APRIL 23, 2012 VOLUME 19 NUMBER 16
Let us try to demystify probate avoidance for a moment. Note that for the purposes of this description, we are not going to argue with you about whether avoidance of probate is good, bad, desirable or a foolish goal — we start here with the assumption that probate avoidance is important. Another day, perhaps, we will discuss with you whether you ought to be concerned about probate avoidance.
Definition of terms first: probate is the court process by which your estate is settled and distributed to your heirs (if you have not made a valid will) or your devisees (if you have). Confusingly, “probate” is also the term applied (in most states) to the court where probate proceedings, guardianship, conservatorship and sometimes even civil commitment and adult adoptions are conducted. We are not talking here about how to avoid probate court altogether, but just about how to keep your estate from having to go through the probate process upon your death.
Arranged (more or less) from least desirable to most, here are some of the ways to avoid probate of your estate upon your death:
Die poor. In Arizona, an estate consisting of up to $50,000 of personal property can be collected by the people who claim to be entitled to it without the need of a probate court proceeding. The affidavit for collection of personal property is widely available and usually free. Your survivors can use it to transfer title to your auto, or to collect small bank (or other financial) accounts. The statute providing for collection of small estates also provides a mechanism for the surviving spouse to get a decedent’s last paycheck, and for beneficiaries to transfer title to real property up to another $75,000 in value. Most other states have a similar law, but with dollar limits that vary widely.
Give it all away. One sure-fire way to avoid probate: give everything to your kids (or whomever you want to receive your stuff) now. The main problem with this approach should be obvious — what if they won’t let you live in your house any more, or withhold the interest you counted on them returning to you each month? Things change: you might change your mind about leaving everything to that child, or to all your children. The child you transfer assets to might marry someone you don’t trust. Worse yet, that child might die — leaving you at the mercy of his or her spouse and children. Maybe you and the child you give your stuff to will end up disagreeing about when you need to go to a nursing home, or whether you ought to get married late in life, or even take in a roommate.
As an aside, it amazes us how often clients come to us after having given everything to their children. Things so often do not work out as planned. This is a very poor way to handle your estate planning — but it would avoid probate. We hear that those new-fangled strap-on jet packs avoid traffic jams, too — but we don’t recommend them as a means of getting to the doctors office.
Joint tenancy. People often refer to this method of holding title by its formal name: “joint tenancy with right of survivorship.” That makes the value of the title pretty clear — the surviving joint tenant(s) own the deceased joint tenant’s portion of the property upon death of one joint tenant. You can have more than two joint tenants — upon the death of any one, the survivors’ interests all increase. We liken this arrangement to a tontine — a lovely idea that combines the best elements of estate planning and lotteries.
Lawyers generally discourage the use of joint tenancy in estate planning. The problems are less obvious than simply giving away your stuff, but they are still real. You might later decide that the child you established the joint tenancy with should get a larger or smaller share of your estate — but the joint tenancy is always, by definition, an equal ownership interest with all the other joint tenants. People who favor joint tenancy as an alternative to good estate planning invariably, in our experience, seem to think it would be OK to name just one child as joint tenant, and to trust her (or him) to divide the property among siblings. That often works just fine — but it often leads to family disputes when the children have different expectations or understandings.
Other problems with joint tenancy: you subject your property to the creditors, spouses and business partners of the child you put on your title. You lose the power to refinance your home, to cash out your certificate of deposit, or to liquidate your government bonds — more accurately, you lose the power to do those things unless your joint tenant will also go to the title company or the bank with you and sign willingly.
Lawyers tend to dislike joint tenancy, except in one circumstance. Many people own their property in joint tenancy with spouses (homes are especially likely to be titled in that fashion), and we lawyers generally think that is alright. In Arizona, there is another alternative between spouses that we like a little better: community property with right of survivorship. That conveys some income tax benefits to a surviving spouse while still avoiding the necessity of any probate on the first spouse’s death.
Beneficiary designations. You probably have a beneficiary (maybe multiple beneficiaries) named on your life insurance policy, on any annuities you have been talked into buying, and on your retirement account (if there is any death benefit included). Did you know that you can do the same thing with bank accounts, stocks and bonds, and even (in Arizona and a handful of other states) real estate?
POD (payable on death) bank accounts — you can designate a POD beneficiary (some banks use the acronym ITF — “in trust for” — and it means the exact same thing) who has no current interest in your account but receives it automatically upon your death. You can even name multiple POD beneficiaries. And you can do this at banks, credit unions, savings and loans. Caution: if you go to your bank and say “I heard that there’s a way I can put my son’s name on my bank account” the clerk will almost always hand you a joint tenancy signature card. Make clear that you’re talking about POD designations — they are used less commonly but are a better fit for most people.
TOD (transfer on death) for stocks and bonds — there is a designation similar to the bank POD account for stocks, bonds, brokerage accounts and mutual funds. It is usually referred to by its acronym, TOD. It is actually more flexible than the POD designation available to banks — it allows you to designate what happens if a TOD beneficiary should die before you, for instance. Talk to your stockbroker about this titling arrangement if you think it might be a good idea for you — but talk to your lawyer first.
Beneficiary deeds for real estate — this one is available in only about a dozen states, but Arizona is one of those. It is like a POD or TOD designation for real estate — including your home. It only works on real estate located in Arizona or one of the other beneficiary deed states. The beneficiary deed conveys no current interest in your property, but avoids probate and vests directly in your beneficiary upon recording of your death certificate. You and your spouse can, for example, own your home as community property with rights of survivorship but upon the second death automatically transfer to your children in equal shares (with provisions about what happens if one of them should not survive both of you) upon the second death. We have written about beneficiary deeds in Arizona before, and our earlier explanations are still valid (even though our newsletter style has been updated).
What’s wrong with these beneficiary-based devices? Two things, at least: (1) they don’t provide for what happens if you make life changes that effectively adjust your estate plan (if, for instance, you live off of one account that was to go to one or two children, and thereby reduce their share of the estate) and (2) they make it hard to change your estate plan (if you decide to disinherit a child, for instance, you have to make sure to change all of the operative documents and titles). But in the right circumstance, beneficiary designations can effectively transfer your estate without probate — they act as a sort of a “poor man’s” trust.
Trusts. Which gets us to the most efficient way to avoid probate for most people — the living trust. To be clear, the trust doesn’t really avoid probate at all — but your trust assets do not have to go through the probate process and so anything you have transferred during life to the trust will avoid probate. It is the “funding” of the trust that avoids probate, not the trust itself.
So there you have it. Probate avoidance in a nutshell. But wait — what’s not on that list? Did you notice? There is so much confusion about the missing item, which does not avoid probate:
Making a will. Preparing and signing your will is a good thing to do. It avoids intestate succession, which might not be right for you. It designates who will be appointed by the court to act as your personal representative. It can name the person who will be your children’s (or your incapacitated spouse’s) guardian. It can even create a trust. But it does not avoid probate.
Your will is instead instructions to the probate court. It has no effect unless and until it is admitted to probate, which another way of saying that a court has determined that it really is your last will. Clients frequently say: “thank goodness I’ve signed my will today. Now I can sleep better knowing my children won’t have to go through probate.” We say: “sit down. We have some more talking to do. Obviously we have failed to get you to understand the distinction between wills and probate avoidance.” Then we talk about living trusts.
Did that help? Do you have a better idea for probate avoidance (we’ve left a couple of less common methods off)? We’d love to hear from you.
NOVEMBER 8, 2010 VOLUME 17 NUMBER 35
Elder law attorneys often see some version of the same story. Parents put child’s name on the deed to their home “just in case.” Dispute between parents and child breaks out when child asserts ownership interest. Sometimes litigation ensues. Child claims that joint ownership of the home means just that — the child owns an interest. The parents claim that putting the child’s name on the deed was just a convenience, or an estate planning device, or a mistake.
The resolution of the recurring story will depend very heavily on individual facts. It should be easy to see that evidence of conversations between the parents and child will tip the result one way or the other, and that written agreements will be even more persuasive than remembered conversations. Again and again, though, we see cases where family members just couldn’t imagine having disagreements in the future. Sometimes the analysis is complicated by the family’s failure to be clear about complicated legal relationships from the outset.
A good illustration of this repeating story is reported in a Missouri appellate case from a few weeks ago. Evan and Evelyn Hoit, who had lived on a Kansas farm for nearly four decades, decided to move closer to their two daughters in Kearney, Missouri. They told Mrs. Hoit’s son (from a prior marriage), Brent Rankin; he and his wife thought it might be a good idea to move closer to family, too. The Rankins suggested that the Hoits could look for a home in Kearney for them, too.
The Rankins had been pre-qualified for a loan, and had hired a real estate agent to find them some likely candidates. They asked the Hoits to check out a couple of the best candidates. The Hoits did, but also went looking for their own place; they found a house that they thought would be perfect for them, and told the Rankins they were going to buy it. The Hoits offered to let the Rankins live in the lower level, but Mrs. Hoit told her son that they intended to buy the house in any event.
The Rankins thought the house would work for them, too; they suggested that the Hoits buy it and let them live there. The Hoits put down 25% of the purchase price. The Rankins agreed to borrow the remainder, since they had pre-qualified for a loan and the Hoit’s farm had not yet sold. No one discussed exactly how the title would be taken, though everyone understood that when the Hoits died the Rankins would inherit the house. Mrs. Hoit later explained that she had intended to leave her other assets — all the couple’s cash and investments — to their two daughters.
Although the couples did not explicitly discuss the title arrangements, the lender apparently made a decision that it would be important to get all four names on the property (and the loan). The result: the four individuals ended up owning the property as joint tenants with right of survivorship.
When the Hoit farm in Kansas sold two months later, they paid off the mortgage with the proceeds. But when they tried to move into the house, they found that the Rankins had taken over one upstairs room that Mrs. Hoit had expressly reserved for her piano, and that there was little space for them to put the rest of their furniture. The family relationships began to fray almost immediately.
Within a few months the Hoits were demanding that the Rankins move out of the house. The Rankins refused, claiming that they owned the property. The Hoits ended up buying another house in Kearney and moving into it. Then they filed a lawsuit asking the courts to decide how much of the first home belonged to them, and how much (if any) to the Rankins.
The trial judge ruled that the Hoits had paid almost the entire cost of purchasing and maintaining the home — their contribution had been $192,734.26, as compared to the $2,757.48 paid by the Rankins. He awarded the home to the Hoits and imposed a lien against it in favor of the Rankins for their small contribution. The Rankins appealed, arguing that they owned half of the home.
The Missouri Court of Appeals affirmed the trial court holding. It noted that, though there is a presumption of equal ownership in joint tenancy titling, that presumption can be overcome by showing the unequal contributions of the joint owners. The appellate court expressly noted that one of the choices available to the Hoits would have been a “beneficiary deed” (recognized in Missouri, as in Arizona and about a dozen other states), but that the evidence showed that the choice of deed was made not by the Hoits but by the lender. Hoit v. Rankin, September 28, 2010.
Though both the trial judge and the appellate court agreed that the evidence was clear that the Hoits did not intend to make a present gift of the property, that successful (for them) outcome may be beside the point. This family, which once got along well enough to experiment with a shared living arrangement, has now spent thousands of dollars in legal fees and two years in the courts battling over what they intended when they started their experiment. Would they have gotten a happier result if one or both couples had talked with a lawyer in advance, and considered what might happen if things didn’t work out as well as they hoped?
OCTOBER 25, 2010 VOLUME 17 NUMBER 33
It has been a while since we wrote about “vest pocket” deeds. That reflects the reality that they are more common in fiction and mythology than in the real world of legal proceedings, but they occasionally do crop up. The problems of validity and effect can involve lawyers after the signer’s death, even in cases where avoiding legal complications was the signer’s primary goal.
Cecil Stockwell lived all of his 91 years in rural South Dakota. He acquired and farmed land totaling over 1,000 acres in 14 parcels. He had five children; for the last twenty years of his life he lived (and was farming partners) with his son Lloyd Stockwell.
In 1992 Cecil Stockwell visited a local lawyer in Freeman, SD, about estate planning. He had the attorney prepare a power of attorney naming Lloyd as his agent, plus four separate deeds to his properties. Each deed conveyed a different number of acres of land to one of his four sons — Lloyd, for instance, would receive 594 acres, and his oldest son Cecil, Jr., would receive 80 acres. Each of the four deeds retained for Cecil the right to farm, rent or use the land; on his death the four deeds would have conveyed their respective properties to his sons.
“Would have” is the operative phrase here. Cecil never recorded the deeds, and he never gave any of them to his sons. He took them home and filed them away. They became what are sometimes called “vest pocket” or, more simply, “pocket” deeds. They would not be effective until actually delivered to the recipients or recorded; their effect if discovered after Cecil’s death would be uncertain.
Cecil did not let the deeds create that confusion, however. In 2001, after he became unhappy with one of his sons, Cecil Stockwell asked his daughter-in-law to help him redraft the old, undelivered deeds. With her help he modified the properties that would be transferred to each of his sons, with the result that Lloyd’s inheritance would be significantly larger. One son (the one he had become unhappy with) was left out entirely, one’s share stayed the same, and the fourth son’s share was reduced somewhat.
After he signed all three of the new deeds and had them notarized, Cecil returned home and handed them to Lloyd, saying “Here you go” or words to that effect. Lloyd took the deeds into his father’s bedroom (remember that he lived with Lloyd) and put them in the dresser that Cecil used.
Two years later there was more family disharmony when three of Cecil’s sons initiated a guardianship and conservatorship action, seeking to have him put in a nursing home. Lloyd helped him get a lawyer to fight the petition; in the course of that proceeding his lawyer had a videotape prepared showing Cecil’s ability to identify all of his children and describe where they lived and what they did for a living. He did get the size of his farm wrong (he said 300 acres, when it was really more than 1,000 acres), and he had trouble naming one of his grandchildren or remembering that his ex-wife had remarried.
Six months after the guardianship petition was initiated Lloyd told Cecil that it was time for him to move into a nursing home. Cecil reminded Lloyd that the deeds were still in the dresser drawer, told him to get them out and have them recorded. Then he asked to be taken on a last tour of his farmland and moved into the nursing home. Lloyd had the deeds recorded a few days later. Four months after that Cecil died.
Lloyd then filed a lawsuit — a “quiet title” action — to have the deeds validated and his inheritance confirmed. His brothers objected, saying that their father was incompetent at the time of signing and/or at the time the deed was delivered. The trial judge found that the three deeds signed in 2001 were effective, and confirmed the transfer of the farmland to three sons.
The south Dakota Supreme Court agreed with the trial judge and affirmed the verdict. One key element of that ruling: the appellate judges agreed that the deeds were delivered when Cecil Stockwell handed them to his son Lloyd — or at least that Lloyd’s deed was. That meant that the question of Cecil’s capacity had to be tested as of 2001, when the deeds were signed and handed to Lloyd, rather than 2004, when they were recorded. Interestingly, an argument could be made that the deeds to the other two sons had to be tested against Cecil’s capacity in 2004, even though Lloyd’s deed only raised questions about Cecil’s capacity in 2001. Stockwell v. Stockwell, October 13, 2010.
Could a lawyer have helped Cecil Stockwell accomplish what he wanted? Absolutely, and at a much smaller cost than his sons ended up paying to their lawyers to sort out the meaning and effect of the vest pocket deeds. With good legal advice, Cecil might have gone ahead and recorded the “life estate” deeds he signed in 2001 — though he would then have given up the ability to make further changes. A lawyer might have recommended that he transfer all of his property into a revocable living trust, which would have allowed him to retain the ability to change who would receive which parcel at his death, and even to make clear who would farm each parcel until that time. Even a will naming beneficiaries would have been less expensive than the vest pocket deeds — as it turned out, his sons filed a probate proceeding anyway, and avoidance of probate might well have been Cecil’s primary motivation.
Because Cecil Stockwell did not live in Arizona (or Arkansas, Colorado, Indiana, Kansas, Missouri, Montana, Michigan, Nevada, New Mexico, Ohio, Oklahoma or Wisconsin) he did not have one useful option available to him. An attorney in those states could have told him about the concept of a “beneficiary” deed — sometimes called a “transfer on death” or “TOD” deed — which might have been exactly what he needed. Such a deed is revocable, but makes the transfer automatic upon the owner’s death. If that had been available to him, it might have let him record his deeds back in 1992 and again in 2001 without blocking him from making later changes as his feelings toward his sons changed.
Five years ago the Arizona Legislature adopted an interesting new law. Modeled on a similar law in Missouri, the “beneficiary deed” statute permitted property owners to designate who would receive their property on death—much like a “payable on death” bank account. Now the state legislature has revisited beneficiary deeds, and made them even more flexible and useful.
One unanswered problem arose a handful of times under the previous law. What would happen if a person named to receive property by a beneficiary deed died before the original property owner? If, for example, a parent signed a beneficiary deed to “my two children, John and Mary,” and Mary died before the parent leaving children of her own, did that mean that her children would receive her share, or that son John would own the entire property on the parent’s death?
Effective this fall (the date is not yet set and won’t be known until the legislature adjourns) beneficiary deeds can solve that problem. Under a law signed by Governor Napolitano on March 24, 2006, all new beneficiary deeds must include a paragraph indicating which of two choices the owner prefers. The language required by the new law:
If a grantee beneficiary predeceases the owner, the conveyance to that grantee beneficiary shall either (choose one):
[] Become null and void.
[] Become part of the estate of the grantee beneficiary.
There are still a number of important issues to remember in the use of beneficiary deeds, and it will not be appropriate in every case to use this approach to transfer property. With some of the following limitations in mind, however, it may be that the beneficiary deed is a simple, inexpensive and useful method to avoid probate, especially in small estates. Among the remaining limitations for beneficiary deeds:
They are not available in every state. As of this writing, only Arizona, Arkansas, Colorado, Kansas, Missouri, Nevada, New Mexico and Ohio permit the use of beneficiary deeds.
An individual using a beneficiary deed will need to coordinate his or her estate plan as to multiple assets—it may, for instance, be necessary to keep track of beneficiary designations on multiple properties, several bank accounts, and a number of insurance policies and brokerage accounts. Anyone with more than a handful of assets should probably consider a living trust instead.
A beneficiary deed can be changed by a surviving owner, so in the case of a husband and wife (for example), the final distribution is not set until the second death.
The beneficiary deed provides no estate tax planning benefits for larger estates.
And what about individuals who signed an Arizona beneficiary deed before the new law was passed? Nothing in the law requires them to change their deeds, but they would be well-advised to consider updating the language to clarify what would happen if a beneficiary died before them. For those who might sign a beneficiary deed between now and the effective date, the best approach is less clear. Both the existing law and the new version require that beneficiary deeds be “substantially in the following form”—and then the form changes. Our advice: if you plan on signing an Arizona beneficiary deed in the next few months, expect to sign an updated version this fall.
Last week Elder Law Issues reported on Arizona’s new “Beneficiary Deed” statute. A law passed by the Arizona legislature this year creates a new, simpler way to pass title to real property, without any requirement of probate and avoiding the cost of establishing a living trust.
A number of readers had questions about the new deed form. Questions included:
When can I sign a beneficiary deed?
Most laws take effect 90 days after the legislature adjourns. Adjournment is now scheduled for Thursday, May 10. If the legislature actually adjourns that day, the new law will be effective (and beneficiary deeds will become an available choice) on August 3, 2001.
Will the recipients under a beneficiary deed receive the benefit of stepped-up basis for income taxes?
Yes. To explain: when you inherit property from another, you usually do not have to pay income taxes on the increase in value of that property during the prior owner’s life. For purposes of calculating the income tax on capital gains, your “basis” in the property is said to have been “stepped up” to its value on the date of death of the person who left it to you. Beneficiary deeds will reach the same result.
How will beneficiary deeds affect ALTCS (Medicaid) recovery rights?
ALTCS is Arizona’s long-term care Medicaid program. When it provides benefits, the program has a claim against the recipient’s estate. Under current law that claim can only be collected in a probate proceeding. Since the beneficiary deed will avoid the probate process, ALTCS’ claim will not be levied against the property. This makes beneficiary deeds particularly attractive to ALTCS recipients and their families.
It is worth noting that a different law passed by the legislature this year may undo some of this benefit. “Non-probate transfers” (including beneficiary deeds, living trusts and joint tenancy bank accounts, but not real estate held as joint tenants) may now be challenged by creditors, including ALTCS.
Why would anyone want to create a living trust now?
Beneficiary deeds will be a valuable new estate planning tool, but will not replace other options. Perhaps most importantly, a beneficiary deed will not help a married couple take advantage of the maximum estate tax exemption if their combined estates exceed the taxable level (currently $675,000).
Trusts remain a more effective way to control property after death (for a disabled or spendthrift child, for example). Trusts can be used for real property outside Arizona. Another advantage for trusts: a single amendment can change your entire estate plan, rather than requiring new deeds and beneficiary designation changes on each individual asset.
For those who already have established living trusts, the beneficiary deed probably represents a step backward. For those now considering their options for the first time the beneficiary deed may be an attractive, low-cost choice for estate planning.
