Written by Mesa Estate Planning Attorney Rilus Dana
Beneficiary deeds are a relatively new tool, created in 2001 by Arizona Revised Statutes Section 33-405 which allow owners of real property to transfer their property interests upon their death.
Benefits of beneficiary deeds:
- Avoids probate – Probate is the legal process of changing title of assets from the deceased person’s name into the rightful beneficiary’s name. Beneficiary deeds transfer the title upon the death of the owner of the real estate and avoids probate
- Reduces liability – Yes, you can avoid probate by putting your children’s names on your house, but this raises two issues: (1) making a gift and (2) liability (both discussed below).
- A beneficiary deed is not a gift since there is not a transfer until the property owner passes away. Simply adding your children’s name to your deed is making a gift and creates a gift tax liability.
- If you have your children on the title of your home, your house is at risk from all of their potential creditors. Your children are angels so you aren’t worried, right? What about their spouses? I have seen situations where liens and judgments were placed upon a house because a woman had her daughter on the title to her home. Her daughter’s husband was sued and had a judgment placed against him. The son-in-law was also behind on taxes so a tax lien was placed on the house. Even though the son-in-law’s name wasn’t on the title, there were two liens placed on his mother-in-law’s home because of the community property laws in AZ. Now you consider your kids are single or they have “good” spouses, right? Do they drive? A car accident can be one of the most common causes of liability. If someone is seriously injured or killed, the claims can easily go beyond the insurance limits, thereby allowing the injured person to use an attorney who is trained to look for assets. A piece of real estate with good equity is a nice target for attorneys since they know it will be easy to secure their fees by putting a lien on the property.
- Owners maintain control of property – Do you know the golden rule? No, not that one. The real golden rule is he who has the gold makes the rules. I have seen situations where parents put their children’s names on the deed, and then later down the road for some unforeseen circumstances, parents are now wanting to sell the house and the children refuse. With a beneficiary deed, the owners can sell or encumber the property without any restrictions. Mom and Dad can also revoke the beneficiary deed at any time.
- Cheaper than a trust – If all of your assets can avoid probate except for some real property, then a beneficiary deed can be a good alternative to a revocable trust for avoiding probate.
Drawbacks of beneficiary deeds.
- No central management – If your three kids are named as the beneficiaries on the deed, then all three of them become the owners upon your death. I have seen situations where one child wants to sell the house, another wants to keep it and rent it out for income, and the other child wants to move into the house. Since all three kids are equal owners, they all have an equal say and ultimately have to work it out. If there will be several owners of a property or you can foresee some potential conflict or disagreement on what should be done with the property, I recommend using a trust. With a trust, you can name one or two people that are in charge of making decisions.
- Minor beneficiaries – If the beneficiaries are children, then it creates a problem leaving an interest outright to them. Someone will have to be appointed as their Guardian and Conservator through the courts to manage their interest for them. A trust is a better option when minor beneficiaries are involved since it can manage the interests for the children until they reach a certain age.
- Surviving spouse can revoke – If you have children from a prior relationship, the surviving spouse has the ability to make changes to the beneficiary deed after your death and leave everything to his or her children, a new boyfriend or girlfriend, or whoever he or she chooses. A carefully drafted trust can avoid this problem.
Good estate planning is not one size fits all. Every family and situation is different. If you can avoid probate with a beneficiary deed, then it is a great tool. If you have several properties and assets that will trigger a probate, then I usually recommend a trust as a way to avoid probate. If you already have a trust, I usually recommend sticking with the trust as a way to avoid probate rather than a beneficiary deed. I am by no means a Trust salesman. My clients are often surprised when I recommend that they do a beneficiary deed instead of a trust. In many situations a trust is not worth the extra expense if planning goals can be met with a beneficiary deed. Please feel free to schedule your free consultation to discuss which option is best for your family.