“Should I Quitclaim My House to My Kids?”

“Should I Quitclaim My House to My Kids?”

I was asked this question recently at a social event, followed by the explanation that “someone told me that if I just add my adult kids to my house with a quitclaim deed, I can avoid probate.” Like most “do-it-yourself” estate planning ideas, there is a nugget of accurate information buried in the advice that “someone” gave. But the issue is much more complex than the questioner realizes, and the advice that was given is full of potential hazards.

Probably the biggest hazard, and the one that is most well known in general, is the negative income tax effect that usually results because of carry-over of the transferor’s tax basis in the property.

This post concerns a different hazard, one that receives much less discussion – the potential effect on the $25,000 homestead exemption. This is a very general discussion. It is not meant to be an exhaustive treatment of this issue. If you need advice about the your particular homestead question, please speak with me or another estate planning attorney.

As my post of May 28 explained, homestead law is actually a series of laws covering three different characteristics of a person’s homestead: 1) tax exemption, 2) creditor protection, and 3) transfer restrictions. All three of these areas can potentially be impacted when there are joint owners of the homestead. This post will cover only the impact on the $25,000 tax exemption allowed by Florida’s Constitution.

As a starting point, let’s recall that to qualify for the $25,000 homestead exemption, the property owner must be a permanent Florida resident, must own and occupy the property as his/her permanent residence, and must hold legal or equitable title to the property.

For example, if a single Florida resident, “Wanda Widow” owned and resided in her home, she would qualify for the homestead tax exemption.

Section 196.031 of the Florida Statutes explains how the $25,000 tax exemption applies to co-owners of homestead property, and makes a distinction between co-owners that have a right of survivorship and those that do not.

If the property is titled to the co-owners as either tenants by the entirety (available only to married persons) or as joint tenants with right of survivorship, if at least one of the co-owners qualifies for the homestead tax exemption, he or she is permitted the entire exemption amount.

So if Wanda got married, and added her new spouse “Howard” as a “tenant by the entireties” owner, Wanda would be able to claim the entire $25,000 tax exemption, even if Howard did not also live in the house, and therefore was not himself eligible for the exemption.

As another example, Wanda would also be entitled to claim the entire exemption if she remained single but added her children, “Able” “Baker,” and “Charlie” as co-owners of the property, if Able, Baker and Charlie held title with Wanda as joint tenants with the right of survivorship. This is true even if Able, Baker and Charlie do not live in the property. As long as title is held in a manner that the co-owners enjoy a right of survivorship, and as long as one of the co-owners is eligible for the homestead exemption, that co-owner can claim the entire exemption.

The result is different if the co-owners do not hold title in a manner that does not include a right of survivorship. For example, if Wanda added her children “as tenants in common,” she could claim only up to her proportionate interest in the assessed value of property.

To illustrate, if Wanda, Able, Baker, and Charlie own the property equally as tenants in common, and the assessed value of the property is $80,000, Wanda will only be able to claim up to her one-fourth interest, or $20,000. She cannot claim the entire $25,000 exemption.

An important fact that may not be commonly known is that this will also be the result if the deed is not specific, and simply says that the grantees are Wanda, Able, Baker, and Charlie. Tenancy in common is the default method of joint ownership, and will be presumed unless the deed specifically conveys a right of survivorship. Also, although tenant-in-common ownership may be held in unequal shares (for example, Wanda can hold a 70% interest, and Able, Baker, and Charlie can each hold a 10% interest), if the deed of conveyance is not specific, a presumption exists of equal ownership.

A completely different example also illustrates this issue. If Mom and Dad want to buy a home for Junior, and Junior alone plans to make the home his homestead, if the property will be held as tenants in common, Mom and Dad must be sure to gift Junior a high enough percentage of ownership in order for Junior to claim the full amount of the homestead tax exemption.

As mentioned at the beginning of this post, there are many potential issues that arise through joint ownership of homestead property. The potential effect on the homestead tax exemption is just one item that is often not clearly understood. This one example illustrates the potential hazards of do-it-yourself planning – you don’t know what you don’t know. So when you receive casual planning advice like the advice that I was asked about recently – please, just say no. Plan only with professional advice.

Sheryl J. Manning, PL.
1104 Ponce de Leon Blvd
Coral Gables, Fl 33134
(786) 804-3456 Direct Line
(305) 445-3721 Receptionist

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