Carryover basis, community property, beneficiary deeds, revocable trusts, and long-term care eligibility
By E. Jonathon Scibilia, JD, LLM | Edward Law Firm, PLLC
Signing your home over to your children may seem like a simple way to avoid probate. But before recording a deed, ask what you may give up, and whether another approach better protects you.
An outright lifetime gift can change control of the home, future income-tax consequences, and long-term care eligibility. Probate avoidance should be evaluated alongside your right to live in, manage, refinance, or sell the property.
A deed can avoid one problem and create another
A parent may wish to transfer a residence during life to avoid probate. But an outright deed can surrender control, expose the property to a child’s financial circumstances, change income-tax consequences, and create long-term care eligibility concerns. Probate avoidance should be evaluated alongside the owner’s need to live in, manage, or sell the property.
Carryover basis versus basis at death
Under I.R.C. § 1015, a donee generally takes the donor’s adjusted basis for gain purposes in gifted appreciated property. Suppose a parent’s adjusted basis is $80,000 and the home is worth $500,000. A lifetime gift may leave the child with an $80,000 gain basis; a later $500,000 sale could yield $420,000 of gain before selling expenses, applicable exclusions, and adjustments. That is not a $420,000 tax bill. The basis rules for determining loss can differ.
By contrast, qualifying property acquired from a decedent generally receives a basis determined by its fair market value at death, subject to statutory exceptions and adjustments. See I.R.C. § 1014. Whether a retained interest or other structure results in estate inclusion—and the corresponding basis consequences—requires individual analysis.
Arizona community property deserves special scrutiny
Arizona generally treats property acquired during marriage as community property, subject to exceptions including gift and inheritance. See A.R.S. § 25-211. For qualifying community property, I.R.C. § 1014(b)(6) can permit a basis adjustment for both spouses’ halves on the first spouse’s death if the statutory conditions are met. This benefit does not extend automatically to every jointly held home.
Before recording a deed, confirm the character of the property, its title history, and whether a contemplated transfer changes ownership or community-property status.
An outright transfer changes control and risk
A completed gift typically gives the recipient ownership. The parent should not assume the right to revoke it, sell unilaterally, refinance, or remain in the home. The child’s death, divorce, creditors, bankruptcy, or disagreement with siblings may create additional complications. Retained occupancy arrangements and life estates require careful analysis rather than reliance on an informal promise.
Arizona beneficiary deeds
A beneficiary deed under A.R.S. § 33-405 can designate a beneficiary to receive the owner’s specified interest at death without an outright lifetime conveyance. It must satisfy the statute’s execution and pre-death recording requirements in the county where the property is located. A compliant beneficiary deed can be revoked during life through the statutory process.
A beneficiary deed does not solve every issue: existing liens, title, multiple owners, beneficiary survivorship, minors, incapacity, and consistency with the broader estate plan remain important.
Revocable trusts as an alternative
A properly structured and funded revocable living trust may allow the trustee or successor trustee to administer and distribute real property outside probate. The deed must accurately identify the trust ownership and comply with applicable recording requirements. Trust funding should be verified rather than presumed from the existence of signed documents.
A revocable trust does not by itself eliminate estate tax, shield assets from the settlor’s creditors, or resolve long-term care eligibility concerns. It can nevertheless provide broader management instructions than a simple beneficiary deed.
ALTCS and the 60-month lookback
Arizona Long Term Care System eligibility rules can penalize certain transfers for less than fair market value. AHCCCS generally applies a 60-month lookback for relevant transfers, subject to exemptions and exceptions. The federal $19,000 gift tax annual exclusion is not an ALTCS safe harbor.
A transfer that creates no gift tax may still affect access to long-term care benefits. Families considering Medicaid-related planning should obtain individualized advice before signing a deed, including consideration of exempt transfers, valuation, timing, and the applicant’s circumstances. See AHCCCS transfer policy and guidance.
A practical decision framework
Before transferring a home, determine: (1) current legal and beneficial ownership; (2) adjusted tax basis and anticipated gain; (3) whether community property rules apply; (4) who will control occupancy and disposition; (5) the intended recipients and contingencies; (6) potential ALTCS exposure; and (7) whether a beneficiary deed or funded revocable trust better achieves the objectives.
The correct structure is not always the one that avoids probate most quickly. It is the one that preserves the owner’s financial security while coordinating title, taxes, and the estate plan.
Discuss Your Planning With Edward Law Firm
The appropriate approach depends on your family, asset ownership, tax position, and objectives. Edward Law Firm, PLLC advises Arizona clients on estate planning and related tax considerations. To discuss the scope of a consultation, call 602-880-3379 or visit www.edwarlawaz.com.
About the Author
E. Jonathon Scibilia, JD, LLM, is Managing Attorney of Edward Law Firm, PLLC. His practice includes Arizona estate planning, trust administration, probate, business planning, and tax matters. His Master of Laws in Taxation informs the firm’s approach to the legal and tax consequences of wealth transfers.
This article is general educational information, not individualized legal or tax advice. Reading it or contacting the firm does not create an attorney-client relationship. The analysis generally addresses U.S. citizens and residents and Arizona law as of October 2026; specialized rules may apply. Representation is subject to an agreement with the firm.
