In this periodic series of posts, we examine various tools that can be used in estate planning to transfer assets without going through the probate process. Today, we look at the beneficiary deed, referred to as the transfer on death deed in Texas. This special type of deed can be executed during the life of the grantor to distribute real property assets upon death. See C.R.S. §15-15-404 (2019); Texas Estates Code § 114.001.
There are several advantages in using a beneficiary deed to transfer real property to intended grantee-beneficiaries. The obvious benefit is that the current owner retains full control and enjoyment of the property. In addition, the beneficiary deed can easily be revoked at any time during the life of the owner. With regard to taxes, at least in Colorado, the owner-grantor avoids paying a gift tax by transferring title at death, and the value of the property at the owner’s death typically receives a stepped-up basis, minimizing the capital gains the beneficiary must pay.1
A beneficiary deed must comply with all the requirements of an ordinary deed. The beneficiary deed must contain very particular legal language and must be recorded with the clerk and recorder’s office in the county where the real property mineral interest is located. Colo. Rev. Stat. § 15-15-404 (2019). Texas Estates Code § 114.055. In particular, accurately describing the property to be conveyed is vitally important. Drafters need to rely upon property descriptions contained in prior deeds. When the property description is in question a survey may be needed to determine the precise description. A certified death certificate, accompanied by a supplemental affidavit, must also be recorded for title to transfer. Colo. Rev. Stat. § 15-15-413 (2019). In Texas, the holder of a power of attorney may not execute the beneficiary deed on behalf of the grantor. Texas Estates Code § 114.054.
Transfer on Death deeds can have drawbacks in certain situations as well. While the grantee-beneficiary takes title to the real property subject to all encumbrances —like mortgages, deeds of trust and leases—the grantee-beneficiary may disclaim all or any part of the real property and will not be liable for any encumbrances if they do so. Colo. Rev. Stat. § 15-15-407(2) (2019); Colo. Rev. Stat. § 15-15-414 (2019). Texas Estate Codes § 114.104. A beneficiary deed may not be the right tool to convey real property and mineral interests if an owner is planning on qualifying for Medicaid, if there are undefined grantee-beneficiaries, or if estate liabilities exceed assets.2 In many situations, however, the beneficiary deed can be an effective tool. If you are interested in learning whether the beneficiary deed may work for your estate planning needs, please consult a professional to more fully evaluate your individual circumstances.
photo courtesy of Kid Circus at Unsplash.com
1 See Practical Considerations in the Use of Colorado Beneficiary Deeds, 44 Colo. Law. 41 (Jan. 2015).