Using Pocket Deeds to Avoid Probate
A pocket deed is a deed that is signed during a person’s life but not recorded in the land records until after the person dies. This planning technique (if it can be called that) is intended to accomplish the two goals we identified in our discussion of avoiding probate with deeds:
- Retained Control – Unrecorded deeds allow the transferor to retain control of the property during his lifetime. Since the unrecorded deed isn’t a matter of public record, the transferor is still the record owner of the property. If the deed stays in his possession, he can even destroy the deed if he changes his mind.
- Avoiding Probate – The recording of the deed after the transferor’s death is intended to avoid probate. If it works (that’s a big assumption), the transfer will be treated as being effective when the deed was signed and the property won’t be included in the transferor’s probate estate.
These two goals are very common, but a pocket deed is always a bad way to accomplish them. Here are a few reasons why.
Unrecorded Deeds Can Create a Cloud on Title
Under the laws of most jurisdictions, a deed is not effective until it has been properly signed and delivered. The delivery requirement is important. Just signing the deed is not enough to complete the transfer.
In ordinary real estate transfers, the deed is delivered and recorded at the time of the conveyance. But with pocket deeds, the deed is not recorded. There is no proof of delivery. This raises a number of questions: Was the deed delivered to the transferee at all? Can it be proved? Who is to say that the transferee didn’t find it after the transferor’s death?
Questions like these can create a cloud on title, meaning that title insurers will not write a policy on the property without some legal action to clear things up. The transferee would have every incentive to claim that the deed was delivered before the transferor died, and the transferor isn’t around to say otherwise. In these circumstances, title companies may be reluctant to simply accept the transferee’s word that the deed was properly delivered prior to the transferor’s death.
In some situations, a title company will simply presume that there was valid delivery. But conservative title companies may require a declaratory action to quiet title before it will issue a policy on the property. An action to quiet title will convert the transferee’s statements regarding delivery to legal testimony in a declaratory action, after publication and notice to anyone who may claim otherwise. Only then can the title company be sure that there aren’t any competing claims to the property.
If a title company will not write a policy on the property without a declaratory action, the transferee’s title to the property is unmarketable. The transferee will be unable to sell, mortgage, or otherwise deal with the property until the title issue is resolved. The legal fees for bringing an action to quiet title are usually more expensive and time-consuming than proper planning on the front end.
Unrecorded Deeds Can Give Creditors a Lien on the Property
An unrecorded deed does not put third-party creditors on notice that the property has been transferred. This means that the transferor’s creditors (including creditors of his or her estate) may put a lien on the property. This leaves the transferee open to a claim by the transferor’s creditors. If that happens, the transferee would need a legal action to deal with the lien.
Unrecorded Deeds Can Create Tax Issues
Pocket deeds can create bad tax consequences. Assuming that the transferor does not have an estate that is taxable for Federal transfer tax purposes (i.e., assuming the transferor’s estate is worth less than $12.92 million under 2023 law), it is usually better from a tax perspective for the transferor to hold onto the property until death. This will give the transferee a full stepped-up basis in the real estate, effectively erasing any appreciation that accrued while the transferor owned the property. This can result in significant income tax savings. This tax planning opportunity forfeited when a pocket deed is signed during the transferor’s lifetime.
In addition, the transferor is required to file a federal gift tax return (Form 709) for any transfer of property that exceeds the annual exclusion amount ($17,000 under 2023 law). Since most real estate is worth more than $15,000, the transferor is usually required to file this return when the pocket deed is actually signed. The hassle and expense of filing the Form 709 can be avoided by holding the property until death.
Unrecorded Deeds Don’t Always Avoid Probate
Unrecorded deeds don’t always avoid probate. Say, for example, that the recording laws change after the transferor signs the deed. This can make the deed unrecordable at a later date. Similar issues arise if the deed is misplaced, destroyed, or hidden by an interested party. Probate may be required to straighten out the botched conveyance, often at a much greater cost than a simple probate proceeding. These risks are simply not worth the perceived savings.
There’s a Better Way
If unrecorded deeds were the only way to allow the grantor to retain control over the property and still avoid probate, they may be worth the risk in very limited circumstances. But they aren’t the only way. Lady bird deeds (also called enhanced life estate deeds) and TOD deeds can accomplish these same goals with less risk. Even in states that don’t recognize lady bird deeds or TOD deeds, a traditional life estate deed or living trust is still a better choice than a pocket deed. There’s no reason to ever use a pocket deed as an estate planning tool.