What Is a Beneficiary Deed?
A beneficiary deed, also known as a transfer-on-death deed, is a way to transfer property to family members or a beneficiary of your choosing upon your passing. This method allows the property asset to transfer directly to the designated beneficiary once the owner has died. In general, a beneficiary deed is used as a way to avoid probate.
A beneficiary deed can be utilized as a way to remove a specific property asset from a probate estate. If the grantor of a will decides to transfer that asset in a manner different from what is dictated in their will, a beneficiary deed can remove that asset from probate and from the directions of the will to transfer it directly to the beneficiary upon the grantor’s death.
Note that the beneficiary deed itself does not serve as a completed gift. Rather, the grantor continues ownership of the property until their passing and retains the option to revoke the deed up until this point. When the transfer does occur, the beneficiary inherits the property with a stepped-up basis, which is the market value of the property at the time of the grantor’s death.
Beneficiary Deed: Advantages vs. Disadvantages
For many, the main advantage of a beneficiary deed is the ability to avoid probate court. Usually, anytime you can forego the complicated probate process while ensuring that your direct wishes are carried out is a welcome thing. Note, however, that this only applies to the specific property asset and not to other assets in your name.
There are a few disadvantages or warnings to be aware of when it comes to beneficiary deeds, as well. For starters, if you own property with a spouse in joint tenancy, be aware that joint tenancy will take precedence over the beneficiary deed.
Another aspect to note is that when using a beneficiary deed you have the option of naming multiple owners to the property. On the one hand this can be useful, say for example you wanted to pass your house onto your children. On the other hand, however, there is the potential for complexity, as each beneficiary named has an equal ownership share in the property. For example, all of your children would then have to agree on what to do with the property.
In the state of Colorado, be aware that a beneficiary deed can affect your Medicaid eligibility. In the event that you require an extended stay in a skilled nursing facility, you may need to sell the property to pay for expenses or revoke the beneficiary deed.
Comparing Beneficiary Deeds to Other Property Transfer Methods
There are a number of different methods available to you when it comes to transferring property and avoiding probate. In addition to beneficiary deeds, some common methods are quitclaim deeds, joint tenancies, and life estates. We’ll take a look at each in comparison to beneficiary deeds to give you a sense of which might work best for you.
Beneficiary Deed vs. Quitclaim Deed
A quitclaim deed is a method used for transferring real estate ownership from one party to another. In this case, the grantor releases their interest in the property over to the designated grantee.
There are a number of potential pitfalls using a quitclaim deed, however. By releasing control of the property, there is the unfortunate potential for eviction by either the grantee or subsequent successors. There may also be tax consequences for the grantee or claims made on the property if the grantee has financial problems. Beneficiary deeds, on the other hand, avoid all of these unfavorable possibilities.
Beneficiary Deed vs. Life Estate
The last method for transferring property we’ll look at is a life estate, which is also known as a life tenant or tenant for life. A life estate is a form of joint ownership that grants one individual full use of their property until their passing. At this point, the property passes to the other owner. A life estate will allow you to avoid probate, so long as the life estate is the sole property.
Note, however, that there are some drawbacks with a life estate. Similar to with a joint tenancy, life estates can only be changed or undone with the agreement of the life tenant and the beneficiaries. Additionally, a life estate’s tax basis is first created with the determination of interest or legal right to property. So, there is the possibility that the property value depreciates over the lifetime of the tenant. In this case, a beneficiary deed would avoid these drawbacks.
Beneficiary Deed vs. Joint Tenancy
Joint tenancy is another method for transferring real estate that is commonly used by married couples. Joint tenants hold an equal share in the property, so when one owner passes away, the remaining owner(s) inherit the deceased’s interest in the property.
While joint tenancies work well for married couples, there are a number of disadvantages that can arise when applied outside of a spousal relationship. Once created, the ownership interests cannot be undone or transferred unless in the event of death or an agreement by all owners. Whereas beneficiary deeds, on the other hand, are revocable.
Also, joint tenancy can be a risky move to implement with third parties. If one owner is experiencing financial difficulties, their creditors could place a lien on the property or force it to be sold. Beneficiary deeds do not have this problem, as they do not create any interest in the property until after the grantor’s death.