Beneficiary Deeds: A Probate Avoidance Technique
Colorado permits the use of beneficiary deeds to avoid probate in the transfer of real property. (Beneficiary deeds are also known as transfer-on-death deeds.) A beneficiary deed does not take control of the property away from the grantor. The grantor can change the beneficiary of the deed or revoke the beneficiary deed at any time prior to his or her death. In essence, a gift through a beneficiary deed does not vest (take effect) until the grantor’s death. This means that the grantee-beneficiary’s creditors cannot access the property during the grantor’s lifetime.
Grantor’s Creditors
A beneficiary deed does not shelter the property from the grantor’s creditors, however. The grantor’s creditors can still access the property prior to the grantor’s death. Furthermore, after his death, a grantor’s creditors may be able to bring the property into the probate estate if the probate assets are insufficient to satisfy the creditor’s claims. If this occurs, the property will not transfer to the grantee-beneficiary. If, however, there are no issues with creditors, the property will transfer to the grantee-beneficiary free of probate.
Tax consequences
The execution of a beneficiary deed in and of itself has no tax consequences when executed and recorded. Tax consequences, if any, take effect upon the death of the grantor. At this time, the property becomes part of the grantor’s estate for gift tax purposes. The grantee-beneficiary will, however, get a step-up in basis when the property transfers. Additionally, a beneficiary deed will not prevent the property from being considered as a part of the grantor’s assets under the Medicaid rules. The grantor may need to “spend down” the property prior to qualifying for Medicaid.
Deed form
The form of a beneficiary deed is similar to any deed that transfers real property. It, too, will be recorded with the recorder’s office in the county where the property is held. Similarly, any changes to or a revocation of the deed will be recorded. The grantor does not need to notify a beneficiary of the deed or, for that matter, of any changes or revocations to the deed.
Joint tenancy
A grantor may execute a beneficiary deed even though he owns property as a joint tenant. However, for the property to pass to the grantee-beneficiary, the grantor must be the last joint tenant to die. For example, in a property owned by two joint tenants, if the grantor passes before the joint tenant, the grantor’s interest will not pass pursuant to the beneficiary deed. Instead, it will pass to the other joint tenant under rights of survivorship. If, on the other hand, the grantor passes after the other joint tenant, the grantor will take full title to the property under the rights of survivorship. Thereafter, the title will pass under any beneficiary deed the grantor may have recorded prior to his death (or, for that matter, prior to the death of the joint tenant).