What exactly is beneficiary deed? And how do they work? Trust & Will explains what you need to know about beneficiary deeds.
Head of Legal , Trust & Will
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There are many options when it comes to leaving property to a loved one. For instance, you may choose to bequeath your home to your child in your Will. In another instance, you could create a Trust and fund it with your home and other assets. Another option is to use a beneficiary deed to transfer property to your heirs. This guide will go over the purpose of a beneficiary deed, how it works, and additional information to help you decide whether this is the right real estate instrument for you.
A beneficiary deed is a type of deed that transfers property to a beneficiary. Most deeds transfer property in the present. In contrast, a beneficiary deed can be used to make arrangements today to pass down property in the future. More specifically, you can use it to transfer property to your beneficiary only in the event of your passing.
Note that beneficiary deeds are also often called transfer-on-death deeds. There are no major differences between these two deeds and their functions. The naming convention simply differs based on the state in which you live. One state’s laws pertaining to transferring property upon death may be called a beneficiary deed, while another state’s might be called a transfer-on-death deed or instrument. That being said, the specific application of the respective law may vary from state-to-state. This guide will provide an overview on the purpose and function of the beneficiary (a.k.a. the transfer-on-death) deed, but it’s always a good idea to understand how the law is applied in your state, as there may be some nuances.
The key purpose of a beneficiary deed is to transfer real estate to your heir in the future, and not in the present moment. The secondary (and also key) purpose is to keep your property outside of probate.
If you simply leave your property to your heir in a Will, then that property will be subject to probate. This process can take months, and court fees can eat several percentage points into your loved one’s inheritance. This also means that your loved one won’t have immediate access to the property. Naturally, most people want to avoid that. Luckily, using a beneficiary deed means that the property doesn’t have to go through probate.
Beneficiary deeds are also popular because you get to retain full interest in your property during your lifetime. This means that you’re still the bonafide owner of your own house, as long as you’re alive. Even with a beneficiary deed, you can still do what you want with the property. Should you choose to sell the property, or take out a home equity loan, you can do so without having to obtain anyone’s permission.
Now let’s get into the nuts and bolts of how a beneficiary deed works. You would obtain a new deed for your house that states that you are granting permission to bequeath the property in the event of your death. You can sign the deed today, even if you do not plan to pass away any time soon.
The deed goes into effect upon your passing. In the meantime, you maintain full ownership of your property, so you can choose to sell it or mortgage it if you’d like. Luckily, the beneficiary deed is revocable, meaning that you can make changes to it. If you end up deciding to sell the property, or change your mind about who you want to leave it to, you can always revoke your current deed and make a new one. This flexibility gives many homeowners a great peace of mind.
Note that beneficiary deeds are a bit more complex if you're not the sole owner of the property. If you jointly own your property with another individual, such as your spouse, then the property won’t pass immediately after your passing. Ownership will be retained by any existing co-owners. When the last surviving owner passes away, then the property will automatically transfer to the named beneficiary.
Recording the beneficiary deed won’t incur real estate transfer taxes or a gift tax because you technically aren’t transferring the property during your lifetime.
A beneficiary deed is not the same as a Trust. A Trust is a fiduciary arrangement into which you place your assets. Then, you name a third party who manages and controls these assets on your behalf.
Both Trusts and beneficiary deeds are popular tools that allow you to avoid probate. However, you get more control over timing when using a Trust. Based on the terms you set up for the Trust, you can make the call about when you would want to pass real estate to your beneficiary. You can also put into place certain conditions or criteria that must be met before your beneficiary can inherit your house, or exceptions when they shouldn’t.
When it comes to a beneficiary deed, the real estate passes automatically to your beneficiary with your death as the triggering event. If you have reasons for which you wouldn’t want your house to go to your beneficiary immediately upon your passing, or you don’t feel sure, then a Trust might be a better option.
Yes, a beneficiary deed avoids probate. This is actually one of the key reasons for which beneficiary deeds are so popular. Because your interest in the property passes automatically to your beneficiary upon your passing, the property technically isn’t included as a part of your estate.
Remember, only assets and property included in your estate go through probate. This is why Trusts are such a popular estate planning instrument as well. This is because you can proactively transfer interest in your personal property and property into the Trust. You can also do the same thing by creating a beneficiary deed specifically for your real estate, unless you choose to transfer your real estate into a Trust as well.
Either way, by removing your property from your personal estate, you get to avoid probate. This can serve as a significant benefit to your loved ones. Grieving a loss is difficult enough; having to deal with months of complex probate proceedings can be tough. On top of that, probate fees can cost between 3 to 7 percent of your estate value. Anything you can do to avoid probate is worth it.
Creating a beneficiary deed may sound complicated in nature, but the process is surprisingly straightforward. Here are the steps you can take to create your beneficiary deed:
1. Research your state’s real estate laws pertaining to whether or not you should be creating a transfer-on-death or beneficiary deed. Remember, this is an issue of naming conventions, as both types of deeds serve the same purpose.
2. Draft your new deed. You may be able to find online forms and templates through your state government website, as well as online estate planning platforms.
3. Write down your name exactly as it appears on your current deed. Including your mailing address.
4. Write down the legal description of your property, including the lot number. Your current deed should have the legal description of the property, including a geographical description, its precise location, boundaries, and any easements. If you have any issue locating your property’s legal description, you can look it up through your county clerk or tax assessor’s office. Most offer online directories.
5. Name your beneficiaries, using their full legal name and mailing addresses.
6. Ensure that your deed includes the verbiage that the property should be transferred upon your death to your named beneficiary or beneficiaries.
7. Double-check your deed to ensure its accuracy and completion.
8. Sign your deed and have it notarized.
9. Submit your deed to your local county office; a filing fee may be required.
Mentioned in the previous section, creating a beneficiary deed is a straightforward process. You can make your life easier by using an online template or form that you can use to simply fill out any custom information.
Simply conduct a search by entering the search terms “beneficiary deed” and the state in which you live. You should find a number of free and at-cost forms and templates provided by nonprofit and for-profit legal services and platforms.
Mind your due diligence and make sure that the resource you select is legitimate and well-respected.
A beneficiary deed is a great way to transfer your real estate interest to a loved one outside of probate. You can create your deed today and have peace of mind knowing that the transfer will happen automatically upon your passing. You’ll retain full ownership and control of the property during your lifetime. Even better, your loved one will inherit property ownership quickly. Because you get to avoid probate court, you can rest assured that your loved one won’t have to wait for months, or pay costly fees, before they can get your home.
Keep in mind that a Trust is another great estate planning tool that can be used to transfer property outside probate court. If for any reason you wish to place any conditions or criteria on your inheritance, then a Trust could be a better option for you. For more information, be sure to visit our guide on how to transfer real estate into a Trust.
Both Trusts and beneficiary deeds are viable instruments for protecting your assets. Today, we talked about how a beneficiary deed can help you protect and transfer your real estate property. However, don’t forget that you have other types of property and assets that deserve protection. By setting up an estate plan, you can make sure that all of your estate gets passed to your loved ones in the way that you would want. We are happy to support you in your quest to establish your estate plan! For those interested in setting up a Will as a first step, next. Once you’ve set up a Will, we strongly recommend our members to set up a Trust for further protection. All of our services are easy to use and affordable.
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