Rights of Survivorship and the Risks of Using a DIY Deed
One common way to avoid probate for real estate is to add children or other individuals to the deed as joint owners with rights of survivorship.
When one joint owner dies, the surviving joint owner or owners automatically receive the deceased owner’s interest. The transfer occurs by operation of law rather than through the deceased owner’s will.
This may sound simple. However, preparing a deed without legal advice can create unintended ownership, tax, creditor, and estate planning consequences.
A deed is not merely a form used to identify who receives the property after death. It transfers a current legal interest in the property.
What Does “Right of Survivorship” Mean?
A right of survivorship means that when one joint owner dies, that owner’s interest passes automatically to the surviving joint owner or owners.
The deceased owner’s interest generally does not pass through probate. It also does not ordinarily pass according to the deceased owner’s will.
The Maryland Courts confirm that property held as joint tenants with right of survivorship passes to the surviving joint owner rather than through probate.
An Example With Three Joint Owners
Assume a parent and two children own a home as joint tenants with rights of survivorship.
When the parent dies, the two surviving children each own 50 percent of the property. The parent’s interest passes to them automatically.
When one child later dies, the last surviving owner receives 100 percent of the property.
Probate is generally not required to transfer the deceased joint owners’ interests. However, documentation may still be needed to update tax and land records.
How Do You Create Joint Ownership With Survivorship Rights?
The current owner generally signs and records a new deed transferring the property from the owner individually to the owner and the new co-owners.
The deed must include language that creates the intended form of ownership.
Exact wording matters. A deed that merely lists several owners may not create survivorship rights. It could instead create a tenancy in common, which generally allows each owner’s share to pass through that owner’s estate.
The deed must also satisfy other state and local requirements involving:
- The legal description
- The grantor and grantees
- Execution and notarization
- Required certifications
- Transfer and recordation tax
- Lien information
- Land record filings
- The property’s current ownership
Maryland deeds are recorded in the Land Records Department for the county or Baltimore City where the property is located. The Maryland Courts provide information about deeds and public land records.
Why Is a DIY Deed Risky?
Many people assume they can download a deed template, fill in the names, sign it, and record it.
However, deeds are legal documents governed by state law. A form written for another state may not satisfy Maryland or Washington, D.C. requirements.
Even a deed that is accepted for recording may not produce the intended legal result. Recording offices generally do not guarantee that a deed is legally valid or creates the ownership arrangement the signer intended.
The consequences may not be discovered until years later, often after the original owner has died.
What Happens If the Deed Uses the Wrong Ownership Language?
The deed may fail to create rights of survivorship.
Suppose a parent intends to create a joint tenancy with two children. The deed instead creates a tenancy in common.
When the parent dies, the parent’s share may need to pass through probate. It may be distributed under the parent’s will or, if there is no valid will, under state intestacy law.
The result could be the opposite of what the parent intended.
A defective deed might also:
- Transfer the wrong percentage
- Omit an existing owner
- Use an incorrect legal description
- Fail to account for a spouse’s rights
- Create a title defect
- Prevent a later sale or refinance
- Trigger an unexpected tax or lender issue
Can a Defective Deed Be Corrected?
Sometimes, but timing is important.
If the Owner Is Still Alive
If a problem is discovered while the original owner is alive and capable, an attorney may be able to prepare and record a corrective deed.
The appropriate correction depends on the defect and applicable law.
A corrective deed should not be attempted without legal advice. A second improperly prepared deed could create additional title problems.
If the Owner Has Died
A correction becomes much more difficult after the owner’s death.
The deceased owner can no longer sign a new deed. Probate, litigation, a court order, or cooperation from multiple interested parties may be required to resolve the title.
The property may not be marketable until the issue is resolved. A sale or refinance could be delayed because the title company cannot confirm legal ownership.
The property might also pass to someone the owner did not intend to benefit.
Does Adding Someone to a Deed Give Them Ownership Now?
Yes. Adding someone to a deed generally gives that person a current ownership interest.
The new owner is not simply a beneficiary waiting to inherit in the future.
Depending on the form of ownership and state law, the co-owner may acquire rights involving:
- Possession of the property
- A share of sale proceeds
- Consent to certain transactions
- Severance of the joint ownership
- Partition of the property
- The ability to transfer or encumber an interest
Once the deed is delivered and recorded, removing that person may require their consent.
A parent who later changes their mind may not be able to reverse the transfer unilaterally.
Can a Child’s Creditors Affect the Property?
Potentially.
Once a child becomes a current owner, the child’s interest may be exposed to the child’s legal and financial problems.
Those problems could include:
- Creditor judgments
- Bankruptcy
- Divorce
- Tax liens
- Lawsuits
- Child support claims
The extent of the exposure depends on the form of ownership and applicable law.
Adding a responsible child to the deed today does not guarantee that the child’s circumstances will remain unchanged.
Can a Joint Owner Force the Sale of the Property?
In some circumstances, a co-owner may seek a partition of jointly owned property.
A partition action asks a court to divide the property or order its sale. The exact rights depend on the ownership arrangement and state law.
This means an owner who adds a child to the deed may give that child legal rights that can interfere with the owner’s plans for the home.
Even when no one seeks partition, disagreement among co-owners can make it difficult to sell, refinance, lease, or improve the property.
Does Adding Someone to a Deed Create a Gift?
It may.
If you add another person to a deed without receiving equal value in return, the transfer may be treated as a gift for federal tax purposes.
The transfer could require a federal gift tax return, even if no gift tax is immediately due.
The amount and timing of the gift depend on:
- The property’s value
- The interest transferred
- The type of joint ownership
- The recipient’s rights
- Whether the transfer can be revoked
- The relationship between the owners
A tax professional should review the proposed transfer before the deed is signed.
How Can a Lifetime Transfer Affect Tax Basis?
Property received as a lifetime gift generally receives different basis treatment from property inherited at death.
A gift recipient may receive the donor’s adjusted tax basis, subject to applicable rules. If the property has increased significantly in value, this could result in a larger taxable gain when it is sold.
The IRS explains that determining the basis of a home received as a gift requires information about the donor’s adjusted basis, the property’s fair market value, and any gift tax paid.
By contrast, inherited property often receives a basis tied to its date-of-death value.
Adding someone to a deed may therefore avoid probate but create a less favorable income tax result. The full tax consequences should be calculated before ownership is changed.
Can Adding Someone to the Deed Affect Medicaid Planning?
Yes.
Transferring part of a home for less than fair market value may be treated as a gift for Medicaid eligibility purposes. Depending on the circumstances, the transfer could create a penalty period for long-term care Medicaid.
There are exceptions for certain transfers, but they are highly specific.
A person who may need long-term care should consult an elder law attorney before adding a child or anyone else to a deed.
A transfer intended to avoid probate could create a much larger long-term care problem.
Could the Transfer Affect the Mortgage or Insurance?
Possibly.
A mortgage or deed of trust may contain restrictions on transferring ownership. Federal or state law may protect certain transfers from enforcement of a due-on-sale clause, but not every transfer receives the same treatment.
The owner should also contact the insurance company.
The policy may need to identify the new owners and reflect how the property is used. Failure to update the coverage could create problems if a claim occurs.
What Other Problems Can a DIY Deed Cause?
A deed change may also affect:
- Homestead or principal residence benefits
- Property tax credits
- Transfer and recordation taxes
- Capital gains taxes
- Inheritance taxes
- Homeowners association requirements
- Title insurance
- Existing estate planning documents
- Eligibility for public benefits
The deed should be reviewed as part of the complete estate plan, not as an isolated probate-avoidance form.
What Are the Alternatives to Adding Someone to a Deed?
Adding joint owners is not the only way to address probate.
Depending on the property and your goals, alternatives may include:
A Revocable Living Trust
Property transferred to a properly funded revocable living trust can generally pass according to the trust’s terms without probate.
A trust may allow you to retain control during your lifetime while naming a successor trustee to manage the property after incapacity or death.
A Will
A will does not avoid probate. However, it can provide clear instructions about who should receive the property.
Probate may be preferable to creating immediate co-ownership with someone whose creditors, divorce, or financial decisions could affect the home.
A Life Estate or Other Deed Arrangement
Some deed-based plans allow a person to retain certain rights during life while directing future ownership.
These arrangements have legal, tax, Medicaid, and creditor consequences. They should be created only after individualized advice.
Sale or Other Planned Transfer
In some circumstances, selling the property or transferring it through another estate planning strategy may better accomplish the owner’s goals.
The right option depends on the owner’s need for control, tax situation, family relationships, and long-term care plans.
What Should You Do Before Changing a Deed?
Before adding children or other beneficiaries to a deed, ask:
- Will this person become an owner immediately?
- Can the transfer be reversed without their consent?
- Could their creditors reach the property?
- Could they force a sale or transfer their interest?
- Will the change create a taxable gift?
- How will it affect capital gains taxes?
- Could it affect Medicaid eligibility?
- Does the mortgage restrict the transfer?
- Will insurance coverage need to change?
- Does this plan still work if the new owner dies first?
- Is a trust or another strategy more appropriate?
The cost of legal advice before signing a deed is usually much lower than the cost of correcting a title problem later.
Speak With an Estate Planning Attorney Before Using a DIY Deed
If you want your home or other real estate to pass without probate, consult an attorney familiar with the estate and real estate laws where the property is located.
This can help ensure that the deed is valid and that the property passes according to your intentions.
Adding someone to the deed may not be the best approach. Gifting, tax, creditor, long-term care, and control issues should all be considered first.
McDonald Law Firm can review the available options and help you create a plan that protects your interests and carries out your wishes for your loved ones.
To schedule a consultation, contact us:
- Howard County: 443-741-1088
- Montgomery County: 301-941-7809
- District of Columbia: 202-640-2133
DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL, INSURANCE, OR TAX ADVICE.
