The Problem With Beneficiary Deeds

The Problem With Beneficiary Deeds

About 20 years ago, Colorado began recognizing transfer-on-death deeds for real estate. At the time, I was one of their biggest supporters. Today, I still use beneficiary deeds—but much more cautiously. Here’s why.

A beneficiary deed is simply a transfer-on-death deed for real estate. The deed must be properly recorded before the real estate owner (the “Grantor”) dies. Upon the Grantor’s death, the property automatically transfers to the named beneficiary.

Sounds great, right? No fuss, no muss. Unfortunately, it’s not always that simple.

A will or trust typically addresses contingencies. What if the beneficiary refuses the property? What if the beneficiary dies before—or shortly after—the Grantor? What if the beneficiary is a minor, incapacitated, or receiving Medicaid benefits?  Beneficiary deeds are rarely that detailed.

Multiple Beneficiaries Can Mean Multiple Problems

A beneficiary deed naming multiple beneficiaries can create significant issues. Typically, each beneficiary receives an undivided ownership interest in the entire property. That means they all own the whole house together, and each has an equal right to live there.

That arrangement works well—until it doesn’t.  If one beneficiary decides to move into the home rent-free while the others help pay property taxes, insurance, and maintenance, tension quickly builds. Disagreements over whether to sell, rent, remodel, or refinance are common. When the co-owners cannot agree, the legal remedy is often a partition action—a lawsuit asking a court to force a sale of the property.  Partition actions can easily cost tens of thousands of dollars in legal fees, significantly reducing the value of the inheritance.

The Insurance Gap Risk

Beneficiary deeds can also create an unexpected gap in insurance coverage.  In a Minnesota case, Dawn Strope-Robinson inherited a house from her uncle, David Strope, under a transfer-on-death deed. The home was insured under a homeowners policy issued by State Farm. Shortly after Mr. Strope’s death, his ex-wife intentionally set the house on fire, causing substantial damage.

Ms. Robinson filed an insurance claim. State Farm denied it.  The Eighth Circuit Court of Appeals agreed with the insurance company in Strope-Robinson v. State Farm Fire and Casualty Co. The court reasoned that because title transferred automatically to Ms. Robinson upon Mr. Strope’s death, his estate never owned the house. And because the estate had no ownership interest, there was no insurable interest under the existing policy. Ms. Robinson was not a named or additional insured.  While this was a Minnesota case, I confirmed with my insurance agent that the result would likely be the same in Colorado. That risk alone gives me pause.

A Tool — But Not a Complete Plan

Beneficiary deeds are not inherently bad. In the right circumstances, they can be a simple and cost-effective tool. But they are not a substitute for thoughtful estate planning.  Real estate is often a family’s most valuable asset. What appears simple on the front end can create unintended complications on the back end—conflicts among beneficiaries, costly litigation, or even a loss of insurance coverage.  Before signing a beneficiary deed, it is worth considering whether a properly structured will or trust might better address the “what ifs” that life inevitably brings.