What Is a Beneficiary Deed?
A beneficiary deed, sometimes called a transfer-on-death deed, can be an effective estate planning tool that allows real estate to pass to heirs without need of probate and with some possible tax benefits. Unfortunately, beneficiary deeds are not available in every state.
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How It Works
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The beneficiary's name is added to the deed before the original owner dies. However, the owner retains all rights to the property, including the right to sell or rent it without approval of beneficiaries. Upon the owner's death, beneficiaries automatically gain control and ownership of the property, including responsibility for satisfying any mortgages or liens.
Purpose
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Beneficiary deeds were enacted to avoid leaving real estate tied up in probate or subject to the interpretation of a will but without creating unnecessary entanglements for property owners during their lifetimes.
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Availability
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At the start of 2010, beneficiary deeds could be created in only 12 states: Arizona, Arkansas, Colorado, Kansas, Minnesota, Missouri, Montana, Nevada, New Mexico, Ohio, Oklahoma and Wisconsin. Details on setting up beneficiary deeds vary from state to state.
Tax Advantages
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A beneficiary deed does not exempt real estate from inclusion in estate tax considerations, but the transfer-on-death characteristic provides a stepped-up capital gains tax basis for the beneficiary. Simply adding another name to the deed during the original owner's lifetime does not change the capital gains tax basis on the property and could produce gift-tax issues.
Medicaid Complications
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A person's home generally is not considered an asset in determining Medicaid qualification. However, some states have passed laws to allow nonprobate assets—including property passed through a beneficiary deed—to be drawn back to the estate in order to recover Medicaid payments.
Ending Beneficiary Deeds
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The original owner, or a properly executed power of attorney, can revoke a beneficiary deed at any time for any reason.
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