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Probate vs. Non-Probate Property: Which Property Can Pass Outside of Probate?

April 18, 2020 by Leave a Comment

Probate is the legal process where a court proves, or validates, the decedent’s will; appoints his or her personal representative; and often oversees the collection, distribution, or sale of the decedent’s property. The probate property, that is. Thus, it is important for the practitioner to know the difference between probate and non-probate property. The easy, but unsatisfactory answer is that probate property is anything other than non-probate property. So what is non-probate property; that is, what property passes at death without a permission slip from the court?

Here’s another easy, but more instructive answer: non-probate property is property that does not pass under the decedent’s will.  As the list below illustrates, that could include a lot of property:

Non-Probate Property

Property that passes by beneficiary designation, which generally includes:

  • Life insurance policies (but see below),
  • Annuities,
  • Individual retirement accounts or IRAs,
  • Roth IRAs,
  • Employee Stock Ownership Plans or ESOPs,
  • Pension Plans, including
  • Defined Benefit Plans,
  • Money Purchase Plans,
  • 401(k) Plans,
  • 403(b) Plans,
  • Simple IRA Plans (Savings Incentive Match Plans for Employees),
  • SEP Plans (Simplified Employee Pension),
  • SARSEP Plans (Salary Reduction Simplified Employee Pension),
  • Payroll Deduction IRAs,
  • Profit Sharing Plans,
  • Governmental Plans under 401(a),
  • 457 Plans,
  • 409A Nonqualified Deferred Compensation Plans,
  • Payable-on-Death or POD Accounts,
  • Transfer-on-Death of TOD Accounts, including investment accounts,
  • Property that passes by deed, which includes:
  • Real estate owned in 1. joint tenancy with rights to survivorship (JTWS), 2. life estate where property passes to another upon death of life tenant, and 3. any property the decedent held in a life estate,
  • Property that passes by account designation, which includes: 1. Bank accounts owned jointly, and 2. brokerage accounts owned jointly,
  • Vehicles owned jointly,
  • Safety deposit boxes,
  • Other property that falls within the definition of a “non-probate transfer,” including ; 1. Insurance policies, contracts of employment, bonds, mortgages, promissory notes, deposit agreements, pension plans, trust agreements, conveyances, or virtually any other written instrument effective as a contract, gift, conveyance, or trust.
  • Property owned by a trustee of a trust. (Of course, if the decedent is the settlor of a trust, that trust will be subject to an administration somewhat similar to the administration that takes place in probate, but away from the prying eyes of both a judge and the public.)

Non-probate property bypasses Go, bypasses the court, and goes directly to the beneficiary, the joint account holder, the joint owner. Often the movement of the property from the decedent owner to the surviving owner is virtually seamless—well, painless anyway: beneficiaries file a death claim with the insurance company, attach a death certificate, and voila! the death proceeds appear. But often the movement requires a trip to the DMV. Even that need not be a chore. If the word “or” separated the two names on the title, the survivor doesn’t have to do anything; however, if he or she wishes to remove the decedent’s name off the title, then mailing or hand-delivering a “Vehicle Application for Title” to the DMV along with a check to cover the cost of removing the name, will do the job. If the word “and” separates the name, the survivor will also need to provide a death certificate.

Likewise, the surviving owner(s) of real property owned in a JTWS must take a few steps to terminate the decedent’s interest in the property under most states’ probate code, including filing an affidavit substantially similar to the statutory form in the county where the property is located and attaching a copy of the death certificate. (By the way, if the decedent owned real estate as a trustee of a trust, the successor trustee should file a similar affidavit along with a death certificate, indicating that the successor trustee has assumed the position of the deceased trustee with regard to the property.)

It should go without saying, but I’ll say it anyway: non-probate property will pass to the intended beneficiary, account holder, surviving owner notwithstanding what the decedent said in his or her will. In other words, the beneficiary designation, the deed, the POD/TOD, etc. controls the disposition of non-probate property, not the will.

Probate Property

If non-probate property includes everything on the list above, probate property includes everything else, including the following:

  • Life insurance/annuities payable to the insured’s estate,
  • Personal property—art, furniture, antiques, and the like—not jointly owned,
  • Real estate the decedent owns either as an individual or as a tenant in common,
  • Accounts owned individually by the decedent, including
    • Bank accounts,
    • Brokerage accounts,
    • Etc.
  • Any other property the decedent owned individually at death.

And if it’s probate property, the court will have some say about who gets what, governed by the decedent’s will of course.

The Attorney’s Job

The probate attorney’s or personal representative’s or PR’s job is to separate the non-probate wheat from the probate chaff. To do that, the attorney or PR should consult the relevant documents. That requires gathering account statements, life insurance policies, retirement plan beneficiary designations, titles, deeds, and the like to determine how the property is owned and who the beneficiaries are in the relevant cases. That may turn out to be more difficult than it seems, largely because you can’t be sure the decedent’s heirs know fact from fiction. Thus, don’t rely on the life insurance policy in the decedent’s file drawer to tell you who or what is the beneficiary. Ask the life insurance agent or call the company to get a copy of the most recent beneficiary designation. Call the title company to pull the most recent vesting deed. (You might even go further, some attorneys argue that there’s no need to record a deed to a revocable trust; thus, the most recent recorded vesting deed may not be the most recent deed.) In other words, check primary sources.

Filed Under: Administration, Ancillary Probate, Elective Share, Estate Planning, Estate Tax, Insurance, Intestacy, Living Will, Probate, Succession Planning, Trusts, Wills Tagged With: , , ,

Gonna Be a Prince of a Mess

April 26, 2016 by Leave a Comment

Well, I guess since Prince didn’t have one, you don’t need one either . . .

Prince’s sister has said the superstar musician had no known will and that she has filed paperwork asking a Minneapolis court appoint a special administrator to oversee his estate.

Something tells me this will neither go smoothly nor end well.

Filed Under: Administration, Estate Planning, Estate Tax, Probate, Trusts, Wealth Transfer, Wills Tagged With:

Estate Administration in 25 Essential But Not Always Easy Steps

April 9, 2016 by Leave a Comment

For your reading pleasure, an excellent but brief article titled, “Estate Planning and Administration – Be Prepared for the Year That Follows the Death of a Loved One.” Worthy of a read if only to put you on notice that there’s a lot to do following the death of a loved one.

Here’s the middle paragraph:

Estate Administration is a Process. The estate administration process generally takes one to three years to complete and is supervised by attorneys. There are numerous steps in the estate administration process, including the following: (1) get the executor appointed by the Surrogate’s Court, (2) open an estate checking account, (3) gather assets, consolidate and retitle them in the name of the estate, (4) address claims and expenses, (5) obtain date of death values for all assets, including appraisals for hard to value assets, (6) prepare estate tax returns (federal and state), (7) prepare income tax returns (including decedent’s final life income tax return and the estate’s income tax return, (8) obtain a closing letter and appropriate tax waivers from the IRS and state tax authorities, (9) distribution of the estate and funding of trusts, including allocation of assets among various beneficiaries, and (10) prepare accounting (formal or informal) and obtain receipt and releases from the estate beneficiaries.

Some of these steps may not come into play depending on the size of the deceased’s estate and how it’s set up. Nevertheless, lots to do.

Filed Under: Administration, Attorneys, Estate Planning, Estate Tax, Wealth Transfer

Quote for the Day

March 9, 2016 by Leave a Comment

What is decanting and how does it relate to trusts?

The term “decanting” sounds mysterious, but in reality, decanting is simply a form of trust modification initiated by a trustee. The trustee accomplishes the modification by moving assets from one trust to a new trust with different terms. Estate planning attorneys draft trusts designed to last for generations based on assumptions about the beneficiaries that may bear no semblance to reality. Decanting then stems from the desire to make changes to an otherwise irrevocable trust.

Gerry W. Beyer and Melissa J. Willms, “Decanting is not just for sommeliers,” Estate Planning Studies, July 2014

Filed Under: Administration, Decanting, Estate Planning, Quote for the Day, Trusts

Quote for the Day

March 8, 2016 by Leave a Comment

 

On becoming a trustee one enters a relationship which is governed by rules and bounded by limits. A trustee who thinks of himself or herself as controlling the relationship is far more likely to encounter serious trouble than a trustee who recognizes that the more practical characterization is that of a faithful partner with the grantor and the beneficiaries, in fulfilling the trust’s objectives.

“What It Means to Be a Trustee: A Guide for Clients,” by the Fiduciary Matters Subcommittee of the ACTEC Practice Committee, 2005

Filed Under: Administration, Estate Planning, Quote for the Day, Trusts

Trusts: You Can Avoid Probate, but You Can’t Avoid (All) the Costs

March 2, 2016 by Leave a Comment

Onassis_NYTThere’s a misconception out there that if you use a revocable living trust in your estate planning, you avoid probate and save on all those costs associated with probate. Well, maybe and maybe not.

First, in order to avoid probate, virtually everything you own has to be owned in a way that will do just that–avoid probate. Sounds circular, I know. What I mean is that if you own property

  1. As joint tenants with rights of survivorship–it will avoid probate.
  2. In so-called POD or Payable on Death accounts–it will avoid probate.
  3. That allows for you to name beneficiaries–a life insurance policy, for example–it will avoid probate.
  4. In a revocable trust–it will avoid probate.
  5. That doesn’t amount to much–you may avoid probate, or at least be eligible for some sort of simplified probate.

Put all that together, and you may avoid probate. But if you have a will, it will need to be proved valid in court–usually a routine process. If you own property that doesn’t fall in one of the categories I just listed, it will probably have to go through probate.

Bottom line, you may be able to avoid probate if you do everything right, own all of your property correctly, dot all your “i’s” and cross all your “t’s.” But if you don’t . . .

That said, to the extent that you do own your property as described above, you reap the big benefit of probate: You keep things private. For example, if your will says who gets the Picasso that hangs over the fireplace and who gets the cabin in the mountains when you die, anybody with the time to go down to the court and check can find that out. If, however, you say who gets what in your revocable trust, nobody has to know except for the people receiving the property. Maintaining your family’s privacy and saving time are the main benefits of avoiding probate to the degree possible. Don’t believe me? Ask Jackie Onassis’s family.

Now, about those costs. Yes, there are costs to probate. Attorney’s fees. Executor’s fees. Court costs. They all add up and can be expensive. But you know what, it costs money to administer a trust when you die: Attorney’s fees, again. Trustee’s fees, again. But typically no court costs. So yes, your estate will probably save money by avoiding probate, but your estate will still spend some money.

One more thing, a thing about revocable living trusts as an estate planning tool: They are predictable. You set them up. You outline all your plans, appoint trustees you trust, and tell them what you want them to do–in writing–and it’s all so predictable and happens almost seamlessly.

You turn that all over to the court in a probate proceeding, and predictability goes out the window.

Revocable living trusts are the way to go–for most people.

Filed Under: Administration, Estate Planning, Estate Planning 101, Funding, Probate, Trusts, Wealth Transfer, Wills Tagged With:

NFA Firearms in an Estate: What’s an Executor (or Trustee?) to Do?

March 1, 2016 by Leave a Comment

Question Mark_YellowYou’re the executor or personal representative of an estate (they’re the same thing, by the way) or a trustee of a trust. The owner of some NFA firearms has died, and you’re left to deal with the aftermath. (Of course, the real “owner” of any NFA arms in a trust is the trustee, but generally, the initial trustee is the grantor of the trust, who we on the outside looking in, view as the owner.) What can you do with the NFA firearms? If you turn them over to the decedent’s heir under the will or the beneficiaries of his trust, do you have to pay the transfer tax?

Fortunately, the BATFE has been fairly helpful on this point, though it could have been more clear. On September 5, 199, the Bureau issued a letter in which it said the following:

If there are unregistered NFA firearms in the estate, these firearms are contraband and cannot be registered by the estate. The executor of the estate should contact the local ATF office to arrange for the abandonment of the unregistered firearms.

So now you know what to do with unregistered NFA items–if you’re an “executor of the estate,” that is. Did the Bureau also mean “trustee of a trust”? Maybe. Later in the same letter, after the word “heir” has been repeated a number of times, we do see this language:

NFA firearms may be transferred directly interstate to a beneficiary of the estate.

Beneficiary. Is that the same as an heir? Though they are often used interchangeably, the two terms are not precise synonyms. Often the word heir is use to define someone who receives property under a will or via a state’s intestacy laws. Beneficiary, on the other hand, is just as often used to describe someone who receives property under trust. Again, they are also used interchangeably. How is the BATFE using the terms in this letter? Inquiring minds would like to know. Maybe this line from the letter helps,

A lawful heir is anyone named in the decedent’s will or, in the absence of a will, anyone entitled to inherit under the laws of the State in which the decedent last resided. (emphasis supplied)

Hmmm. This sounds like intestacy, but is that all? Does “under the laws of the State” mean the same thing as “operation of law” (see below)?

Well, recently, the Bureau issued the final Rule 41F, which affects so-call NFA or gun trusts, among other things:

It [the new rule] also adds a new section to ATF’s regulations to address the possession and transfer of firearms registered to a decedent. The new section clarifies that the executor, administrator, personal representative, or other person authorized under State law to dispose of property in an estate may possess a firearm registered to a decedent during the term of probate without such possession being treated as a “transfer” under the NF A. It also specifies that the transfer of the firearm to any beneficiary of the estate may be made on a tax-exempt basis. (emphasis supplied)

Such transfers are not taxable transfers because they are not “voluntary”; that is, the executor, personal representative, etc. must follow the terms of the will (or trust?) or law. He or she has no choice. That’s all fine and dandy, but are transfers from trust to beneficiaries tax exempt? Come on. Tell us BATFE. You can do it.

In the commentary on the new rule, the Bureau gets a clear as it’s probably going to get in answering that question, when it says:

Transfers of NFA firearms from an estate to a lawful heir are necessary because the deceased registrant can no longer possess the firearm. For this reason, ATF has long considered any transfer necessitated because of death to be involuntary and tax-free when the transfer is made to a lawful heir as designated by the decedent or State law. However, when an NFA firearm is transferred from an estate to a person other than a lawful heir, it is considered a voluntary transfer because the decision has been made to transfer the firearm to a person who would not take possession as a matter of law. Such transfers cannot be considered involuntary and should not be exempt from the transfer tax. Other tax-exempt transfers—including those made by operation of law—may be effected by submitting Form 5. Instructions are provided on the form. (emphasis supplied)

Operation of law would seem to include transfers mandated by language in trusts, trusts which are created under state law, laws that include fiduciary standards that compel trustees to carry out the wishes of the grantor of the trust, whose wishes are stated in the language of the trust. I’m hanging my hat on that.

There are a couple of other things I’d do to make sure that hat fits in every circumstance, but I won’t go into that here.

 

Filed Under: 41F, Administration, Estate Planning, Firearms, Gun Trusts, NFA Trusts, Probate, Trusts, Wills Tagged With: ,

Practicing Law without a License: What Could Go Wrong?

February 10, 2016 by Leave a Comment

Slide1So a relative just gave me a blank copy of her parents’s will and trust, documents prepared for them by a financial planner, a guy not licensed to practice law. I have no idea what this guy knows about financial planning. I know that he knows very little about wills and trusts. Here’s a short list of problems with the documents:

1. Both documents are simple, fill-in-the-blank forms. How do I know that? The blanks. I have no idea whether the financial planner guy discussed with his clients the who, what, where, and why of filling in those blanks. For example, both the will and the trust provide spaces for appointing executors, guardians, and trustees. Was any discussion had about who should occupy those positions and why–maybe–they should not?

2. And about that guardian. The article in the will providing for the appointment of a guardian speaks only of acting on behalf of “a minor child.” The clients are both in their 80s. Obviously, the will was prepared especially for them–not!IMG_2720

3. The will gives the impression that the executor has the power to administer the clients’s estate with little or no court supervision when, in fact, state law grants that power, but only if the size of the estate does not exceed certain maximums. In Utah, that maximum is $100,000. The provision is misleading and, frankly, unnecessary, especially given that the clients’ home is worth at least $400,000, well in excess of the $100,000 maximum for informal probate in Utah or $200,000 in Wyoming. In such cases, the law already allows a simplified probate variously called informal probate, unsupervised probate, distribution by affidavit and summary procedure, and the like. My impression is that the will in question makes a big to-do about this “power” so as to appear like it’s actually accomplishing something beyond wasting paper.

4. In Utah a will is valid if it is in writing, is signed by the testator (the husband), and is witnessed by two competent persons.  In Wyoming, the requirements are virtually the same, though the witnesses must also be disinterested. This will has that, plus an affidavit that the testator is also supposed to sign and which, apparently, needs to be witnessed by three witnesses–and all these signatures are supposed to be acknowledged before a notary public. This is overkill masquerading as thoroughness and an indication that this is a one-size-fits-all-states document. Worse, the affidavit is poorly written. To wit, it says.

I sign and execute this instrument as my Will . . . (emphasis supplied)

Which instrument would that be? Arguably the affidavit. Since the affidavit is a separate document and because it refers to just any “Will” and not to the “Last Will and Testament of Joe Blow,” the word “instrument” is ambiguous and virtually worthless.

5. By the way, I see no “Last Will and Testament” for the wife. She is referred to in the title of the trust, but only by first name! The same goes for the signature line at the end of the trust.

6. The will is a so-called pour over will, a document that essentially directs that all property the testator owns at the time of his death goes into a trust, either a testamentary trust (one created by the will and which comes into existence at his death) or an existing living trust (a trust he created during his lifetime and which he’s been using while he’s alive). In this case, the trust is a living will. So far, so good. But here’s the problem: it is not apparent that anything has been done to ensure that the testator’s property has been transferred to the living trust. If that’s the case, then there will be formal probate and the living trust is of no value until the testator dies. NO VALUE.

7. And when he dies? Well, the trust has some value at that point, but just some. I’ll be brief:

a. The lifetime dispositive provisions–the directions on income and property while both grantors are alive–are minimal and leave a lot to the imagination.

b. The directions on what happens upon the death of the first-to-die are even more unclear and attempt to do a few things that I’m not sure you can do. Can a trust become irrevocable at the death of the first-to-die, but only as to certain property? I don’t think so. What should happen–and what often happens under a well-drafted trust–is that at death a separate trust is created for that property and that trust is irrevocable. The provision in the trust in this case is a mishmash of gobbledygook.

c. The provisions regarding specific distributions of personal property or financial assets is likewise poorly drafted and confusing. To boot, the provisions introduces new terminology that is not defined elsewhere in the trust. As trustee, I could guess, but could I be sure that I’m doing the grantors’ bidding when such ambiguity exists?

d. There is no discussion of marital deduction, applicable exclusion amount, portability, basis or other potentially estate and income tax saving concepts.

I could go on. Did he even talk about durable powers of attorney? About health care directives? The list of potential problems is endless, bu I’m going to stop here. The closer I read the documents, the madder I get. And that’s without contemplating the very likely fact that little or no counseling took place when the financial planner handed this garbage to his clients.

The grantors/testators paid good money for this mishmash of words, money they may never get back. As a person licensed to practice law in Utah and Wyoming, I have my differences with the whole idea of licensing, but what I’ve just described is a big argument in the other direction.

And so, dear reader, CAVEAT EMPTOR. Buyer beware. Better yet, simply don’t buy. You can do as well as this guy by yourself. But when it comes to wills and trusts, you can do a lot better by talking to a licensed attorney, particularly one who practices in the area of wills and trusts. Trust me.

 

Filed Under: Administration, Estate Planning 101, Probate, Trusts, Wills Tagged With:

Death Certificates: For Those Who Won’t Take Your Word That Your Loved One Died

January 29, 2016 by Leave a Comment

Your loved one has died, and you discover that you are the personal representative or executor of his or her will. What do you do now? Well, possibly the first thing you should do is order the death certificates; you’re going to need them–in spades:

  • To file an estate tax return–if necessary.
  • To prove to the life insurance company that the insured has died.
  • To transfer ownership of cars, trucks, boats, and any other titled vehicle.
  • To the bank.
  • To a creditor.
  • Etc. etc. etc.

Order multiple copies, maybe 10 or more. Though some will be satisfied with a copy of a death certificate, many will not, and if you don’t have an original at hand, things come to a stop. So place ordering death certificates at or near the top of your to-do list.

In Wyoming, go to the Office of Vital Statistics at the Wyoming Department of Health. The cost is $10.00 per certificate.

In Utah, go to the Office of Vital Records of the Utah Department of Health. The cost is $18.00 per certificate.

Filed Under: Administration, Wills Tagged With: , ,
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