Mountain Law: Real estate transfers before death (column)
December 27, 2016
Aaron wants to leave his condo to his sister, Becky, when he dies. While he could simply leave the property to her in his will, he does not want her to have to go through the legal process known as probate after he dies and he does not otherwise have any assets that would require probate. Can he transfer the property to her during his lifetime in a way that would avoid probate while retaining possession of it until his death? Yes, there are three methods and various considerations for their use.
The first is for Aaron to deed to the property to Becky while reserving to himself a "life estate." The deed would be delivered and recorded the same as any other deed (and would be ineffective if Aaron doesn't deliver the deed to Becky during his lifetime). This type of conveyance utilizes a regular deed form adding after the description of the property words to the effect of, "expressly reserving to grantor, however, the entire use and possession of said unit, and all appurtenances thereto, and all rents and profits therefrom, for and during his life." This type of deed is a "present conveyance," which means it transfers title immediately. That could be a problem if Aaron and Becky get in a fight at Christmas dinner and Aaron wants to revoke the deed. A present conveyance may also have adverse tax consequences for Becky that could possibly be avoided if title transfers to her only upon Aaron's death.
The second method would be by the creation of what is technically known as a "springing use." This is also done by deed and would involve inserting into the granting clause in the deed words to the effect of, "immediately upon the death of the grantor but not at any earlier time." The result would be that title remains in Aaron until his death, at which time the title would transfer to Becky like a coiled spring. Such deed would not be a present conveyance but also could not be revoked by Aaron if desired.
The third method would be the use of a "transfer on death deed" or "beneficiary deed." By statutory definition, a beneficiary deed is a deed, "subject to revocation by the owner, which conveys an interest in real property and which contains language that the conveyance is to be effective upon the death of the owner…" Colorado statutes provide a specific form for beneficiary deeds. One advantage of beneficiary deeds is that, unlike the types of deeds discussed above, they are revocable at any time before death by recording a notice of revocation or giving a beneficiary deed for the same property to a different person. Beneficiary deeds have the disadvantage that they render the grantor (Aaron) ineligible for Medicaid benefits.
There are special rules for using beneficiary deeds if the grantor holds title as a joint tenant (rather than a tenant in common). If Aaron owns the condo as a joint tenant with Clarice, then Aaron's beneficiary deed to Becky will be effective only if Aaron dies after Clarice. If Aaron dies first, then his interest will transfer to Clarice on death because of the joint tenancy and Aaron's deed to Becky will be ineffective. In other words, joint tenancy takes precedence over any beneficiary deed and Aaron's use of a beneficiary deed would not "sever" the joint tenancy and render he and Clarice tenants in common.
In sum, there are three ways to transfer interests in real property during a person's lifetime and avoid probate while retaining possession until death and each has its own considerations.
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Noah Klug is owner of The Klug Law Firm, LLC, in Summit County, Colorado. He may be reached at 970-468-4953 or Noah@TheKlugLawFirm.com.
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