Beneficiary Deeds: Simple and Inexpensive ... but Not Quite Perfect for All Situations

If you own Arizona real estate and wish to leave it upon your death to a specific person, a beneficiary deed might be the best way to achieve your objective.

A beneficiary deed is a type of real property deed used to transfer property upon the death of the owner. When the owner dies, their real property interest is automatically conveyed to the beneficiary named in the deed.

A beneficiary deed works in much the same way as a "transfer on death" (TOD) or "payable on death" (POD) designation on a bank account.

Creating a beneficiary deed is relatively simple and inexpensive, but it involves an understanding of certain legal requirements. For example, in order to be effective, a beneficiary deed must be:

• recorded in the county where the property is located,
• before the death of the property owner.

For most other types of deeds, recording with the county is not a prerequisite to the effectiveness of the transfer. That is not the case with a beneficiary deed.

(In Arizona, the laws governing Arizona beneficiary deeds are contained in A.R.S. § 33-405. In many other states, this type of document is known as a "TOD deed" or "deed upon death.")

Advantages of a Beneficiary Deed

There are many benefits associated with use of beneficiary deeds, including these:

• A beneficiary deed is simpler and much less expensive than setting up a trust.
• A beneficiary deed goes into effect only upon the death of the owner.
• Until that time, the owner can easily revoke or revise the beneficiary deed at any time, and the owner retains all rights of ownership, including selling, developing and encumbering the property.
• With a beneficiary deed, the transfer of ownership occurs outside of probate.

Drawbacks

While a beneficiary deed is a popular option for many owners of Arizona real estate, it is not a panacea and is not the best choice in all situations. For example:

• A beneficiary deed is public record, as it must be recorded in the county in which the real property is located.
• The real property that was transferred via beneficiary deed is included in the decedent's assets for the purpose of estate taxation, if applicable.
• For persons with complex estates, business interests and financial exposure, a simple beneficiary deed will not provide the legal protections that are found in a properly drafted trust or other more sophisticated planning strategies.
• A beneficiary deed does not provide a means for satisfying any loans against the property. While the property may pass to the beneficiary outside of probate, dealing with an existing mortgage might have to be accomplished within the probate environment. Also, the beneficiary may not be financially able to handle the debt that encumbers the property.
• If the beneficiary has special needs for which they receive government benefits, taking direct ownership of a piece of property can threaten their eligibility. (This situation does not rule out the use of a beneficiary deed; rather, it might warrant the creation of a trust to serve as the recipient of the conveyed property.)
• Similarly, if the beneficiary is going through a divorce, bankruptcy or other legal proceeding, the sudden and unexpected possession of real property could upset carefully crafted strategies designed to achieve an important legal objective.

An Important Ingredient - But Not the Whole Recipe

In helping clients design their estate plans, we commonly include the use of beneficiary deeds as a way to transfer real property interests.

However, in most instances, a beneficiary deed is not a separate device; rather, it is a useful component of a comprehensive estate plan that addresses the nature of the client's estate, the client's specific objectives, and the situations and needs of the children, grandchildren and other parties to whom they wish to leave their assets.