The Guide to Beneficiary Deeds

A will might seem like the simplest way to leave something to a loved one or other beneficiary, and it’s certainly the most common, but wills must be probated. This necessitates a lengthy process that can slow the transfer of property from a decedent to a beneficiary; it also opens the door to will disputes that can add further delays. Special deeds, sometimes called transfer-on-death (TOD) deeds, simplify the transfer, but they come with their own set of potential legal issues. 

Understanding Beneficiary Deeds

Simply put, a beneficiary deed allows a real property owner to execute a deed that transfers the title to the property to a beneficiary upon the death of the grantor. The deed does not alter the owner’s current interest in the property, and it is simple to modify, offering additional protections and customization options. If the owner sells the property prior to his or her death, the deed automatically terminates.

Not all states allow these deeds, since the lack of a probate process can make it difficult to track and account for the property transfers. And if you do live in a state that authorizes the use of beneficiary deeds, you’ll have to follow your state’s specific requirements and procedures for the deed to be valid and executable.

A beneficiary deed doesn’t have to transfer to just one person. In most states, a grantor has two options for transferring the property to multiple parties. He or she can transfer the property as a joint tenancy with the right of survivorship. In such a scenario, if one beneficiary dies, his or her share will transfer to the other beneficiary or beneficiaries. Alternatively, grantors can transfer the property as a tenancy in common. With this distribution scheme, upon the death of one of the beneficiaries, his or her share will transfer according to the terms of his or her will—not the will of the grantor. In this scenario, the beneficiary can avoid probate by signing a subsequent beneficiary deed transferring the property either to an heir or to the other beneficiary.

Benefits of Beneficiary Deeds

Beneficiary deeds are highly convenient, and for most grantors, this is their primary appeal. In addition to helping beneficiaries avoid the probate process, beneficiary deeds also offer the following benefits:

• A rapid transfer of property, which can be particularly helpful for a needy family member, if the property is tied to a family business, or the property has strong sentimental value.

• Creates no present interest in the real property, which means that the grantor still owns the property free and clear, and can revoke the deed at any time.

• Reduced costs associated with probating a will and managing a loved one’s deaths; in some states, probating a will can be extremely expensive, particularly if will disputes arise.

• Some protection from manipulation by unscrupulous relatives. With a beneficiary deed, relatives cannot ask an ailing family member to transfer the property “just in case.” This protects the owner’s current interest in his or her property, even when dementia or other cognitive issues are a problem.

• The deed can be created and filed even when there is a loan on the property, and the lender does not have to be notified of the deed’s execution.

• Flexibility: a grantor can assign a beneficiary deed to one or more parties.

Drawbacks of Beneficiary Deeds

Like all deeds, beneficiary deeds aren’t right for everyone. Some of the risks of transferring property in this way include:

• They don’t require a lawyer, and because they’re fairly simple to execute, many grantors may not consult a lawyer. If the deed is legally insufficient, contains the wrong information, or is not properly filed, it could become null and void.

• Beneficiary deeds can still be challenged, so if there is no will or other supporting documentation associated with the will, this can lead to a messy and protracted dispute.

• Issues with title insurance. If there are ambiguities in the deed or in ownership, title insurance companies might be reluctant to issue insurance.

• A deed cannot substitute for a will.

Do All States Allow Beneficiary Deeds?

About half of all states allow beneficiary deeds, but state laws are constantly changing, so check with a lawyer before beginning the process of creating a beneficiary deed. 

Though state laws governing who can use a beneficiary deed and in what circumstances vary slightly, one thing remains true across all states: you do not have to be a state resident to execute a beneficiary deed. You need only own property in that state. You cannot, however, use a beneficiary deed just because you are currently located in a state. For instance, you can’t travel from Georgia to Arkansas to sign a beneficiary deed for Georgia property The property—and the deeds you can use to transfer it—is governed by the laws of the state in which it is located.

Because every state has its own set of procedures to execute and make legally sufficient a beneficiary deed, it’s wise to consult with local counsel before you begin the process. You’ll always have to file the deed in the clerk’s office; an unfiled deed is legally insufficient.

In Missouri, for example, the beneficiary deed must be filed with the Recorder of Deeds office in the county in which the property is located. Property is only transferred upon the owner’s death, or if there are multiple owners, upon the death of the last remaining owner. Grantors can change the deed by filing a new beneficiary deed. Grantors can also revoke the deed outright by filing a revocation of beneficiary deed. The deed, though, will remain in full effect until such time as it is revoked.

Can a Beneficiary Deed Be Revoked?

A beneficiary deed can be revoked, but only by replacing or revoking the deed itself. You cannot change a beneficiary deed by adding a clause to your will. Indeed, doing so can lead to a long, protracted, and highly costly will fight.

Beneficiary deeds do not confer any interest in the property until your death, which means that the grantee cannot fight your revocation of the deed. There are three options for revoking your beneficiary deed, and while state laws addressing how to proceed are quite similar, every state sets slightly different filing requirements, so it’s critical to consult with a lawyer and carefully review your state’s laws. Your options are:

•Transferring the property to someone else. A quit claim deed, for instance, will transfer the property to another party, nullifying the beneficiary deed. Note that you can only transfer the property to someone else while you are still alive; a deed that transfers the property upon your death can create a hazy legal picture that gives rise to a fight over the property.

• Recording a new beneficiary deed. The most recently recorded beneficiary deed is the one with legal weight, so if you simply want to transfer the property to someone else—or make minor modifications to a standing beneficiary deed—recording a new deed may be your best option.

• Filing a revocation of the deed in your county clerk’s office; state procedures for doing so vary slightly, but you’ll generally have to use a specific form, or follow language outlined in a statute.

Grantor’s Rights

A beneficiary deed is an appealing option to grantors because it protects their rights to the property, and offers very few rights to the grantee. A grantor can revoke a beneficiary deed at any time,even without telling the grantee. The grantor also maintains his or her property rights to the home. A grantor cannot sell the property, enter the property, or make decisions about the property; ownership only transfers upon the death of the grantor, and prior to that time, the grantor maintains all rights to the property in question.

Grantee’s Rights

The beneficiary or recipient of the property is known as the grantee. Unlike in some other property transfer scenarios, grantees have almost no rights. Instead, a beneficiary deed creates an interest in the property only upon the death of the grantor, at which time the title immediately transfers to the grantee and confers ownership. Prior to this time, grantees have no claim to the property, no right to make decisions regarding the property, and no option to dispute decisions made by the grantor—including decisions about changing the grantee.

What if the Grantee Dies First?

If the grantee—the beneficiary of the deed—dies first, what happens next depends on the terms of the deed itself. In most states, the title to the property will go to the grantor’s heirs—not the grantee’s. If the grantee’s heirs are also heirs for the grantor, though, the property will transfer to them—usually to be evenly divided among the heirs.

However, grantees generally have some discretion regarding the execution of the deed. A grantor can add a clause specifying that the property does not go to his or her heirs, or may add language revoking the beneficiary deed entirely if the grantee dies first. In such a scenario, the property will then transfer to the heirs outlined in the grantor’s will, or if no such heirs exist, shall be distributed according to the state’s guidelines for death without a will.

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