Wednesday, November 5, 2014

The Beneficiary Deed – Is It Right for You?

It is common knowledge that the purpose of a Will is to ensure assets are distributed according to a person’s wishes upon his or her death. In addition, many people will go a step further, perhaps upon the advice of their attorney or accountant, and have a trust prepared to help avoid the sometimes lengthy legal process of probate, as well as potentially help minimize or avoid federal estate tax; however, in Arizona, there exists another effective, yet lesser known, estate planning tool called a “beneficiary deed.” 

A beneficiary deed is a deed to real property that specifies who should receive ownership of the real estate upon the death of the current property owner. The designated beneficiary can be either an individual or it can identify multiple beneficiaries. A beneficiary deed can also designate a successor beneficiary. For instance, you may provide that your home goes to your son, but if he predeceases you, the property goes to your brother. In order to be effective, the beneficiary deed must be executed in accordance with the law and recorded in the office of the county recorder of the county in which the property is located prior to the death of the property owner.  Further, the person designated to receive the property need not sign the document, nor are they required to receive notice that they have been designated as a beneficiary.

A property owner may also change or revoke a beneficiary deed, even if it has already been recorded.  If there are co-owners of the property, the beneficiary deed can be revoked by any of the owners who signed the deed initially. A beneficiary deed will not prevent using the property to secure a loan, and will not prevent the owner from selling his or her home.

In addition to the above described flexibility, another advantage of utilizing a beneficiary deed is the fact that the real estate passes to the individual designated without having to go through probate, much like it would if a trust were prepared; however, a beneficiary deed can be generated more quickly and less expensively than preparing a trust. The beneficiary deed also has advantages over gifting property to a family member or friend prior to death, as it permits the owner to maintain control of the property, and avoid gift tax liability.  It also allows the recipient to get the stepped up basis, up to the value of the property, at the time of your death. 

Depending on the individual situation, there are also potential disadvantages to using a beneficiary deed. For instance, if the beneficiary to whom an owner intends to leave the property is a minor, it may be better to have a trust created, allowing the trustee to oversee and maintain the property until the minor reaches an appropriate age. Another potential drawback to using a beneficiary deed in lieu of a trust is that the property remains as part of the estate for purposes of calculating the value for estate taxes.  Although the foregoing may be a non-issue for those whose estate value does not exceed the current exemption amount of $5,340,000, for those whose estate exceeds the current exemption amount, this is something to consider.

The above references are not intended to be an exhaustive list of the pros and cons of beneficiary deeds. Contact an estate planning attorney to discuss your individual circumstances before deciding how best to proceed to determine the best plans to satisfy your individual estate planning needs.


*Garrett Olexa is a member of the law firm of Jennings, Strouss & Salmon, PLC. His practice includes estate planning and estate planning litigation.  Mr. Olexa can be contacted at golexa@jsslaw.com or 623.878.2222.
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