One of the more useful estate planning tools for people wanting to avoid probate is a beneficiary deed. A beneficiary deed does for real property what a pay-on-death designation does for bank or brokerage accounts.

With a beneficiary deed, ownership of the property, until death, remains wholly in the hands of the person signing the deed, called the grantor. The named beneficiary, called the grantee, has nothing to say about a sale or refinancing of the property by the grantor. The grantor can revoke the beneficiary deed or change the grantee at any time before the grantor’s death.

The mechanics for using a beneficiary deed are not complex. The grantor signs a one-page document — the beneficiary deed — naming the grantee (or grantees) who will succeed to ownership of the property at the grantor’s death. The beneficiary deed is then recorded in the county where the property is located.

To consummate the transfer at the death of the grantor, a copy of the grantor’s death certificate is recorded in county records. No personal representative, and no probate court, are involved. The property, after the transfer, will continue to be subject to whatever mortgages and liens the grantor may have placed on the property.

But, notwithstanding the seemingly straightforward nature of a beneficiary deed, it’s still possible for a grantor to do something that will enhance the incomes of lawyers after the grantor’s death. In September, the Colorado Court of Appeals had to deal with just such a situation.

In this case, the grantor of the beneficiary deed, Dan Argo, named two nieces as the grantees to take title to the property upon his death. However, three days before he died, Dan and his wife, Angela, signed a lease agreement saying Angela, as tenant, could occupy the property for the rest of her life.

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The lease was not recorded and the nieces only learned about it after Dan’s death — at a family gathering (which no doubt quickly became a less friendly affair). To complicate matters, by then, the nieces had contracted to sell the property.

The nieces hired a lawyer who wrote a letter to Angela telling her the lease was invalid and she had one month to remove her personal possessions from the property. Angela then hired a lawyer who sued the nieces, asking the Otero County District Court to rule that the lease was in fact valid and she had a lifetime right to occupy the property.

The nieces prevailed in this lawsuit because the statute authorizing the use of beneficiary deeds says that someone in Angela’s position must record the document being relied on for a claim against the property within four months following the grantor’s death. Angela eventually did record the lease, but not until five months after Dan’s passing. To round out Angela’s bad day in court, the District Court also awarded the nieces $36,318 in attorneys’ fees and costs.

Angela appealed, but the Court of Appeals had little trouble affirming the District Court’s decision that the lease was invalid and the nieces owned the property. However, the Court of Appeals did not affirm the award of attorneys’ fees and costs. That’s because the District Court had not adequately explained the basis for its decision on this issue. So, the case is now back at the District Court for further proceedings (and further legal expense) concerning the nieces’ claim for attorneys’ fees and costs.

Bottom line: a beneficiary deed can be a very useful estate planning tool, but it can also present legal sand traps. Therefore, getting help from an experienced estate planning lawyer before signing one of these outside-of-probate transfer documents is always a good idea.

Jim Flynn is a business columnist and an attorney with the Colorado Springs firm of Flynn & Wright LLC. You can contact him at moneylaw@jtflynn.com.

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