The Downside of a Deed in the Drawer

Posted on: Thursday, January 3rd, 2019

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Sometimes the old ways are best.  But sometimes the old ways were never really all that smart.  Signing deeds and not recording them until after death is an old school approach to estate planning that was probably never a good idea, and an idea that has only become worse with time.

There are at least three common problems arise when someone pulls a deed out of the drawer of someone who has died.

The first problem arises out of a legal concept called “delivery.”  The law holds that a deed that is signed is not effective until it is “delivered.”  That means, until the deed is physically (or “constructively”) conveyed to the person to whom the property is being transferred, the conveyance is ineffective.   In other words, if you die and you never “delivered” the deed during life (i.e., you kept it in your desk drawer) litigation often arises as to whether the property was transferred at all.  That can be costly.

A second issue relates to the property taxes.  Deeds that purport to convey real estate on a date some years in the past, and which are then recorded when someone dies, are typically reviewed by the local city or township and their reaction is often to accept the deed but to determine that the property taxes that were paid on the property while the prior owner was alive are insufficient, and to demand that the new owners make up the shortfall.  This is because they will assert (probably correctly) that the taxes on the property were “uncapped” when the deed was signed.  That can be costly too.

Finally, there are capital gains taxes.  These are the taxes that are paid on the increase in value on property that occurs from the time it is purchased until the time it is sold.  An important issue in estate planning is to use the capital gains tax rule that allows these taxes to be avoided when property passes at the death of the owner.  Where a deed purports to convey real estate during life, regardless of the fact that it is recorded after their death, these favorable tax rules might be unavailable.  That also can cost a lot of money.

So, in conclusion, it’s rarely (if ever) a good plan to sign a deed to be held until after your death.  That’s an old school technique that has gone out of favor; nonetheless there are still some planners who use this approach and many deeds done long ago that remain in desk drawers.  If there’s an unrecorded deed in your desk drawer, talk to an estate planning attorney about how to avoid the costly problems that can arise as a result.

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