Using a quitclaim deed for estate planning

A quitclaim deed is a legal document that transfers your ownership of a piece of real property to someone else. There does not need to be any sale involved to transfer the ownership. Quitclaim deeds can sometimes be used as part of an estate plan, but using them for this purpose is generally not a good idea.

How a quitclaim deed works

When you quitclaim your interest in a property to someone else, known as the grantee, you transfer your interest to them, but you make no guarantees that you actually own the property and hold title free and clear. In other words, all the deed does is say, "Whatever I have, I give it to you, but I make no promises that I actually own the property." A quitclaim deed does not actually complete the transfer until it is recorded in the county clerk's office.

Cost basis

One of the problems with using a quitclaim deed for estate planning is that doing so may not be advantageous for the grantee's cost basis, or amount the Internal Revenue Service (IRS) deems to be what you paid for a property. When you inherit property through a will, you receive the decedent's cost basis, but if the property is transferred via quitclaim deed, you receive the current market value.

For example, if a mother buys a home for $100,000 in 2000, and then decides to quitclaim the property to her son in 2018, when the property is worth $200,000, the son receives a cost basis of $100,000 (what she paid). If he then sells the property for $200,000, he must pay capital gains tax on the $100,000 difference between the basis and the sale price. If the mother were to instead leave the home to her son in her will and she dies in 2018, her son inherits the home and has a new cost basis of $200,000 (the property's market value that year). If he then sells the home for $200,000, he owes no capital gains tax.

Delayed filing of quitclaim deeds

One method some people try to use with quitclaim deeds is to complete the deed but wait to file it until the original owner dies. The problem with this strategy is that once the original owner is deceased, there is no authorization to file the deed. When the owner is alive, she can direct an attorney to file the deed. But once the owner is dead, she no longer owns the property—the estate does—and there's no authorization from the estate for the deed to be filed, thereby invalidating the transfer.

Medicaid Planning

One reason some people use a quitclaim deed to transfer property is to get the property out of their names so they have fewer assets, thereby enabling them to qualify for Medicaid more quickly. Medicaid pays for long-term nursing home care, which can be very expensive if you have to pay for it yourself. To qualify for Medicaid, you must meet a state eligibility test, which has an asset cap, meaning if you have more assets than allowed, you have to spend them before you can qualify.

To plan for such a situation, it's possible to quitclaim your home to a family member to get the asset out of your name. However, Medicaid has a five-year look-back period, so any transfers you made in the five years before you qualify can be included in your assets and disqualify you from eligibility. If you are interested in using a quitclaim deed as Medicaid planning, it's important to work with an attorney who is experienced in such matters.