Do You Want to Use a Death Deed for Inheritance Purposes?

Introduction

A Death Deed, also known as a transfer-on-death deed or beneficiary deed, is a legal document that allows an individual to transfer real estate to one or more designated beneficiaries upon their death, without the need for probate.

While a Death Deed may seem like a simple and inexpensive way to transfer real estate to beneficiaries, it has some limitations compared to a Living Trust. Here are a few reasons why a Living Trust may be considered a better option:

1. Probate Avoidance: A Living Trust helps bypass the probate process completely, which can be time-consuming, costly, and subject to public record. On the other hand, a Death Deed only avoids probate for the described property but not other assets.

2. Flexibility and Control: A Living Trust allows for more flexibility in managing and distributing assets, including real estate. It allows you to specify your wishes for how the assets should be transferred to beneficiaries. In contrast, a Death Deed only transfers the property to the beneficiary named in the deed, without any additional instructions or ongoing control.

3. Incapacity Planning: A Living Trust also addresses the management of assets in the event of your incapacity, providing a mechanism for a successor trustee to manage and use the assets for your benefit without the need for court intervention. A Death Deed does not provide this level of protection or flexibility.

4. Privacy: A Living Trust offers a higher level of privacy since it is not a public record. In contrast, a Death Deed becomes public record upon the death of the grantor and might expose sensitive information about the property and beneficiaries. 5. Step-Up Basis: Death Deed does not provide the same benefits in terms of capital gains taxation as a Living Trust. When real estate is transferred through a Living Trust, the property's cost basis is "stepped up" to its fair market value at the time of the owner's death. This means that if the beneficiaries were to sell the property, they would only be subject to capital gains taxes on any appreciation that occurs after the owner's death, not on the entire gain since the original purchase.

Conclusion

Death Deed does not offer the same step-up basis for capital gains purposes. If the property is transferred through a Death Deed, the beneficiaries would generally receive the property with the same cost basis as the original owner. If they were to sell the property, they would be liable for capital gains taxes on the full amount of appreciation since the original purchase.

Currently the capital gains taxes are at 15% of the differnce between the purchase price and the fair market value at the time of the inheritance. It's important to consult with a tax professional or estate planning attorney to fully understand the tax implications of transferring property and to determine the best strategy for minimizing tax liabilities for your beneficiaries.