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You can name beneficiaries on real estate,
but should you?

Traditionally homes and other real estate required probate after the death of the owner, unless another person was added to the title with a current ownership interest such as joint tenant or life estate. Estate planning can avoid probate through the use of a revocable living trust. But the convenience of naming a beneficiary on assets such as bank accounts and life interest was not available for real estate.

Minnesota law effective August 1, 2008, created a new Transfer on Death Deed ("TODD"). Special deed forms allow one or more beneficiaries to be named on specific parcels of real estate. The TODD is effective upon recording in the county's real estate records. Upon the owner's death, title transfers to the beneficiary upon recording a death certificate and affidavit. A Clearance Certificate must also be obtained from the county regarding possible public assistance liens or claims.

This new estate planning tool is simple and convenient. It has several benefits in addition to avoiding probate. The TODD does not give the beneficiary any current interest in the real estate, so the owner retains full control including selling or mortgaging the property. The TODD can be revoked by the owner. No adverse income or gift tax issues are created, and under current law the property qualifies for stepped up basis.

However, the TODD should be used with caution and only with the assistance of an estate planning attorney. Several potential problems may arise. First, the law contains numerous technical requirements that must be met for the TODD to be effective. For example, the owner's spouse must consent on the deed even if the spouse does not have an ownership interest. Second, the description of one or more beneficiaries or successor beneficiaries must be very carefully drafted to avoid creating conflicting or ambiguous language. Third, minors or persons with disabilities should not normally be named as beneficiaries. Fourth, the initial TODD or revocation of a TODD must be properly executed and recorded prior to the owner's death. Fifth, the accurate legal description of the property must be ascertained and shown on the TODD.

Caution should be used in naming multiple beneficiaries. An example may be helpful. A home owned by a husband and wife (or surviving spouse) is the only asset that would be subject to probate. They wish to avoid probate. If they have one adult child who has no disabilities or special concerns, a TODD may work well to pass the home to the child following their death. However, if they have several children the TODD may not be a good solution. If title passes to multiple children after the parents' death, sale of the property requires the agreement and signature of each child and each child's spouse on every step in the process-selection of real estate agent, asking price, negotiations, execution of purchase agreement and execution of closing documents. If the children live in different states obtaining signatures will be inconvenient. Obtaining the necessary agreement may be difficult or impossible in some families. If a child has died or become incapacitated more difficulties may exist. Proceeds of the home will not be available for other desired purposes such as gifts to grandchildren or charities, payment of estate expenses or adjustments in gifts to the children resulting in unequal shares.

In situations such as this example, the more traditional estate planning tools of a revocable living trust or simple Will with probate may be better choices. The personal representative or trustee selected by the parents will have full authority to sell the property, and after payment of expenses and fulfillment of other applicable provisions of the estate plan, the proceeds can be distributed to the children in accordance with directions in the plan.

As in any legal matter, you should consult with an attorney for specific legal advice for your own circumstances. Contact Berg Law Offices, P.A. to discuss your estate planning needs, and to determine if a Transfer on Death Deed is appropriate for you.