Like a number of other states, Arizona permits a real estate owner to sign a deed that transfers property automatically at death. This type of deed, often referred to as a “beneficiary deed,” is revocable during life, but can help avoid the probate process on the death of the owner. So does that mean every Arizona property owner should sign a beneficiary deed?
Not necessarily. Though we recommend that clients sign beneficiary deeds in lots of cases, they are not the right estate planning choice for every property owner. In fact, we urge clients to sign beneficiary deeds far less often than we recommend other alternatives.
We see a lot of interest in beneficiary deeds, and we encourage clients to consider the option. To help explain what a beneficiary deed is and when it might be appropriate, we’ve provided more information in our FAQ section, and on our YouTube channel:
So when is a beneficiary deed most likely to be an appropriate choice? Here are some of the likely suspects:
The family home
A beneficiary deed can be used for any real estate in Arizona. The family home is the most common subject of a beneficiary deed, however.
If you own multiple pieces of real estate, or investment properties, the beneficiary deed likely will not be as suitable for you. Why not?
If you own several parcels of real estate, you are likely to have a more complicated estate. That might mean you ought to consider a living trust. You should also think about establishing some entity to own the property — and maybe a separate entity for each piece of property. A limited liability company (LLC) or family limited partnership (FLP) will not be able to sign a beneficiary deed.
Even if those two possibilities aren’t on your agenda, there is another reality to consider. If you buy and sell real estate regularly, you are unlikely to own the same parcels at your death. It might make your estate very confused if you designate individual properties for different beneficiaries, and changes in property values or parcels might adjust your estate plan without you even thinking about it.
If you own multiple parcels of real estate, let’s talk through what you actually want to accomplish and get the structure of your estate plan figured out. The beneficiary deed is unlikely to be the way to do that.
One or two children of a single person
Can a married couple use a beneficiary deed to transfer the family home to eight children in equal shares? Sure — but we don’t recommend it.
What’s wrong with naming all of your children as joint owners of your home? Well, let’s start with the obvious follow-up question: how well do they get along? Because they will effectively be partners in the management, clean-up and sale of the property you leave them. Will they all agree on whether it needs a new roof before being listed for sale? Can each write a check for their share of that roof? What if they have to oust the one grandchild who is living in the house by that time — will all agree and act?
No one likes to think about the deaths of their children, but the reality is that sometimes a child dies first. Will your surviving children all get along with a deceased child’s children (your grandchildren)? You can see that larger families can lead to more complicated problems. That’s why we urge you to put one child in charge and let them handle the entire estate. You might even want to choose someone other than a family member. All that might mean a probate proceeding, or a trust you establish — either is likely to be a better outcome than using a beneficiary deed.
Can a couple use a beneficiary deed that only becomes effective upon the second death? Yes — that’s precisely how beneficiary deeds work. The surviving spouse can revoke the beneficiary deed, change the beneficiary or even sell or give away the property. If you intend to lock in your estate plan after the first death, the beneficiary deed won’t accomplish your goal.
Small estate
If you are not particularly wealthy, and your home is your largest asset, you are a better candidate for a beneficiary deed. Why? Because it is then easy to avoid probate altogether.
Mind you, probate avoidance may not be as important as you have been told. Probate proceedings are actually far less commonly needed than people think. The cost and difficulty is also less than most people believe. But still, it would be nice to avoid probate — particularly if it is easy. When your estate is small, and your plans easy to capsulize, a beneficiary deed can help accomplish your goal.
Uncomplicated estates
The flip side of small estates: uncomplicated estates. By that we mean that everything is going to a small number of individuals, and it will be an outright distribution.
No one ever comes to us and says “I’d like to have you prepare a complicated estate plan for me.” Quite the reverse — most people insist that all they want is a “simple” will. We’ve written about this misconception before, but the point here is that when your estate plan truly is simple, you might be a good candidate for a beneficiary deed.
What would make your estate plan (dare we say it) complicated? Do you want to divide your estate among your three children in unequal percentages? Will you put one child’s share in a spendthrift or special needs trust? You may have begun to describe a more complicated estate plan. And that might mean you should not rely on a beneficiary deed.
Living trusts
A beneficiary deed is often an alternative to a living trust arrangement. It can also sometimes be a part of trust planning.
If you establish a revocable living trust, you ordinarily put all of your assets in the trust — a process called trust “funding.” There might be good reasons you’d rather not transfer your real estate into the trust’s name. In that case, the beneficiary deed might be a part of your estate planning and trust.
We hope this helps you understand the Arizona beneficiary deed. We look forward to discussing it further during your office visit.
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