Using Colorado Beneficiary Deeds vs. Colorado Quitclaim Deeds To Avoid Probate: A Comparison
By Douglas A. Turner, Esq. • Jan 9th, 2008 • Category: Colorado Real Estate, Estate Planning & Colorado ProbateMany people try to avoid Colorado probate because of the perceived expense. To avoid a Colorado probate proceeding upon death, Colorado real and personal property must pass to the heirs by other means. In the case of real estate, Colorado quitclaim deeds (note: not “Colorado quit claim deeds”, as erroneously written at times) are often used. In most cases, however, the better alternative is a Colorado beneficiary deed.
The Colorado Quitclaim Deed
A Colorado quitclaim deed* transfers property from the current owner (the Grantor) to a new owner (the Grantee). To avoid probate, many people will quit claim the property from themselves to themselves and a child in joint tenancy. For example, A executes a Colorado quitclaim deed from A, as grantor, to A and child of A, as grantees, in joint tenancy with right of survivorship. Upon the death of the joint tenant, the real property passes to the surviving joint tenant, automatically. This technique is especially popular for vacation homes and timeshares.
The Disadvantages of a Quitclaim Deed in Colorado
The problems with using a Colorado quitclaim deed as a transfer on death deed are numerous. The transfer is considered a gift to the other joint tenant. In most cases, that gift does not trigger any transfer tax. However, a gift of more than $12,000.00 should be reported on a gift tax return. Under the wrong set of circumstances, this can result in either estate or gift tax being owed now or in the future.
Transferring real property to another by a Colorado quitclaim deed is a gift. A gift to a new owner does not get a stepped up basis for income tax purposes. At death, all property of the deceased is revalued for income tax purposes. For example, a home purchased 20 years ago for $100,000.00 and now worth $400,000.00 will have a new income tax basis of $400,000.00 on the day the owner dies. If the home is sold shortly after the death, there will be no capital gain reported on the sale. If that same home is transferred to the “heir” just before the owner dies, a sale shortly after death will result in a capital gain of $300,000.00. If the capital gain tax is 20%, that is a $60,000.00 tax bill incurred to avoid a $5,000.00 Colorado probate. Oops!
In some cases, a parent will execute a Colorado quitclaim deed putting the real property in joint tenancy with one of several children. The parent will then tell that child to sell the real property after the parent dies and split up the proceeds with the other children. This can cause conflict between the children. It is not unusual for the child on the deed to keep the property and not split any sale proceeds. Sometimes it is because the parent tells different children different versions of the “plan”. Sometimes it happens because the child on the deed just decides to keep the real estate or sale proceeds.
The creditors of a joint tenant can place a lien on real property. While a foreclosure sale of joint tenancy property can be difficult, it is a lien all the same, extending to the entire interest of the joint tenant. The lien will ultimately be satisfied when the parent dies. Keep in mind that the creditor is sometimes a soon-to-be ex-spouse.
The Colorado Beneficiary Deed: A Better Alternative
A Colorado beneficiary deed avoids many of the problems listed above. A Colorado beneficiary deed functions like a Colorado transfer on death deed and avoids Colorado probate. There is no gift during life; therefore, the real property receives a full step up in basis at death. No capital gain tax is owed. No gift tax is owed due to a transfer before death (although a federal estate tax may be owed if the estate is large enough). Instead of listing one child as a joint tenant, all the children can be named as beneficiaries. If a beneficiary has creditor problems or if a divorce is looming, that child’s share can be given to another child or perhaps held in a fully discretionary asset protection trust. Last but not least, the ultimate goal is still achieved – avoiding a Colorado probate of real property.
*Note: The proper name is Colorado quitclaim deed and not Colorado quit claim deed. However, several individuals still make the mistake of typing “Colorado quit claim deed” instead of “Colorado quitclaim deed”.
Douglas A. Turner, Esq..
This column is not legal advice nor does it create an attorney-client relationship with the reader. Due to limited space, complex legal concepts and rules may be stated in terms of general concepts.
Based on 2008 Colorado and Federal law. Consult legal counsel before acting on any information contained in this column.
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Two situations:
1. In 2005 I was not married and bought a condo. I have since married and would like to add my wife to the condo Deed; is a quitclaim deed sufficient?
2. In 2007 we bought a house, but she was not present to sign. I signed, but want to add her to the Deed; is a quitclaim deed sufficient?
Thanks,
Andy
Andy:
We cannot give legal advice in a public forum. If you would like to set up an appointment either in person or by phone to discuss the matter, please give us a call. There are some issues you should consider.
Douglas Turner
Thanks for the article. Wouldn’t a living revocable trust would give the same protection as a Colorado Beneficiary Deed plus provide some estate tax benefit too?
Well, like most law questions, it depends on the situation. In general, a revocable trust does not provide much asset protection or privacy when it comes to US real estate. It will thwart the novice collection lawyer, but not a good one. I also suggest looking at the article about bringing property back into an estate to pay bills, after death. That said, if the client already had a revocable trust and money was not an issue (costs little more to transfer to the trust), I would probably use the trust.
Well, like most law questions, it depends on the situation. In general, a revocable trust does not provide much asset protection or privacy when it comes to US real estate. It will thwart the novice collection lawyer, but not a good one. I also suggest looking at the article about bringing property back into an estate to pay bills, after death. That said, if the client already had a revocable trust and money was not an issue (costs little more to transfer to the trust), I would probably use the trust.
As for the estate tax issue, that is a separate issue. Common misconception is that a revocable trust provides some special estate tx benefits. It does not. About anything that can be accomplished through a revocable trust can be accomplished by other means, as well. That said, we use revocable trusts for the mor esophisticated plans for many reasons.
Hello, I’m in the military stationed in Virginia, I have a house in Cascade, CO that I rent. It was my primary residence while stationed in Colorado. It’s titled in my name only. Does my will in Virginia cover the property in Colorado or do I need a second Colorado will addressing disposition of this property? Or should I be considering a Colorado quitclaim or beneficiary deed that I keep filed with my Virginia estate planning documents?
Ms. Lundy:
Your will in Virginia “covers” your real property in Colorado. However, it will require a separate proceeding here in Colorado upon your death to deed the property to your heirs or sell the property. That seprate proceeding could be expensive and is not necessary. A better option might be a Colorado beneficiary deed for your Colorado real property. If you would like to discuss your situation in detail, please give me a call.
Douglas Turner, Esq.
If a nbeneficiary deed is recorded, and the grantor wants to sell the property, is he allowed to do so? does the beneficiary dedd lock up the property, or it is only valid AFTER the grantor dies?
Elizabeth:
A Colorado beneficiary deed passes NO interest in the real property until after the death of the current owner. The Colorado beneficiary deed does not “lock up” the property. In addition, the grantor of the Colorado beneficiary deed can revoke the Colorado beneficiary deed at any time.
I’ve been interested in taxations for lengthier then I care to acknowledge, both on the individual side (all my employed life!!) and from a legal viewpoint since satisfying the bar and following tax law. I’ve furnished a lot of advice and rectified a lot of wrongs, and I must say that what you’ve posted makes utter sense. Please persist in the good work – the more individuals know the better they’ll be equipped to comprehend with the tax man, and that’s what it’s all about.
Can title companies prepare and record beneficiary deeds at a home closing or does that specific deed have to be recorded later? Are attorneys only allowed to prepare beneficiary deeds? Thanks,
Craig:
Good question. I can give you my opinion, but it is only that – my opinion.
I doubt a Colorado title company will prepare a Colorado beneficiary deed because is not a necessary part of providing title insurance. There is a court case from many years back where the Colorado court held that a Colorado title company is not practicing law when it prepares a warranty deed for a residential home sale. That is the issue – whether it is considered the practice of law. I do not think the beneficiary deed falls within that exception. It is probably considered the practice of law.
The above said (1) ask your title company. Never hurts to ask. (2) At the time of sale, that would be a good time to have the lawyer prepare the Colorado beneficiary deed because the proper legal description is in the title work. It will be less expensive and the title company will probably send the Colorado beneficiary deed in for recording along with the warranty deed.
I’m curious as to when a lender of real property is assigned the beneficiary status with the deed of trust? I would think it’s right away. I bought a property in Arlington VA a few years ago, from a broker lender, and it is found on the MERS system where MERS is listed as the beneficiary. MERS is not the lender; however, they they have rights to foreclose without any interest in the property or being a true beneficiary. This is baffling to me… Does (VA) realestate law require a certain time limit to assign the property a true beneficiary? and if it’s not assigned, with-in a year so so, who has it on their accounting books?
Doug – Do you think you can create a life estate with a beneficiary deed – particularly since the statute says a beneficiary deed passes NO interest in the real property until after the death of the current owner? For instance, if the Grantor ultimately wants his kids to inherit the property upon his death, but in the mean time wants to make sure his brother is able to live there until Grantor dies.
No, you cannot create a life estate with a beneficiary deed. I suggest the person trying to do this contact legal counsel to properly create the life estate.
Sorry!
Douglas Turner
Doug – upon the death of the grantor of a CO beneficiary deed (real estate), may the grantee beneficiary take a death certificate to the county recorder’s office and have the property deed changed, or must the beneficiary process the grantor’s will and death certificate through the probate court?
Jerry:
If there is a properly executed beneficiary deed recorded in the Colorado county where the real estate is locate prior to the Grantor’s death, a Colorado probate is not necessary. Technically, the property passes upon the death of the Grantor — no death certificate is require to change ownership. However, much like a joint tenancy situation, title is not marketable because there is no record of the death. Therefore, a certified copy of the death certificate is required.
Regards
dt
Question. You mention the Colorado Beneficiary Deed as a popular way to pass on timeshares. What recourse does a beneficiary have if they inherit a timeshare of no real value but with substantial maintenance obligations. Can the gift be declined or returned to the HOA by the beneficiary? Would if be better to leave the timeshare in the estate?
Paul:
Thank you for the question. However, it is too broad to answer in an open forum. Please consult your probate counsel in the state where you are located.
Regards,
Douglas Turner
Mr. Turner,
Does a General Power of Attorney, inclusive of real property powers, negate the need for a beneficiary deed?
No. Most powers of attorney are invalid once the principle dies.
Douglas