Using Colorado Beneficiary Deeds vs. Colorado Quitclaim Deeds To Avoid Probate: A Comparison
Many 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”.
