The intersection of real estate law and estate planning can often produce some interesting results. The decision in the Estate of Ganoni, 238 Ariz. 144, 357 P.3d 828 (App. 2015) is illustrative.
Most real estate professionals are familiar with beneficiary deeds. This form of deed came into existence in 2001 to provide property owners with a simple solution to avoid probate and transfer real estate from one person to another upon the owner’s death. A beneficiary deed is unlike joint tenancy deeds with right of survivorship (“JTWROS”) or community property deeds with rights of survivorship (“CPWROS”) which permit the surviving owner or owners to automatically assume ownership of the deceased owner’s share of the property “as a matter of law” when the deceased owner passes away. A JTWROS deed often involves married couples but is broad enough to include any parties that wish to be joint owners and can include more than two individuals. CPWROS deeds are only allowed as between married couples and have a more favorable step-up in basis for tax purposes.
Prior to the creation of the beneficiary deed, owners who wished to leave their real estate to another person upon their passing could not easily do so via a deed. For instance, a parent wishing to leave their home to an adult child upon the parent’s passing would commonly add the child to the title to the real estate (in this case JTWROS) immediately making the child a title owner of the real estate. The understanding (usually) when the conveyance initially occurred was that the house truly belonged to the parent, with the child only titled as an owner for estate planning purposes.
But if the property has a mortgage, then adding another person to the deed could trigger the “due on sale” clause or “restraint on alienation” clause and trigger a default and foreclosure of the property by the lender. Immediately adding the child to the deed could also create challenges if the parent decides to sell the property or refinance the mortgage. Or worse, fast forward a few years when the relationship has become strained for one reason or another and the parent suddenly finds the child asking to sell the house so the child can get their one-half share of the house. With this example, you can easily see the problems raised with this kind of estate planning.
To address the above issue, the Arizona legislature adopted A.R.S. § 33-405 which created for the first time in Arizona the use of beneficiary deeds. This unique tool overcame the conundrum of how to simply pass real estate property to a person without elaborate estate planning, without probate proceedings, and without creating a present ownership interest in the real property. Essentially, the beneficiary deed names a beneficiary (much like you name a beneficiary to a life insurance policy or something similar) who will receive the property, but only on the passing of owner. Where there is more than one joint owner, the beneficiary does not take ownership of the property until the remaining owners die.
So here is this great solution – what could go wrong? In 2015, the Court of Appeals considered a twist on the use of a beneficiary deed. In Ganoni, the Court considered whether the owner of the property who wishes to execute a beneficiary deed must be a natural person (i.e. as opposed to an entity). In Ganoni, the owner of the real estate was a trust. The trustee (who was also the trustor) executed a beneficiary deed in 2003 naming her attorney as the beneficiary. Later, the trustor restated her Trust in 2012 to remove her attorney as the beneficiary. After the trustor’s death, litigation ensued between the successor trustee and the Personal Representative concerning the validity of the beneficiary deed. The successor trustee argued the beneficiary deed was ineffective to convey title because the attempted conveyance was from a trust and not a natural person.
In deciding the case, the Court of Appeals found that the statutory language clearly provides that “only natural persons are intended.” Use of words and phrases like “deceased person” and “lifetime” only apply to natural persons. And trusts do not “die” or have a “lifetime”, they simply “terminate”.
Additionally, the Court reasoned that the statute does not specifically provide for the use of a beneficiary deed by trustees and trust property, and the Court refused to judicially expand the clear language of the statute.
While it may seem obvious now, prior to the 2015 decision, this question had not been considered and was a case of first impression. The solution here going forward is simple – only real live people who own real property in their individual name(s) can execute a proper beneficiary deed. Keep in mind though that the issue in Ganoni laid dormant for approximately ten years. There may be other similarly defective beneficiary deeds in need of correction to properly carry out the parties’ intent. Moreover, the beneficiary deed has other strict requirements not mentioned in this article.
There are many ways for property owners to hold title to real estate. And there are many great estate planning options available to smoothly transfer title upon the owner’s death outside of probate, including the careful use of the beneficiary deed.
If you are someone you know has questions regarding how best to legally transfer title or any estate planning questions in general, please call our office today to schedule a consultation.