JUNE 1, 2015 VOLUME 22 NUMBER 20
Arizona is one of about a dozen states permitting "beneficiary" deeds. Some states have the same concept but use a different term, like the inelegant "revocable transfer on death" deeds. The basic idea: you can sign a deed to your real property which acts like a beneficiary designation -- just like your insurance policy, your bank or brokerage account, or other assets that can be held in such a fashion (including, in Arizona at least, your vehicles). If you want to, you can change the beneficiary (or simply delete any beneficiary) later, by signing a new beneficiary deed.
While they are often not a good substitute for more thoughtful estate planning, Arizona beneficiary deeds can help people avoid the expense and delay that the probate process might engender. They can act as a simple planning device for people who do not want, or do not need, to incur the cost of creating a living trust and transferring assets into the trust's name.
Here's one way we often use beneficiary deeds: sometimes a client creates a revocable living trust but does not want to transfer real estate into the trust's name immediately. They can sign a beneficiary deed naming the trust as ultimate recipient of the property, avoid the probate process and gain the other benefits of trust planning (like the easy ability to impose limits on the future use or transfer of the trust's property). Of course, after a client has gone to the trouble and expense of establishing a living trust, it usually makes sense to just transfer real estate into the trust's name -- but sometimes the beneficiary deed can work as part of the plan.
A recent Arizona Court of Appeals case described how not to use beneficiary deeds in connection with trusts. The background: Alexandra Granger (not her real name) was in her late 70s when she completely rewrote her revocable living trust, naming her attorney Whitney L. Sorrell as successor trustee. Her Scottsdale-area home had already been transferred into the trust's name.
Three years later Alexandra signed a beneficiary deed, as trustee. The deed purported to leave her home to her attorney upon her death, though it would otherwise have passed according to the trust's terms without the necessity of probate. It is unclear why Alexandra would have wanted to sign the beneficiary deed.
A few years later, when Alexandra was 89, she resigned as trustee of her own trust and turned over finances to attorney Sorrell. Although the court decision does not explain why, just one year later she revised her trust again -- naming a new trustee and removing Sorrell. No change was made to the beneficiary deed. Alexandra died a few weeks later.
The attorney filed Alexandra's earlier documents with the probate court, and asked for appointment as her personal representative. The person named in the last amendments objected, and sought probate court approval of those new documents. Mr. Sorrell then asked the probate judge for a ruling that he was entitled to Alexandra's home by virtue of the beneficiary deed she had signed as trustee.
The probate judge denied the request, and the Arizona Court of Appeals last week ruled that he was right. A beneficiary deed must follow the language of the statute, ruled the appellate court, and that requires that it be signed by an individual owner, not a trustee. Besides, as the appellate judges noted, a beneficiary deed only takes effect when the property owner dies, and a trust does not "die" with its settlor -- so a beneficiary deed for a trust-owned property is a meaningless document. In Re Ganoni, May 28, 2015.
Buried in the facts of Alexandra's case is an unanswered question: is it permissible for a lawyer to receive any inheritance from a client? Generally speaking, it is not -- but that question is actually not addressed (and certainly not answered) in last week's reported case. Still, it is worth noting that there are rules about attorneys inheriting from clients.
Generally speaking, an Arizona attorney is not permitted to prepare estate planning documents which leave any "substantial" gift to the lawyer -- even if the client is competent and fully apprised about the possibility of conflict. Almost all of the American states have adopted versions of the American Bar Association's "Model Rules of Professional Conduct," and Ethical Rule 1.8(c) (as adopted in Arizona) makes the prohibition clear: "A lawyer shall not solicit any substantial gift from a client, including a testamentary gift, or prepare on behalf of a client an instrument giving the lawyer or a person related to the lawyer any substantial gift unless the lawyer or other recipient of the gift is related to the client." In other words, even if a client knows the rule, and insists that the lawyer write herself into a will, the lawyer is required to refuse.
Does that mean that Alexandra's attorney violated ethical rules? It is not clear from the reported decision -- the key missing piece of information being whether he prepared the beneficiary deed in question. There is not a similar prohibition in Arizona against a lawyer naming himself or herself as successor trustee, but the intertwined relationship the Court of Appeals describes certainly raises questions about the arrangement.