I first wrote about using an Arizona beneficiary deed to avoid probate on November 13, 2012.

A recent decision of the Ninth Circuit Bankruptcy Appellate Panel reveals a major shortcoming that should affect the popularity of beneficiary deeds.  In Jones v. Mullen, BAP No. AZ-12-1644-DPaKu, the panel decided that the debtor’s interest in real property acquired because of the death of his grandmother 3 days after the debtor filed a Chapter 7 bankruptcy petition was property of the bankruptcy estate.  The bankruptcy trustee was allowed to sell the debtor’s post-petition acquired interest in the real property.  The debtor’s creditors benefited from the decedent’s beneficiary deed rather than the intended grantee, the decedent’s grandson.

Beneficiary deeds have become so popular and widely available on the internet, many people create beneficiary deeds without consulting a lawyer or otherwise gaining an appreciation for some of the more common pitfalls.  Leaving property outright to an intended beneficiary heads the list of problems that can be avoided with planning.  This mistake could be made in a Will or a trust as well as a beneficiary deed, but most trusts and many Wills are prepared by lawyers who have the opportunity to counsel their clients and discover whether or not special circumstances exist which suggest adoption of a different plan.

Bankruptcy laws can disrupt an estate plan and cause a detrimental unintended consequence.  A well constructed estate plan considers potential obstacles such as unforeseen bankruptcy filings and poor timing and “plans” for such possibilities in ways that a beneficiary deed form cannot.

Interestingly, in Jones, the decision did not rely on the 180 day clawback rule of §541(a)(5) for inheritances, but rather reconfirmed a 24 year old case, Neuton v. B. Danning (In re Neuton), 922 F.2d 1379 (9th Cir. 1990), decided using §541(a)(1).  The controlling law in the Ninth Circuit is that a contingent interest becomes property of the bankruptcy estate upon the filing of a petition, subject to divestiture and valuation issues.  Here, when the contingency occurred, Grandma’s death, during the pendency of the bankruptcy case, the debtor was left with no recourse and the interest was sold for the benefit of the bankruptcy estate and the debtor’s creditors.

The Ninth Circuit consists of California, Oregon, Washington, Nevada, Hawaii, Alaska, Montana, Idaho and Arizona.  The result could be different in other states that don’t have the same precedent.

The Jones case is a perfect example of the old adage “that for the want of a nail, the horse was lost.”  Although a beneficiary deed may be inexpensive to create and avoids probate, it also contains none of the protections many folks want for their descendants.  If any adverse conditions exist on the date of death, the decedent’s estate plan will be frustrated.

This is just one example of how beneficiary deeds may be innocently misused.  Failure to adequately identify who takes the property if the originally named beneficiary fails to survive the grantor is another common mistake that can be avoided with careful planning and competent drafting.

In the proper circumstances, a beneficiary deed can be a time and money saving alternative to probate, but unforeseen consequences can assure that the simple idea is not a good one.  Before using a beneficiary deed, make sure you have identified not only the benefits you desire, but the risks and pitfalls not often discussed.  An estate planning attorney can analyze whether a beneficiary deed is a good solution for you.  For this or any other estate planning concern, call us today at (602) 254-6008.