A beneficiary deed is a property deed that keeps legal title in the current owner’s name (or owners’ names) but, upon the death of a property owner(s), immediately transfers title to predetermined beneficiaries (oftentimes a living trust). This can be a very good thing – the home will not be subjected to the time-consuming, costly probate process. However, there are a number of other reasons why our office prefers to use beneficiary deeds to transfer title to Arizona real estate (as opposed to transferring title now, usually to a living trust that we’ve created for a client); the beneficiary deed route helps to avoid the many potential detriments of an immediate transfer:
- If the property is not your personal residence and there is a loan on the property that has an acceleration clause (most do), the lender may call the loan upon the transfer to your trust. This has not been an issue for many years because, with current interest rates being lower than existing loan interest rates, lenders have had little incentive to accelerate loans. However, as we enter what appears to be an era of rising interest rates, lenders will likely have an increased incentive to accelerate loans and force homeowners to either accept an inflated interest rate or sell the real estate that was transferred to your trust;
- Should any owner ever need to apply for long term care benefits to afford a skilled nursing facility (current average cost in Maricopa County is about $7,000/month), ALTCS (Arizona’s version of Medicaid) will disregard the value of the home in determining eligibility for the benefit. However, if the home is owned by a trust, ALTCS views the home as a countable resource which may disqualify the applicant;
- Upon transfer to a trust, there is no legal authority that the $150,000 homestead protection from creditors applies to trust-owned property;
- Some older title insurance policies provide an immediate transfer invalidates the current policy and a new, costly policy may be required;
- In Arizona, there is a “speculative builder tax” which exempts individual homeowners. Currently, the state takes the position that trust-owned property does not qualify for the exemption. This substantial tax can be triggered by a home improvement project.
As with any good strategy, there are trade-offs to consider. That being said, I’ve only ever heard of three draw backs to utilizing a beneficiary deed to create a “delayed transfer” to a revocable living trust: (1) a perceived loss of control of the property during a period of disability, (2) potential revocation of the trust, and, (3) in the event a married couple executes a beneficiary deed, there is a possibility that a surviving spouse may revoke the beneficiary deed after losing his/her spouse. For the following reasons, though, I do not believe these three alleged draw backs render the technique a risky one:
- Should a client voice concern over losing control of the property during a potential disability period (which, in theory, could render the client unable to manage the property), I explain that, in 42 years of practicing law, I have never had a problem utilizing the power of attorney to allow a pre-determined loved one to manage the real estate under such circumstances.
- If a client revokes a trust that was originally the recipient of property under beneficiary deed planning, the revoking client will almost always be creating a new estate plan which addresses the still-held property. Even under a scenario where a client completely dissolves the original estate plan and doesn’t replace it, he/she is no worse off as the property would then be owned directly in the client’s name with no beneficiary in place (just as would have been the case if the property had originally been placed in the trust originally).
- For those expressing concern regarding a spouse altering an estate plan’s beneficiaries if he/she should die first, we would never implement the use of a beneficiary deed in the first place.
In summary, I believe that, in most cases, implementing a beneficiary deed transfer to a revocable living trust is superior to deeding the Arizona real estate directly to the trust immediately.