Why Parents Should Rethink Quitclaim Deeds in Washington Estate Planning

As parents, when you start thinking about how your home will pass to your children, you might think of turning to a quitclaim deed. This instrument is used to transfer ownership interest in a property to someone else, such as your children, without going through a formal sale. Due to its simplicity, it can sound appealing.

However, in practice, using a quitclaim deed for your house for estate planning reasons to your children can cause problems that implicate taxes, who has control over the property, planning for your long-term care as you age, and your family’s overall financial stability. In many cases, there are better ways to make sure your home ends up in the right hands while protecting its value. 

If you’re in Washington state and considering a quitclaim deed as an estate planning strategy, let’s examine why it might not be the best way to protect your property. 

How a Quitclaim Deed Affects Who Has Control of Your Home

When you sign a quitclaim deed, you will no longer be the legal owner of your property. In other words, your decision-making power will rest entirely with someone else. 

While you may trust your children implicitly, as we all know, relationships can change in a heartbeat. So can finances and health. Then there’s the possibility that they divorce or die, or that you simply change your mind, all of which can likewise complicate matters. 

Even if your children have nothing but the best intentions, if life gets complicated, they could find themselves looking to your home as a solution or wanting to do something other than what you intended. If your home’s been quitclaimed, you won’t have a word to say about it. 

How a Quitclaim Deed to Your Child Affects Taxes for You Both

From a tax perspective, a quitclaim deed can create challenges that may not become apparent until years later. In Washington state, property transferred by a quitclaim deed does not receive a new tax basis. Instead, your children inherit the amount you originally paid for the property, adjusted only by specific improvements. 

So if your parents spent $75,000 on a home in 1971, and it’s worth $1.8 million today, you or they could be hit with a surprise from the government. For example, if your parents decide to sell the home, the capital gains tax they would have to pay would be calculated based on the difference between the sale price and the original purchase price. Based on the above numbers, the tax bill could be pretty sizable.

On the other hand, if your children inherit the home after you pass away, they would receive what is known as a step-up in basis. This means the property’s value would be based on its market value at the time of your death. Selling would thus result in little to no capital gains tax. Ignoring that potential benefit by using a quitclaim deed can prove costly to your children.

Estate Taxes in Washington

Washington state, too, imposes an estate tax on transfers valued above a certain threshold, currently $3,000,000. If you were thinking that transferring your home to your child via a quitclaim deed would exempt it from being counted toward the total value of your estate for tax purposes in all situations, it will not, due to its classification as a gift. Speak with a Washington state estate planning lawyer to discuss your situation. 

The Medicaid Issue You May Overlook by Using a Quitclaim Deed

One of the most common reasons people in Washington regret using a quitclaim deed comes when they must apply for Medicaid to help pay for their long-term care. Under Washington rules, transferring your home for less than fair market value is considered a gift. Medicaid has a five-year lookback period. This means there will be an examination of all your financial transactions for the five years preceding your application.

If you quitclaimed your home during that window, you could face a penalty that makes you ineligible for benefits. Such a delay would make it problematic to access the care you need when you need it, and often necessitates people dipping into other assets or relying on family members for help if they don’t have the means. This can cause added stress for you and your loved ones during a challenging time. 

The Possibility That Your Children’s Problems Could Put Your Home at Risk

Unfortunately, life happens, so even if your children are the picture of financial responsibility, circumstances beyond their control can put your home, and by extension you, in a precarious position. 

As touched on earlier, once you put your house in your children’s names, it will be treated for legal purposes as their asset. This means that if they go through a divorce, creditors or their soon-to-be ex could have a legal claim to your home. 

The same is true if they file for bankruptcy, are involved in a lawsuit, are in a car accident that results in a judgment against them, or they find themselves with hefty medical bills. The result could be a lien placed on the property, limiting your ability to sell the property and negatively affecting its value. 

Alternatives to Quitclaim Deeds to Transfer Property

A quitclaim deed feels like a simple way to avoid probate or make sure a child receives your home. That being said, estate planning involves more than transferring assets and should also speak to preserving the value of your assets, reducing your tax liability, and keeping your options open should your needs change. In Washington, you have several tools that can accomplish these goals without giving up your legal rights too soon.

The first option is a revocable trust, sometimes called a living trust. With this kind of trust, you can place your home in the trust’s name at the same time you serve as trustee of the trust. This allows you to maintain complete control of any assets in the trust, including your home, throughout your lifetime. 

You can set the terms of the trust, deciding who will receive the property after your death, and even create rules around the disposition of it after, such as when the house can be sold. You can even decide to dissolve it.

The second is a transfer-on-death deed, which allows you to name a beneficiary who you want to inherit your property when you die automatically, and bypasses probate altogether. Similar to a revocable trust, you would still retain ownership of your home and decision-making power while you are alive.

The final option is to establish what’s called a life estate. A life estate grants you the right to live in and control your home until your death, at which point your ownership would pass to any beneficiaries you designate. 

Because each of these methods has its own rules and tax implications, it’s best to talk with a Seattle estate planning attorney to better understand your rights and responsibilities under Washington state estate planning laws before deciding which option would work best in supporting your wishes.

Speak to a Seattle Estate Planning Lawyer About Protecting Your Home in a Washington State Estate Plan

For many people, their home is the most significant asset they own in terms of monetary value. This is especially true in Washington, which is known for its high property values. Then there’s the emotional connection people have to a family home.

Therefore, deciding how you want it to pass to your children should not just be a matter of signing a document but, instead, involve carefully assessing the pros and cons each option could present to you and your family. Talking with an attorney who understands Washington estate planning can help you make this important decision.

At Elise Buie Family Law, our team of experienced Washington state estate planning attorneys can help you design a strategy that meets your goals while protecting what you have worked so hard to build. Contact us today or schedule a convenient time to speak.