Pros and Cons of Transfer on Death or Beneficiary Deed
Using a transfer-on-death deed is a lot like using a payable-on-death (POD) designation for a bank account. You name one or more beneficiaries now, who then inherit the property at your death without the need for probate court proceedings. Does this estate planning option make sense for your situation?
You will first need to establish if a Beneficiary Deed is available in your state since not all states have adopted this deed of transfer for property. Currently the states that we are aware offer beneficiary deeds are Arizona, Arkansas, Colorado, Indiana, Kansas, Nevada, New Mexico, Ohio, Wisconsin, Minnesota, Montana and Oklahoma. Generally, Beneficiary Deeds are utilized more often in smaller estates which allow an individual to transfer the property immediately upon death without having to go through probate. However, this may make sense in other estates but we strongly encourage the advice of a professional estate attorney and/or tax advisor in all circumstances. A Beneficiary deed takes effect once it is recorded in the county real estate records and may be changed at any time at the direction of the owner. The recipient may also disclaim any or all of the property if they wish and would not assume any liability in association with the property. In the deed, you can also name an alternate beneficiary who will inherit the real estate if your first choice isn't alive at your death.
A beneficiary deed does not allow the transfer of assets for the purposes of Medicaid planning and the reduction of assets.
If you anticipate any estate tax liability, you may consider purchasing a life insurance policy in the estimated amount of tax liability to offset the tax incurred.
Generally, the information that needs to be filed is as follows:
• It must be notarized and filed before death of the property owner.
• It must describe the property and its instrument number.
• It must describe the portion of the property being transferred.
• It must state whether or not you are married. If you are, your spouse must sign the affidavit also.
• It must name the beneficiary and/or alternate beneficiary and their contact address (You may also designate multiple beneficiaries and varying percentages at your discretion)
Here is a scenario that would make more sense to do a beneficary deed than to add a child as a joint tenant.
Widow owns a house that she bought for $50,000 which is worth $250,000. widow puts daughter on the deed as a joint and survivor benefit to avoid probate. Daughter is married. (Either before or after the house is put in joint and survivor deed.) Here are the issues:
• Daughter now owns a portion of the house. If Widow wants to sell house she needs signature of daughter and daughter's spouse.
• If widow had owned the house in her own name and sold the house there would be no income tax. Since she owns the house in joint and survivor ownership, the daughter could owe Federal and state income taxes on the sale of approximately $20,000.
• If daughter has any debt problems, daughter's ½ of house could be subject to creditor claims. The creditor could force the sale of the house.
- Easily transfers a property asset through beneficiary and avoids probate.
- Allows owner to retain full ownership of the property until death.
- Revisions to the beneficiary may easily be made through revocation or additional filing.
- Reduces estate value for purposes of attorney fees or probate fees.
- Since your beneficiaries have no present interest in the real estate, any legal action such as bankruptcy, divorce, lawsuits, or judgments brought against any designated beneficiary will not affect your real estate. Your beneficiary’s creditor cannot place a lien on your property. Your beneficiary also will not be able to transfer, mortgage, or pledge his or her interest in your property during your lifetime (unlike if it is a joint tenant)
- The asset is still subject to estate taxes.
- A beneficiary deed does not protect the asset from your own credit liabilities since you maintain full ownership of the property. (unlike trusts which can provide protection from creditors)
- It does not exempt your real property from inclusion in assets available to determine your Medicaid eligibility for nursing home care or in-home assistance under Medicaid programs.
- Since the asset does not pass through probate it may be more vulnerable to beneficiary disputes if you are anticipating disagreements.
- If the beneficiary pre-deceases the owner it is not automatically transferred to their heirs, therefore you would need to file a revocation or amendment to the beneficiary deed should that occur.
Once you fully understand the features and benefits of the Beneficiary Deed and through consultation this can be a very useful tool in your estate planning. This information is for informational purposes only and should not be understood as legal advice in any manner. Please consult with an estate attorney who can better understand your particular situation and can make appropriate recommendations.