What is a Beneficiary Deed and When Should It Be Used?

Section 15-15-401 et seq. of the Colorado Revised Statutes authorize the execution and recording of “beneficiary deeds” in Colorado. Beneficiary deed forms are set forth in C.R.S. 15-15-404. A beneficiary deed is a conveyance of an interest in real property which is revocable, and which becomes effective upon the death of the grantor, or, if there are multiple grantors, upon the death of the last surviving grantor. It can only be used by an individual – trusts cannot grant valid beneficiary deeds (Fischbach v. Holzberlein, App.2009, 215 P.3d 407). A beneficiary deed is generally used for avoidance of probate, although it may be used to remove a particular property from a probate estate. If the grantor’s will provides for a certain distribution of assets held in the probate estate, and she decides that one or more parcels of real estate should be transferred differently, she can employ a beneficiary deed to remove that property from the probate estate and from the directions set forth in her will. The only title requirement to transfer property upon the death of the grantor or grantors is the recording of death certificates for all grantors. Revocation of a beneficiary deed must comply with the statutory requirements of C.R.S. 15-15-405: “An owner may revoke a beneficiary deed by executing an instrument that describes the real property affected, that revokes the deed, and that is recorded prior to the death of the owner in the office of the clerk and recorder in the county where the real property is located. The joinder, signature, consent, agreement of, or notice to, the grantee-beneficiary is not required for the revocation to be effective.” A form of revocation is provided in the statute.

Advantages of a Beneficiary Deed over Quitclaim Deeds, Joint Tenancies and Life Estates

There are several ways to handle the transfer of real property to avoid probate, or to create rights of ownership that arise upon the death of a grantor. I often am asked about quitclaim deeds to relatives, joint tenancies and life estates.

Quitclaim Deeds v. Beneficiary Deeds.

I am often asked about the advisability of using quitclaim deeds to children or other parties to avoid probate. This is almost always a bad idea. Control of the property is surrendered by the grantor, and she may be evicted by the grantee or his successors. If the grantee has financial problems his creditors or bankruptcy trustees may claim the property. There may also be unfavorable tax consequences for the grantee if the transfer is a gift (this is discussed below). Beneficiary deeds avoid all of these problems.

Joint Tenancies vs. Beneficiary Deeds.

A joint tenancy may be created which extinguishes a joint owner’s interest upon her death but allows her rights in the property during her lifetime. The only title requirement to confirm ownership of the surviving joint tenant is the recording of the deceased tenant’s death certificate. This form of ownership is very often used by married couples. There are serious disadvantages to the use of joint tenancy as an estate planning strategy for people other than spouses, however. Once a joint tenancy is created, the joint owners’ interests can only be extinguished by death of a tenant or by a voluntary transfer by one or both of the joint tenants. Beneficiary deeds are revocable, and if the grantor changes her mind, she can execute and record a revocation of the beneficiary deed.

In a joint tenancy, if one of the owners has financial problems, her creditors may be able to place a lien on the property, or a bankruptcy trustee may be able to force a sale of the property. It is very risky to form joint tenancies with third parties, and it may even be a problem with spouses if they have different financial circumstances. Beneficiary deeds create no interest in property for the beneficiary until the grantor’s death. The property will not be affected by the financial misfortunes of the beneficiary.

Creation of a joint tenancy without payment by a joint tenant who is receiving the interest is a completed gift from the grantor when the joint tenancy is created. When a gift is made, the donee receives the donor’s tax basis. In a typical situation, an elderly parent may create a joint tenancy with a child or grandchild of property that has been owned by the grantor for a long time, and its tax basis may be low compared to its value. After the grantor’s death, if the survivor sells the property, there may be substantial capital gains tax. Because beneficiary deeds are revocable, and the grantor maintains control of the property until she dies, no transfer of any interest in the property takes place until the death of the last surviving grantor. Under current tax law, this means that the beneficiary receives a “stepped-up basis” and the property is treated, for tax purposes, as though it were purchased by the beneficiary at its value as of the date of the grantor’s death, and capital gains tax is generally avoided.

Life Estates vs. Beneficiary Deeds.

Life estates are usually created by deeds with a reservation of the grantor’s right to occupy property and enjoy all rights of ownership until the grantor’s death. They may also be formed by wills or trusts. Life estates will eliminate probate if the only property of the life tenant is the property in the life estate; otherwise, they cause nothing but trouble. Fortunately, they are not very common any more.

Life estates have many disadvantages, and beneficiary deeds are much better for everyone involved. Like a joint tenancy, the only way a life estate can be changed or removed is with the cooperation of the life tenant and the remaindermen (the people who will obtain ownership when the life tenant dies). The tax basis of a life estate is determined when the interests are created, and since it must last the lifetime of the life tenant, it is often much less than the value at her death. A “future interest” is created in the remaindermen when the life estate is created, which means that they have something of value which creditors and bankruptcy trustees can attach even though the life tenant is still alive.

Since life estates cannot end until the death of the life tenant, the title transfer may not take place until long after the life tenant has left the property for a nursing home or other care facility. The property will be unmarketable unless the life tenant and the remaindermen cooperate to terminate the life estate by mutual conveyances. This, of course, is impossible if any of the parties has become incompetent. Life estates should almost always be avoided; Beneficiary deeds are better in every way.

Beneficiary deeds are a very useful innovation, and their advantages should always be considered as an estate planning strategy if the client’s objective is to avoid probate costs and to simplify transfers to her successors after her death.