Estate Planning for Real Property

Finding the Practical Middle Ground

December 2025 By Charles “Chad” E. Rounds

This article covers the numerous complications and pitfalls associated with using joint ownership and beneficiary deeds to plan for disposition of real estate after death, as well as the relative advantages and disadvantages of using wills versus revocable trusts for estates containing real estate.

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In estate planning for real property, clients are often drawn to seemingly simple solutions—joint ownership or beneficiary deeds—without fully appreciating the potential negative consequences of their choices. Yet more complex options like trusts or entities are not always the right solution either. A sensible middle ground is available for most clients when it comes to estate planning for real property. This involves weighing the pros and cons of using a revocable trust versus a will as the primary estate planning tool. This article discusses estate planning considerations for estates containing real property and explains potential drawbacks of some commonly used estate planning tools.

Potential Problems With Joint Ownership

Adding prospective beneficiaries as joint owners could cause unintended negative consequences, including costly partition actions, titling mistakes, tax liability, creditor exposure, and loss of Medicaid eligibility.

Co-Ownership Conflicts and Partition Litigation

Clients often attempt to transfer real estate upon death by adding their intended beneficiaries as joint owners of their residences and/or other real property during their lifetime. The simplicity of this arrangement has an understandable attraction. However, it can lead to complications after the client’s death, particularly if the property ends up being jointly owned by multiple hostile or uncooperative individuals (e.g., siblings who do not get along, children and stepparents, distant relatives, or even nonrelatives with no relationship to each other). To address potential future conflicts related to joint ownership of real estate, the co-owners could cooperatively enter into a joint ownership agreement or place the property into an entity with clear provisions addressing joint ownership. This arrangement should address in detail the myriad issues that can arise from joint ownership of real property, including the property’s current and future use, future sale of the property, and the allocation and payment of the various types of continuing expenses associated with real estate ownership.

Without such an agreement, a costly partition with a potential forced sale of real estate, or, at best, cost and delay of mediation, may be unavoidable. CRS §§ 38-28-101 et seq. and Martinez v. Martinez1 establish the legal framework in Colorado for a partition action. All persons having any interest—direct, beneficial, contingent, or otherwise—in the subject property must be made parties to the action.2 The petitioner seeking partition must initially demonstrate to the court that there is no practical method to physically divide the property among the co-owners.3 Then, court approval must be obtained for a sale of the property. The mechanics of this sale should be detailed in the court order approving the sale, so the petition for partition needs to address several questions: If and how will the property be marketed to the public? By whom? At what price? Will each co-owner have a right of first refusal? Some courts even require court approval of any purchase offer before it is accepted.

After the sale of property is successfully closed, the second stage of a partition action commences. This involves dividing the net proceeds among the co-owners, unless they can agree to an equal division. The co-owners can present legal and equitable arguments to increase their share of the proceeds. For example, one co-owner might have initially contributed more to the payment of property expenses or overall upkeep of the property than the other owners. Alternatively, one co-owner might have benefited from the property disproportionately by living in or receiving rent from the property to the exclusion of the other owners. The distribution percentages awarded by the court could end up different than the ownership percentages.

Titling Mistakes

Clients are too often unaware of the various consequences of titling real property in “joint tenancy” versus “tenancy in common.” For example, spouses who purchase real estate together frequently assume that when one spouse dies, the surviving spouse will automatically become the sole owner of the property, without the need for probate. But the statutory default in Colorado is tenants in common, so that is how title will be held unless the words “in joint tenancy,” “JTWROS,” “as joint tenants,” or “as joint tenants with rights of survivorship” are explicitly mentioned in the deed. This is often not discovered until the surviving spouse is under contract to sell the property and the title company has issued the title commitment requiring a personal representative to be appointed to deal with the decedent’s “tenancy in common” interest in the property.

In other cases, the property may be erroneously titled “in joint tenancy.” With this arrangement, a provision in the deceased tenant’s will devising the property to a person other than the co-owner will usually have no operation. Instead, the interest of the deceased co-owner passes by operation of law to the surviving tenant upon the recording of a death certificate and affidavit.4 At best, this can result in costly litigation based on claims of mistake, fraud, lack of capacity, or undue influence, often seeking the remedy of the imposition of a constructive trust on the property.5

Tax Implications

Adding additional owners to the title of real property can also have negative income tax consequences for the new owners. If a client retains sole ownership of an appreciated residence until death (instead of listing intended beneficiaries as co-owners), the beneficiaries would inherit the property with a basis increased to its full market value as of the date of death,6 and the estate or beneficiaries would have lower capital gains tax liability upon selling the property. In contrast, if the intended beneficiaries were added as co-owners during the client’s lifetime, the co-ownership is treated as a lifetime gift from the client, and the surviving co-owners’ original share of the basis is not adjusted to the client’s (donor’s) date of death value.7 Furthermore, if the property were sold during the donor’s lifetime, the interest of non-occupants of the property would not get the benefit of the $250,000 exclusion from gain that is available to certain occupants.8

Creditor Exposure

Adding additional owners to real property also exposes the initial owner’s original interest in the property to the claims of the added owners’ potential creditors or ex-spouses. Even if the new owners are financially responsible, unpredictable events such as divorce proceedings or even “at fault” car accidents can give rise to unexpected creditors’ claims affecting the interest of the added owners.

Medicaid Eligibility Risks

Using joint tenancy or life estate ownership interests in children or other desired beneficiaries may reduce the chance of the Medicaid lien being asserted at a client’s death. However, if a client’s only significant asset is their residence, adding their children or other beneficiaries to the title during their lifetime potentially jeopardizes the client’s eligibility for Medicaid during the five-year “look-back” period.9 While a primary residence is an exempt asset in the Medicaid eligibility analysis, adding others as owners to real property is a gift for Medicaid eligibility purposes. Medicaid applicants who gift assets within five years of applying for benefits will incur a penalty and risk being ineligible for benefits.

The Drawbacks of Beneficiary Deeds

Avoiding “expensive” probate remains a frequent misguided goal among laypersons, even though informal probate has been available in Colorado for almost 50 years. To achieve this goal, many clients ask about using a beneficiary deed, and some may even execute and record one without the advice of competent legal counsel. While a beneficiary deed takes effect upon the grantor’s death and can be revoked before then, it must be recorded prior to the grantor’s death to be valid.10

In the past, some attorneys would hold a client’s executed deed “in their drawer” and then present and record it after the client’s death to avoid probate. This practice is no longer appropriate and may be questioned by title insurance companies.

Even when recorded properly, however, a beneficiary deed has several drawbacks when used as a substitute for a will or revocable trust.11

Co-Ownership Conflicts

As with joint tenancy or other probate-avoidance techniques, a beneficiary deed naming multiple parties who do not get along or do not have the same short- or long-term plans for the real property can create the same co-ownership conflicts—and costly resolutions—as those described earlier in this article.

Lack of Flexibility

A beneficiary deed also offers less flexibility in drafting the dispositive provisions relating to real property than a will or revocable trust. This is because a beneficiary deed must contain the specific names of the grantees/beneficiaries, as well as any contingent beneficiaries, to enable a title company to determine the actual owners in the chain of title from the county real estate title records. Furthermore, a beneficiary deed containing class gift provisions, such as “issue by representation,” requires a court order to be obtained and recorded to evidence the specific owners.

A beneficiary deed can name a grantor’s revocable trust as the beneficiary, and this technique is a viable alternative to funding the inter vivos revocable trust with the settlor’s real estate during the settlor’s lifetime.12 This option also might avoid professional trustee fees that could be incurred if the trust owned the real estate during the client’s lifetime. However, designating testamentary or other trusts that have not been created at the time of the beneficiary deed’s execution can also lead to title problems.13

Additionally, a beneficiary deed can delay the sale after the grantor’s death, because, in many cases, a statutory four-month waiting period must pass before a title company will insure the title.14

Property Insurance Issues

Beneficiary deeds can also give rise to property insurance issues. A beneficiary deed statutorily transfers title to the real estate immediately upon the grantor’s death, so gaps in property insurance coverage could occur if the grantor’s property insurance coverage only names the grantor as the insured.15 To maintain coverage, the grantor should add the named grantees to their existing property insurance policy at the time the beneficiary deed is executed and recorded, thereby protecting the property from loss from incidents occurring soon after the grantor’s death.

Medicaid Ineligibility

In Colorado, a recorded beneficiary deed can affect a grantor’s Medicaid eligibility. Under CRS § 15-15-403, an applicant for or recipient of Medicaid services who has a beneficiary deed in place may not use the residence asset exemption. If the grantor still has legal capacity, the client could record a revocation of any existing beneficiary deed before applying for Medicaid. But if the grantor lacks capacity and does not have a financial power of attorney with express authority to revoke the beneficiary deed, the only option may be to seek a court-appointed conservator with authority to revoke the deed.

Avoiding Overly Complex Solutions Could Prevent Funding Failures

Clients with revocable trusts often fail to transfer the property’s title into the revocable trust during their lifetime. Because the average homeowner moves every seven years, it’s easy for a client with a revocable trust to forget to title a new home in the trust or to have difficulty obtaining a mortgage if the new home is held in the trust’s name. Many clients also assume that all their assets are automatically assigned into the trust once they execute their trust agreement.

Even if the estate planner confirms that the client’s existing real property is deeded into the trust, the practitioner cannot realistically ensure that the client will take the proper steps to title future real or personal property in the name of the trust in order to avoid probate. As a result, probate administration is often still required for clients with a revocable trust, making the process more complicated and costly than it would have been without the trust.

Clients could also face obstacles when financing a property titled to a trust. Some banks will not refinance or allow a mortgage on a property owned by a trust, so the client may have to transfer the property out of the trust when applying for or refinancing a mortgage, and then transfer it back in. Additionally, unless lender consent is obtained, transferring an encumbered property into a trust or an entity might trigger the “due on sale” clause in the deed of trust because ownership has changed. This could cause the entire principal balance to be due immediately.

When Using Trusts or LLCs for Real Property May Be Appropriate

If the estate planning client owns real property in multiple states, a revocable trust may be beneficial in avoiding the complications and costs associated with multiple probates. While Colorado and many other states offer a simpler, less costly, and expedited informal probate process, some states do not. If a client owns real property in other states, especially those without an informal probate process, using a revocable trust to hold title to that real estate should be considered. To avoid the unauthorized practice of law in that state, the funding deed should be prepared and recorded by an attorney in that state. The Colorado trust might hold title to only the non-Colorado real estate; using a regular will, rather than the usual pour-over will, to distribute the client’s Colorado probate assets could actually help expedite and simplify the remaining estate administration. If a continuing trust is desired, that trust can be included as a testamentary trust in the will.

If a client wants to allow their family to share joint use of family cabins, vacation homes, or any other real property after their death, placing such property into a trust or a limited liability company (LLC) rather than joint ownership with a co-ownership agreement might better facilitate arrangements for use, payment of expenses, and centralized management of the property.

However, in many cases, using an LLC to hold title to real estate may be unnecessarily complicated from a tax or practical standpoint, and it may not even provide any liability protection. Unless the entity has employees, an owner whose conduct was independently the basis for liability could still be held personally liable. If liability protection is important to the client, it is often more efficient and cost-effective to increase insurance coverage on a residence or rental property. In any event, to avoid exposing other properties to liability associated with a single property, multiple LLCs holding ownership of a single property would be necessary, which would increase the complexity and expense of multiple registrations, annual reports, tax filings, and administration.

The Advantages of Using a Will as a Client’s Primary Estate Planning Tool

While no estate planning tool is always appropriate, a will has numerous potential advantages for the disposition of real property. A will should eliminate the potential need for a costly partition action between individual co-owners after a client’s death, because a personal representative can sell real property during an estate administration and distribute the net proceeds among the designated estate beneficiaries as provided in the will.16 When the personal representative sells appreciated real property owned exclusively by the decedent, the estate can benefit from a full increase in cost basis to the date of death value, giving rise to a capital loss pass-through of sale costs (including brokerage commissions) to the devisees, as well as a pass-through of excess attorney fees upon termination and distribution of the estate.

Before the sale, the personal representative has the sole authority to use estate funds to pay all necessary expenses for maintaining the property and preparing it for sale. This avoids the potential complication of joint owners needing to cooperate to pay essential expenses and taxes on the property, and to make other necessary ownership decisions prior to sale. If the probate estate does not have access to liquid funds, that asset can either be sold “as is,” or the devisees can loan the estate the necessary funds to pay the expenses of sale and administration and obtain reimbursements out of the sales proceeds after the real estate closing.

A well-drafted will can also address many of the other real estate-related complications that can arise after a death. For example, if the testator wants to grant occupancy rights to a second spouse or other party living in a home with the decedent at the time of death, the will can provide for a specific period of continued occupancy. A testamentary trust in the will, as opposed to deeding a life estate to the surviving spouse, can allow the passing of ownership of the property to a client’s children if the surviving spouse no longer wishes to remain, or is unable to live independently, in the residence.

Conclusion

Estate planning for real property involves various options, each with its own advantages and disadvantages that the attorney should consider. In states like Colorado, which have simplified probate procedures, a probate-avoidance approach is often not the best choice. Instead, a will with a properly drafted durable power of attorney is generally sufficient and, depending on the client’s particular circumstances, may be the less costly and complicated approach.

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