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  • Writer's pictureDavid Krueger

WHAT IS A TRANSFER ON DEATH DEED AND DO I NEED ONE?



Since 2004, Kansas has allowed families to use beneficiary deeds, also known as transfer on death deeds, to transfer real property without the need of probate.  Although the use of beneficiary deeds has become common and is a cost effective way to transfer property at death, in many cases such deeds should not be used in place of a comprehensive estate plan. 

Basics of a Transfer on Death Deed

 

A transfer on death deed states that upon your death ownership in your home or real estate automatically transfers to your designated beneficiaries without the need of probate.  When you execute a beneficiary deed you continue as the owner of the property during your lifetime.  You effectively maintain the ability to do what you want with the property and can at any time revoke the transfer on death deed. 

 

There are several technical requirements for a beneficiary deed to be valid in Kansas.  The deed must use language such as “conveys on death” or “transfers on death” or similar provisions that makes it clear that the ownership transfer is only to be effective on the death of the owner.  A beneficiary deed must also be recorded prior to the death of the owner in the office of the clerk and recorder in the county where the property is located.


Potential Tax Benefit of a Transfer on Death Deed

 

Because a beneficiary deed allows you to retain control and exercise ownership rights over your property during your lifetime, a transfer on death deed is not considered a “completed gift” by the IRS and will allow the property to enjoy the benefits of stepped-up tax basis at death.

 

When a transfer of property occurs at death through a beneficiary deed, the heir takes the property with a stepped-up tax basis.  This means that when the heir ultimately sells the property, the potential “gain” for income tax purposes is only the increase in appreciation of the property from the date of death transfer date.

 

For example, assume your mother bought her home thirty years ago for $150,000.  Fortunately, the home has appreciated to a current value of $350,000.  Your mother now wants to use a beneficiary deed to transfer ownership of her home to you at her death outside of the probate process.  A transfer on death deed would allow you to inherit the home at your mother’s death with a tax basis of $350,000 (the original $150,000 tax basis would be stepped-up to the date of death value).  If you were to sell the home two years after your mother’s death for $400,000, you would only have to pay income taxes on the $50,000 of gain/appreciation that occurred after your mother’s death. 

 

In comparison, if you mother had deeded or gifted you the home during her lifetime, you would receive a carry-over tax basis in the home (your tax basis would be the same as your mother’s tax basis of the original purchase price of $150,000).  Because you did not receive a stepped-up tax basis in the home, selling the home after your mother’s death for $400,000 would trigger a gain of $250,000 that would be reported and taxed on your tax return in the year of the home sale.

 

 Drawbacks of Transfer on Death Deeds

 

Joint tenancy takes precedence over a transfer on death deed.  If a property is owned in joint tenancy, a beneficiary deed is ineffective.  In joint tenancy when one of the owners dies, that owner’s interest in the property automatically passes to the surviving joint tenant owners. 

 

A beneficiary deed that names multiple recipients as the new owners of real property upon the death of the current owner can have negative consequences.  For example, if you want to leave your home to your three children, a beneficiary deed will give each child equal rights to the home.  That means that all three children will need to come to a consensus as to whether the home should be sold, when it should be sold and what is a fair selling price.  If instead you used a will or trust to leave the home proceeds to your children, a personal representative or trustee would have the authority to make those decisions without requiring a consensus from all three children.  In addition, if one of your children dies before you, upon your death only your two remaining children named in the beneficiary deed (and not any of your grandchildren from your deceased child) would be the owners of your home and benefit from the future sale proceeds of your home.


Another potential disadvantage of a beneficiary deed is that under Kansas law the maker of a beneficiary deed becomes ineligible for Medicaid benefits. The Kansas statutes specifically state:  “No person who is an applicant for or recipient of medical assistance . . . shall be entitled to such medical assistance if the person has in effect a beneficiary deed.” 

 

If you are using transfer on death deeds as part of your overall estate planning, you should make sure to also include a power of attorney document with language that grants someone the authority to revoke the beneficiary deed, as it is sometimes possible to revoke a beneficiary deed to qualify for Medicaid benefits.

 

Summary

 

If you are confident you do not have other assets that will need to be probated, a beneficiary deed is a cost effective way to transfer real property to your family or heirs outside of probate.  However, without careful consideration, a transfer on death can have unintended consequences, including potential disqualification of Medicaid benefits. 



PLEASE CONTACT US IF YOU HAVE QUESTIONS REGARDING TRANSFER ON DEATH DEEDS, OR IF YOU NEED ASSISTANCE WITH PLANNING TO AVOID OR MINIMIZE PROBATE. 



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