When a person dies, the courts determine who should inherit her property through a process called probate. Probate applies to any property with a written title, such as a house. There are several ways to avoid the necessity of probate, including designating a beneficiary for your house in the event of your death. However, you should consider the potential downside before using this method.
Methods of Avoiding Probate
Joint tenancies and beneficiary designations are two common ways of avoiding probate. In a joint tenancy, you specify another person as a joint tenant with “right of survivorship.” If one of you dies, the other one inherits the house without going through probate. The joint tenant has all the same legal rights as the original owner, so after you designate a person as your joint tenant, all decisions about the property must be made in common. A beneficiary designation specifies who should inherit the house if you die, but does not give that person co-ownership of the house while you're still alive. Beneficiary designations take legal precedence over anything you say in your will, so make sure they don't contradict each other.
Concerns About Mismanagement
Whoever you name as the designated beneficiary becomes the owner of the house in case of your death. If you're worried about whether or not the designated beneficiary will manage the property responsibly, then this can be a disadvantage. For example, if you name a child as the designated beneficiary, he may not yet be mature enough for the responsibilities of homeownership if you die while he is still young. If he owes money to creditors, they may be able to make a claim against the house. The designated beneficiary might also lose eligibility for Medicaid or SSI assistance when she inherits the house and might incur a federal estate tax burden.
If you name your spouse as the designated beneficiary and your spouse remarries after your death, the new spouse might be able to make a claim on the property in the event of divorce. If you want your estate to be divided among several beneficiaries, the beneficiary designation must specify the exact proportion to be given to each of them. Unlike a will, a beneficiary designation doesn't specify a process for coordinating the dispersal of your property when you die.
Most of the potential disadvantages of designating a beneficiary for your house can be avoided by using a revocable trust instead. A revocable trust allows you to designate a reliable trustee to manage the property, prevents the house from being counted as an asset for Medicaid and SSI eligibility purposes, reduces the federal estate tax burden to the beneficiary, protects the house from the beneficiary's creditors and provides for the orderly dispersal of your estate.