Beneficiary Deeds

-William D. Clements, Esq.-

 

            Beneficiary deeds, or “transfer on death” deeds, are a relatively new estate planning tool available in a growing number of states. Arkansas enacted legislation in 2005 which permits landowners to convey real property interests via beneficiary deed. Although not advisable in all cases, these deeds offer some attractive advantages for clients desiring to avoid probate. This article will briefly explain what beneficiary deeds are, explore some of the pros and cons of using them, and conclude with guidance on when and how they might best be utilized.

 

            Generally speaking, deeds are the legal instruments by which real property interests are conveyed or transferred from one person to another. The most common examples are warranty and quitclaim deeds. From an estate planning perspective, the drawback to using these traditional deeds is that they effectuate an immediate transfer of the property, which might not be desirable for a number of reasons. Beneficiary deeds, on the other hand, do not transfer any interest in the property until the grantor’s death[1].

 

Pros:

 

            Beneficiary deeds are will substitutes. That is, they convey property after death outside the terms of a will or intestacy laws (which apply when there is no will). As such, the property is not considered part of the probate estate and can pass automatically without the need for court proceedings.

 

Because a beneficiary deed does not convey any interest in the property while the grantor is still alive, he retains full control over the property. He is free to sell, transfer, mortgage, or otherwise convey or encumber the property without having to answer to the grantee.

 

            Property transferred at the time of death may be entitled to a “stepped-up basis.” That is, the grantee takes the property at current market value, not the value the grantor originally paid (plus improvements). This is important if/when the grantee decides to sell the property. Without stepped-up basis for valuation, the gain the grantee would realize from selling the property would be the difference between current market value and what was originally paid (plus improvements) – which could be a huge difference and result in substantial taxes if the property had been purchased decades earlier. With stepped-up basis for valuation, the realized gain would be much smaller[2].

 

Cons:

 

            There is no estate tax advantage to transferring property via beneficiary deed. Although the property is considered removed from the grantor’s probate estate, it is not removed from his/her taxable estate – he/she still owns it, therefore his/her estate might owe taxes on it.

 

            There are no real asset protection advantages to using beneficiary deeds. The property will remain vulnerable to claims by the grantor’s creditors[3], and will become vulnerable to the grantee’s creditors upon the grantor’s death. Limited protection from the grantee’s creditors is possible due to the fact that if the grantee experiences financial trouble before the grantor’s death, the grantor is free to change the beneficiary, or place the property in an asset protection trust.

 

When to use beneficiary deeds:

 

            A beneficiary deed might be preferable to a trust in the following circumstances:

 

·        The primary/only concern is avoiding probate;

·        The grantor does not want to maintain any level of control over the property after his/her death;

·        The grantor is not concerned about the threat of creditor attacks;

·        The costs of a trust outweigh the potential benefits (rare), or render the trust unaffordable.

 

 

 

 

This article is intended for general information purposes only and should not be taken as legal advice. You should speak to a licensed attorney before attempting to use any of the information contained in this article.

 

 

[1] If the property is owned by more than one grantor, the transfer will not occur until the death of the last surviving grantor.

[2] If the property is sold immediately for market value, the gain could in fact be $0 for tax purposes.

[3] Limited protection may be available under the Homestead Exemption Act.

 

Copyright 2010. All rights reserved.