REVOCABLE TRUST VS. BENEFICIARY DEED? When a person dies owning real property in his or her name, probate may be required in order to transfer that property to the heirs of the deceased person. Because of the costs, delays and hassles associated with going through probate, many people desire to transfer, or to at least structure the future transfer of, their real property, prior to their deaths. Common methods of probate avoidance for real estate include the following:
1. Hold real property with a right of survivorship, either in joint tenancy or as community property;
2. Convey outright title to real estate by way of pre-death gift;
3. Establish a living revocable trust to own and hold real property; or
4. Use a beneficiary deed, deed upon death, or transfer on death deed (all synonyms referring to the same instrument) to make the transfer of real estate effective upon death.
As with all estate planning techniques, each of the above options carries with it potential burdens and benefits.
While using a joint tenancy or other titling options with rights of survivorship is sometimes to referred to as the “Poor Man’s Estate Plan” or “Home Spun Estate Planning”, this article will focus on the particulars and problems with using beneficiary deeds.
A Beneficiary Deed which will effectively transfer the real property to the named beneficiary upon the death of the grantor. These deeds are revocable, so that if the grantor changes her mind she may revoke the conveyance. To be effective these Beneficiary Deeds, as they are sometimes called, must be recorded prior to the death of the grantor.
While Deeds upon Death may initially appear to be less expensive than establishing and using a revocable trust, there are many downsides which ought to be considered prior to going down the Transfer on Death route. Some of these problems are as follows:
1. Transfer on death forms or deed upon death forms
Forms for beneficiary deeds are readily available online but may prove unreliable. Unless a grantor uses the correct language, as required by the Deed upon Death Act, the transfer will not be effective.
2. Difficult to get title insurance
Many title insurance companies are refusing to issue a title insurance policy until the new owner has owned the property for at least eighteen (18) months after the grantor’s death. If in such case, the beneficiary desires to sell the property soon after the grantor’s death, especially to a non-cash buyer, the new buyer may have problems obtaining title insurance, and, therefore, may have problems borrowing money to buy the property, seeing how most mortgage companies require title insurance before making a loan. It is possible that probate can be done to rectify this situation, but this, of course, defeats the purpose of the transfer on death deed which was to avoid probate.
3. Vulnerability to claims by grantor’s creditors
Some States allow the creditors of the grantor’s probate estate to enforce their liabilities against a property transferred pursuant to a deed upon death for up to 18 months following the grantor’s death.
4. Vulnerability to claims by beneficiary’s creditors
As the creditors of the grantor may have increased opportunity to attach the real estate being transferred by way of beneficiary deed, so also might the creditors of the beneficiary be able to attack the property upon the death of the grantor. For example, in the event a beneficiary is going through a divorce, bankruptcy, insolvency or has a large judgment against them, the related creditors in those actions may be able to legally attach and take the value of such real property.
5. Real Property Transfer Taxes
When the deed upon death is recorded there is no real estate transfer fee at that time. However, when the grantor dies and the new owner (the beneficiary) files his “Death of Grantor Affidavit,” there will be a real property transfer tax due unless the beneficiary and the grantor are not husband and wife or parent and child. In the alternative, using a living revocable trust will help the beneficiary avoid the payment of real property transfer tax, regardless of the beneficiary’s relationship to the grantor.
6. Beneficiaries do not handle contingencies well
The transfer upon death deed does not provide for solutions to contingencies in the same way a revocable trust can. For example, a trust will generally specify that upon Mom’s passing, any trust property, including real estate, will instead be distributed to Son, and if Son does not survive Mom, it is instead to be given to the children of Son. Moreover, trusts can provided that distributions to minor children, or anyone else who may be incapacitated or vulnerable, will not be made until such beneficiaries attain certain ages, levels of education, or other benchmarks denoting maturity and sensibility. Beneficiary deeds do not have these same capabilities built in and therefore, a transfer by deed upon death might be soon wasted or spent by a spendthrift child or otherwise vulnerable beneficiary. While trusts may cost a bit more in the beginning, they unusually provide greater flexibility and savings in the long-run.
Because of the potential problems that a beneficiary of a Deed on Death might face, it is recommended that a person speak with a lawyer prior to drafting, signing or recording a deed upon death. Many options for transfer of real property on death exist. In the proper circumstance, a lawyer might recommend that the deed upon death is right for you. In other cases, as described above, other options might be preferable.