Did You Know? Naming a Beneficiary on Real Estate Holdings

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Earlier this year we wrote a blog on the importance of estate planning. The purpose of today’s post is to focus on one specific aspect of that topic – beneficiary designations. In practice, the act of naming beneficiaries on financial accounts seems mundane; however, it is anything but when it ultimately comes time for your heirs to inherit those assets. This is because any financial asset with a named beneficiary (or that you own jointly or in trust) passes to your heirs outside of probate – the time consuming, expensive legal process of winding down the affairs of a decedent. To avoid probate means your heirs don’t have to waste time and money trying to take possession of their inheritance. 

On which types of assets can you name beneficiaries?

The most common answer is accounts like life insurance, IRAs, 401(k)s, and annuities. This is because the paperwork usually includes a hard-to-miss section specifically asking you to select beneficiaries. You may also know that banking and taxable brokerage accounts (held in individual or joint name) allow you to name beneficiaries via a “Transfer-on-Death” (TOD) designation.

But did you know that, thanks to a 2013 law, Virginians now have the ability to also name legal beneficiaries on real estate holdings such as a primary residence, vacation home, rental property, and vacant land?

Indeed, Virginia has joined the ranks of 25 other states to allow real estate owners to file what’s called a “transfer-on-death” deed, which automatically transfers title of a property to a designated beneficiary(ies) at the owner’s death.

Why does this matter?

The cost of probate is a function of the total dollar value of assets passing through it. So, in general, the more assets that are subject to probate, the more your estate will pay in legal and court fees, and the less leftover for heirs. 

Given that real estate is most Americans’ largest asset (according to a 2014 U.S. Census Bureau study), this is a potential game changer for estate planning.

Prior to 2013, essentially the only option Virginians had to keep real estate from going through probate was to put it in a trust. True, jointly owned real estate avoids probate, but this is only when the first owner dies; absent a transfer-on-death deed, the Pied Piper will be paid upon the death of the survivor.

While a trust may make sense for some people, in order to realize the benefits you must first incur the upfront cost to create it (potentially thousands of dollars) and possibly attorney fees down the road if extra maintenance or administration is required. So, a transfer-on-death deed presents a simpler and potentially more cost-effective way to implement real estate into your estate plan.

How does it work?

Filing a transfer-on-death deed is easier than you may think.

As the name implies, a transfer-on-death deed involves recording a new property deed with your local county clerk’s office. The deed includes very specific language to describe the property in question and who is to be the beneficiary(ies). 

Because a valid transfer-on-death deed involves the use of very specific legal language, it is recommended you not try to do it yourself. Rather you should consult a qualified attorney, most of whom charge a flat fee of a few hundred dollars. In general, a transfer-on-death deed is far simpler and more economical than creating a trust.

Importantly, the named beneficiary(ies) has no legal right to the property as long as you are still living. This means you are free to do with the property as you please, and you can amend or revoke the transfer-on-death designation at any time, for any reason. Also note if you own the house jointly with a spouse or other person, a transfer-on-death beneficiary will only receive title to the property once the second owner dies.  As far as taxes go, adding a transfer-on-death deed should not give rise to gift or real estate transfer taxes because you will still maintain ownership of the property.  Like an IRA or 401(k) beneficiary, the transfer-on-death deed beneficiary’s rights only kick in once the original owner dies.

Conclusion

Consider a transfer-on-death deed to be one more arrow in your estate planning quiver. Of course, trusts and other titling strategies can still make sense in many situations. The point is, a transfer-on-death deed offers a potentially more cost effective and simpler mechanism for transferring real estate to one’s heirs. As always, consult a qualified attorney to see if this strategy is right for you and your overall estate plan.

And be sure to reach out to us with any questions!

Disclosures:

Taylor Hoffman is an SEC registered investment adviser with its principal place of business in the State of Virginia. Any references to the terms “registered investment adviser” or “registered,” do not imply that Taylor Hoffman or any person associated with Taylor Hoffman have achieved a certain level of skill or training. Taylor Hoffman may only transact business in those states in which it is registered /notice filed, or qualifies for an exemption or exclusion from registration /notice filing requirements. For information pertaining to the registration status of Taylor Hoffman or for additional information about Taylor Hoffman, including fees and services, please visit www.adviserinfo.sec.gov.

The information contained herein is provided for informational purposes only, represents only a summary of the topics discussed, and should not be construed as the provision of personalized investment advice, or an offer to sell or the solicitation of any offer to buy any securities. The contents should also not be construed as tax or legal advice.  Rather, the contents including, without limitation, any forecasts and projections, simply reflect the opinions and views of the author. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change without notice. There is no guarantee that the views and opinions expressed herein will come to pass.

This document contains information derived from third party sources.  Although we believe these third party sources to be reliable, Taylor Hoffman makes no representations as to the accuracy or completeness of any information derived from such third-party sources and takes no responsibility therefore.

Taylor Hoffman is not a Public Accounting firm, and the information contained herein should not be construed as tax advice. Rather the contents included are a reflection of the view and opinions of the author. There is no guarantee that the information provided fits every situation, and individuals should consult their tax advisor for more specifics.

Taylor Hoffman is not a Law firm, and the information contained herein should not be construed as legal advice. Rather the contents included are a reflection of the view and opinions of the author. There is no guarantee that the information provided fits every situation, and individuals should consult their individual attorney for more specifics.

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