. They might promise to return your deed later. These are red flags.

Some manipulative quitclaim schemes ask a homeowner to rent “temporarily” so the struggling homeowner can rebuild credit and get the home back. But once an owner quitclaims the deed, the recipient is in control. The rent might become impossible to manage, and the deed holder could exploit the value of the home in any number of ways.

Other schemes involve the owner quitclaiming the home so a company can sell it, for a cut. After the owner moves out, here again, the company can exploit the value of the property. The owner loses control through the quitclaim. And the past-due mortgage doesn’t just disappear.

By law, legitimate mortgage assistance businesses do not:

  • Ask you to sign over your ownership.  
  • Promise to work for you without telling you the total charges up front.
  • Demand payment before you receive and agree to a modification offer from the lender.

In contrast, lawyers can charge upfront fees. But they must be licensed in the same state as the homeowner, and must hold client money in a trust account until the work is done. If a mortgage assistance business claims to be made up of legal professionals, potential clients should vet its claims carefully.

Here are some points to ponder before transferring a deed without a lawyer.

Give Up Your Deed for Medicaid Eligibility? Careful!

Medical care costs a lot. People who can’t afford nursing care might toss away their assets to become eligible for Medicaid. Be aware that quitclaiming or giving away assets can disqualify seniors from receiving benefits for a set time. Say you transfer a deed and need medical assistance within five years from that date. Then the deed transfer can disqualify your application.

Quitclaims have good uses. They can work well for some transfers of properties among family members, co-owners, business partners, or divorcing marriage partners. Unlike a warranty deed, a quitclaim is not a promise of clear title.

There may be no need to worry about the home value at this time. For the average couple, the value of the Medicaid applicant’s primary home isn’t counted against approval if the spouse (or certain other family members) still lives in the home.

So, transferring a deed to qualify for benefits doesn’t always work out as expected. In the worst-case scenario, it could be flagged as possible fraud.

 See more from Deeds.com about Medicare/Medicaid and your home title.

OK, What’s the Best Option for Passing Your Home Along? Depends on Your Situation.

Consider whether one of these planning tools might be right for your current circumstances:  

  • A will. Your last will is a perfectly good tool to pass your home along. The probate court will certify the title transfer for good. While California and Florida might be known for complicated, expensive processes, most states streamline probate for modest estates.
  • A trust. With a Declaration of Trust document, you can form a trust and then deed real estate into it, with named beneficiaries who’ll receive your assets after you pass on. A revocable, living trust can be costly to set up, but it holds assets out of probate, so some homeowners want it.
  • A transfer on death deed. The revocable transfer on death deed moves property to a designated recipient who will use your death certificate to claim it. It’s like naming a beneficiary for your bank account. It’s a simple solution. The home stays under your control for life. 

Not all states allow the transfer on death, but wills and trusts are available in every state. The simplest option of these three is the will.

 Have you written your will yet? No time like the present.

Takeaways: Signing That Deed Isn’t Always the Best Option

Prevent disputes down the road by never giving (or taking) a pocket deed. Unless it’s time to sell your house, passing a deed along in any form needs careful thought.

As for alternatives, consider wills, trusts, or transfer on death deeds. Life estates or joint ownership with survivorship rights also work, depending on your life circumstances and relationships.

In short, plan your home’s future with care. If you feel strongly about avoiding probate, the best tactic of all is to consult with a respected wills and estates lawyer in your state.

Supporting References

The American Bar Association via AmericanBar.org: Estate Planning – The Probate Process.

U.S. Federal Trade Commission Consumer Advice via FTC.gov: Mortgage Relief Scams (Sep. 2022).

Liz Weston of NerdWallet,in The Associated Press via AP News.com: Don’t Give Your Adult Kids Your House (Mar. 30, 2020).

Deeds.com: The Monster Under the Bed: When a Home’s Past Holds an Unrecorded Deed (Oct. 23, 2020).

Deeds.com: Medicare and Medicaid – Can They Take Your Home? (Dec. 1, 2019).

Deeds.com: Don’t Quit Your Claim! A Quitclaim Deed Is Not a Mortgage Saving or Estate Planning Tool (Apr. 26, 2019).

Deeds.com: Quitclaim Deeds.

And as linked.

Photo credits: Andrea Piacquadio and RODNAE Productions, via Pexels.