Posts Tagged ‘payable on death’

To Our Favorite Estate Planning Client: Please Help Us Help You

JUNE 1, 2009  VOLUME 16, NUMBER 42

Dear client:

It has been wonderful working with you. We are pleased that your estate plan is completed, and simultaneously saddened that we will not be seeing much of you for a couple years. Please remember to get in touch with us if there are major life changes. In any event, you should probably make an appointment in five or six years just to check on what is new — either in your life or in the  world of estate planning.

In the meantime, we would very much like it if you would help us out. It will make things much easier for us (and for your family) if you will take these additional steps:

Please talk with your family. The best way to minimize disappointment and disputes after your death is to let everyone know what to expect in advance. Be prepared to discuss issues with your family, too. You may even make changes to your estate plan based on those conversations — we will be happy to have follow-up discussions as needed. There is no legal requirement that you either share or withhold copies, but there are good practical reasons to let them in on the plans.

Recently we had a client who carefully prepared her advance medical directives. She told the son she named as her agent what she wanted, and she completed all the documents correctly. When she fell ill, her daughter (who had not maintained much contact) could not believe her mother would want to refuse medical care. She initiated legal proceedings to force continued aggressive treatment. She was not successful, but the cost and heartache were both considerable — and brother and sister no longer speak to one another. Mom could have avoided that outcome, we think, if she had discussed her wishes with both children.

Coordinate your beneficiary designations. If your will leaves everything to your children equally, but your life insurance names only your oldest daughter as beneficiary, your daughter gets the proceeds regardless of your will. Is that what you intend? If so, make it clear. If not, change the beneficiary designation to match your will. Different considerations are involved with life insurance, IRAs, and other kinds of policies; please ask us for assistance in getting your beneficiary designations arranged.

In a recent case in our office, a mother told her three children that they and her long-time companion were named as equal beneficiaries on her IRA account. When she died it turned out that the companion was the only beneficiary. Did mom intend that result, or was it an oversight? An excellent relationship with the grieving companion is endangered by this outcome. If, in fact, mom wanted to split the account among the four people most important in her life, that will not be the result.

In our recent example, even if all four beneficiaries were to agree that the account should have been split, it is not as easy as just doing that. Income tax consequences mean that the children would receive considerably less than their mother apparently intended. Even if everything can be worked out harmoniously, there will be legal expenses, not to mention a period of uncertainty and unease.Please talk with your family, and even show them the documentation. Don’t leave them uncertain about whether you really intended the result your documents indicate.

Don’t tinker with your beneficiary designations, documents or titles. If someone at your bank says you should make all your accounts into “Payable on Death” (POD) accounts, please talk to us first. If we have helped you name a trust as beneficiary on your IRA and your accountant tells you that’s a mistake, please talk to us before you change it back.

Please do not put your children’s name on your house, or your bank account, “just in case.” We prepared your documents to take care of “just in case,” and your changes may undo the value and effect of the documents we prepared for you. We are happy to discuss the effect of the change in title; if your banker tells you that we “just don’t know how banks work,” remind him that he is not the expert on how the law works. There is nothing that prevents us from meeting with you, your insurance agent and/or your broker all at once; we can then discuss and reach agreement on what should happen to effect your wishes.

Prepare a personal property list. Almost every will we prepare includes a provision that allows you to designate individual items of personal property (like family heirlooms, antique furniture, favorite paintings, etc.) that should be left to specific individuals. We encourage you to complete that list, even if it remains a work in progress. It need not list every item in your house, but time and again we have seen the outright joy on the faces of friends and family members (and particularly, we might note, on the faces of grandchildren) who received an individual item from such a list. It can convey a special message to your loved ones.

Some years ago we handled the estate of a woman whose personal property list ran to more than fifty pages. She felt strongly about each item on the list; you probably do not have that many specific bequests you wish to make. If your list is only three items long, that is fine. And once again, we urge you to show it to your family; your son may surprise you by telling you that he doesn’t actually have any interest in grandma’s antique cedar chest, and you should know that now so that you can leave it to your granddaughter instead.

Prepare a list of assets and directions. It really helps if you have left a roadmap for the person who handles your estate. You know perfectly well where the life insurance policy you bought in 1955 is located, and how often the statement from that little bank in Ohio arrives. Your daughter does not, and if she is handling your estate she will spend countless hours looking for those kinds of information. You can make her job much easier if you give her some clues and direction. She also will need to make decisions about your funeral, your obituary and even what (if any) music will be played. If you have told her what you want, her job will be so much less stressful, and the other family members can hardly criticize her for following your directions.

When you signed your estate planning documents, we gave you a form called “What My Family Should Know.” It is not the only way to gather this information, but it can be a useful starting point. If you can not locate the form, do not hesitate to contact us for a new copy; even if you have partly completed it and just want to start over or make a few changes, we will be happy to give you another blank copy. Just ask.

Incidentally, we would really like it if your online login and password information was available somewhere. Whoever handles your estate (whether after your death or after you have become incapacitated) will be able to check (and close) your e-mail account, get up-to-date information from your online bank and brokerage services, and complete many steps that take much longer if they must be done solely by mail. There is a balance to be struck, of course; you need to keep that information confidential while you are still alive and capable, but available to the one person who needs it when you are not able to pass it along in person. Let us know if you need help with this project; we might have some ideas about how to manage the competing interests.

Feel free to update our information. Many of our clients send us periodic updates of their assets, titles and information. We do not charge to glance at those forms as they arrive, and that means there is at least one other place your family might look for roughly current information. We will simply hold the information in your file, to be updated again when we next hear from you.

We hope you enjoy perfect health, and that your estate plan turns out not to have been needed. This is one instance in which it is good if it turns out you didn’t need to expend the funds. But please help us so that if something should happen, we can make your estate plan work the way you intended. And we’re looking forward to seeing you in five years (or sooner) to update.

Arizona Legislature Changes Format For Beneficiary Deed

APRIL 3, 2006  VOLUME 13, NUMBER 40

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.

Two Life Insurance Beneficiary Designations Require Litigation

APRIL 28, 2003 VOLUME 10, NUMBER 43

When people consider “estate planning” they usually are thinking about preparing a will. Sometimes the common conception of estate planning includes preparing a trust as well, and often durable powers of attorney are also part of the plan. But two recent cases demonstrate that “estate planning” is really much more—it includes the titling of assets and beneficiary designations as well. The most carefully-considered estate plan may fail if those other issues are not also dealt with at the same time.

Lori Flanigan was divorced and had two children when she married her second husband, Craig Munson. Ms. Flanigan had two life insurance policies through her work totaling $217,600. Her divorce agreement required her to name the children as beneficiaries on her life insurance, but she had not gotten around to completing a beneficiary designation form when she died in 1995.

Her insurance policies provided that they would be paid to a surviving spouse if she had not designated a beneficiary, and so the proceeds were distributed to Mr. Munson. The children’s grandparents (who took custody after Ms. Flanigan died) then filed a lawsuit to impose a constructive trust on the remaining insurance proceeds and Mr. Munson’s home, since he had used some of the proceeds to pay off his mortgage and other debts.

The trial judge denied the grandparents their requested relief, but the New Jersey Supreme Court agreed that the insurance proceeds should go to the children. It ordered the money transferred to the children’s benefit—eight years and thousands of dollars in legal fees after her death. Flanigan v. Munson, April 3, 2003.

Daniel Lambert was not so lucky. He argued that his mother’s life insurance policy should be part of her estate, and that her will specified that he was to receive a portion of that estate. Unfortunately for him, whatever his mother’s intentions might have been she had named her daughter Suella Southard as beneficiary.

Another sibling, brother Steven Powell, was prepared to testify that their mother had always intended that the life insurance policy should be used to pay the costs of handling her estate and then distributed to the children according to her will. He was not allowed to testify, however, because of a long-standing court rule prohibiting testimony about conversations with deceased persons, the so-called “Dead Man’s Statute.” The Indiana Court of Appeals refused to permit imposition of a constructive trust on the life insurance proceeds. Lambert v. Southard, April 1, 2003.

The moral: “estate planning” requires consideration of beneficiary designations and account titles as well as signing of a will, trust and powers of attorney. Even a carefully-drafted estate plan, including a will, a living trust and both financial and health care powers of attorney, can be altered or frustrated by incorrect (or missing) beneficiary designations, joint tenancies, “payable on death,” “transfer on death” or “in trust for” account titles or other, similar arrangements.

Heir Sues Agent For Adding Beneficiaries To Bank Accounts

JULY 23, 2001 VOLUME 9, NUMBER 4

Fae Powell had given her nephew Jackie Powell a power of attorney so that he could handle her financial affairs. Mr. Powell used that power of attorney to change over $600,000 worth of bank CDs into “payable on death” status, naming himself and other nephews and nieces as beneficiaries. Ms. Powell’s will, however, left her estate to her sister and others. Did Mr. Powell have the authority to make those changes in his aunt’s estate plan?

The question posed to the Nebraska courts was actually more complicated than that. In most states it is clear that a power of attorney does not give the agent (sometimes also referred to as the “attorney-in-fact”) authority to make gifts unless there is a specific provision in the document. But is changing accounts so that they pass automatically on death to someone else really a gift? After all, no transfer would occur until after Ms. Powell’s death, so it could be argued that her agent had made no gifts.

Ms. Powell’s situation was further complicated by her nephew’s insistence that she had specifically instructed him to make each change, and that he was simply signing her name to actions she was really directing herself. Of course, it would be difficult for him to prove that she gave him such instructions, unless she did so in the presence of neutral observers.

Ms. Powell’s sister Eleine Hampshire did not believe that Mr. Powell was carrying out the decedent’s instructions. She pointed out that if the changes had not been made she would have inherited nearly $80,000 from Ms. Powell’s estate, and so she sued Mr. Powell for fraud.

The Nebraska Court of Appeals threw Ms. Hampshire’s case out of court. The justices decided that the action should have been brought by Ms. Powell’s estate against her attorney-in-fact, and that Ms. Hampshire could not sue directly for the loss to the estate. Never mind that Mr. Powell was named as personal representative of the estate—that problem would have to be solved by someone seeking to disqualify him from serving in the probate court. Ms. Hampshire had simply filed her lawsuit improperly. Hampshire v. Powell, May 8, 2001.

The Nebraska court’s decision, based as it is on procedural grounds, fails to answer the underlying question: does an agent under a power of attorney have the authority to change beneficiary designations on accounts, life insurance and the like? Other cases have decided the question differently, depending on the individual facts in each instance. It would certainly be better to have the change in beneficiary designations signed by the individual herself, rather than by the agent. In Arizona the law is a little clearer: unless the power of attorney gives express authority to make such changes (and the authority is separately initialed on the form), they are probably invalid.

Retirement Plan Beneficiary Designation Controls Despite Will Provisions

DECEMBER 11, 2000 VOLUME 8, NUMBER 24

“Estate planning” means more than just preparing and signing a will. The families of Donald and Mary Perkins learned that even when a will is in place, there still may be problems.

Mr. and Mrs. Perkins had both been married before. Each of them had three children from their prior marriages. Mr. Perkins worked as a bus driver in Shreveport, Louisiana, where he had a company life insurance policy, a pension plan benefit and a 401(k) account.

The couple presumably thought they had completed their estate plan. They had both signed wills, and those wills were perfectly valid. Each provided that, in the event of simultaneous death, they would be deemed to have survived the other.

In September, 1996, Mr. and Mrs. Perkins were riding a motorcycle when they were struck head-on by a truck. Both died instantly, and so neither one survived the other. This was the exact possibility their wills addressed, and so it seemed that Mr. Perkins’ property would pass to his three children, and Mrs. Perkins’ share would go to her three children.

Much of Mr. Perkins’ estate, however, was tied up in the three benefit plans at his place of employment. His 401(k) plan named one daughter, Allecca Perkins Tucker, as the alternate beneficiary in case his wife did not survive him. The life insurance plan named all three of his children as alternate beneficiaries.

Mr. Perkins’ retirement plan, however, was a little different. It named his wife as primary beneficiary, but named his brother as alternate beneficiary if his wife “should die before” him.

Despite the clear language of Mr. Perkins’ will, the question of entitlement to his benefits ended up in Louisiana Federal Court. When the ruling there was appealed, the U.S. Fifth Circuit Court of Appeals ended up resolving the issue.

Although non-lawyers may think that a will disposes of all property, the courts recognized that Mr. Perkins’ beneficiary designations controlled who would receive his life insurance and retirement benefits. The court pointed to the clear language of the alternate beneficiary designations on his life insurance and 401(k) plan, and awarded the former to all of Mr. Perkins’ children and the latter to the one daughter named as alternate beneficiary. The retirement plan’s beneficiary designation, however, was interpreted naming his wife because she had not died before him—those proceeds went to his wife’s estate and, ultimately, to her three children. Tucker v. Shreveport Transit Management, Inc., September 14, 2000.

The moral: an estate plan is not complete when a will (or even a trust) is signed. Beneficiary designations and “pay on death” (POD) or “in trust for” (ITF) account titling can change your estate plan. A coordinated estate plan should consider not only those types of accounts, but also “transfer on death” (TOD) accounts, joint tenancy property and other titling issues.

Living Trusts Are Valuable Tools Alright, But Watch That Pitch

MARCH 1, 1999 VOLUME 6, NUMBER 35

“Since the Revocable Living Trust avoids the expensive and lengthy legal process known as ‘probate’” proclaims a national insurance sales agency in its brochure, “it is fast replacing the Last Will and Testament as the preferred method for asset distribution.” Elsewhere, the same insurance agency promises that the “Living Trust avoids probate and is less expensive, quicker and private. The Living Trust completely eliminates the court process.”

In their zeal to sell living trusts, many non-lawyer document preparers and not a few lawyers resort to half-truths and the occasional outright misrepresentation. A review of the literature handed to seniors at a recent Tucson “estate planning” seminar (really a pitch for living trusts, annuities and insurance) reveals some of the misinformation:

The pitch– “Aren’t trusts only for the rich? No. Anyone with property or assets totalling more than $30,000 should consider a trust to avoid probate.”

The truth–in Arizona, estates of up to $50,000 in personal property plus $50,000 in real estate can be transferred through a very simple affidavit process. But even more fundamentally, even larger estates seldom go through the probate process. Holding property in “joint tenancy with right of survivorship” is a popular way to avoid the probate process, particularly between spouses. Bank accounts, stock certificates, bonds, brokerage accounts, annuities, life insurance and many other assets can be titled as “POD–payable on death” (or “TOD–transfer on death”) to avoid the necessity of probate. The simple reality is that probate is initiated in a tiny minority of cases, and often only as to a fraction of the decedent’s assets.

The pitch– “At your death, the court must first validify [sic] your will. This process is called probate. During probate not only is your estate tied up, it is also publicly recorded making your private information available for anyone, family friend, or stranger.” And elsewhere: “A recent survey indicated that it takes sixteen months for the average estate in America to clear probate.”

The truth–the probate process is, indeed, the mechanism by which the court determines the validity of your will. In almost every case, that determination is simple and straightforward–will contests are extremely rare. More importantly, your estate will not be “tied up” during the probate process. Your personal representative will be authorized to liquidate assets as may be needed, pay your debts, distribute living expenses to your spouse and children, and even make distributions of some of your estate. Despite the common belief that estate information is publicly available, there is no requirement that an inventory or accounting be filed unless requested by one of the beneficiaries. And the typical probate process, at least in Arizona, takes about six months, with many probates being opened and closed virtually simultaneously.

The pitch– “This [probate] is also the process that can cost your heirs up to 8% of your estate.” Another pamphlet trumpets that “Probate expenses…can cost between 3% to 12% of an estate’s gross value.”

The truth–the cost of probate proceedings must (at least in Arizona) be based on the actual work required to administer the estate. If the personal representative chooses not to charge (which is usually the case, especially when the personal representative is also an heir), then the only costs will be legal fees. While those fees may be substantial, they are more likely to be 1% than 8% of the estate. Arizona law is more restrictive than some states, but even in those states which provide for a percentage fee for the attorney handling a probate, it is more likely to be 3% than 8%. Administering a living trust will also cost something, though likely not as much as a probate for a comparable estate.

Living trusts are an important estate planning tool–and option– for many people. They may be particularly valuable for those who have real estate in more than one state, or disabled (or spendthrift) children, or large estates requiring careful tax planning. But living trusts are seriously oversold, and consultation with a competent estate planning attorney is the best way to make the necessary cost-benefit analysis. Be wary about getting legal advice from an insurance agent.

Legislative Changes II

JULY 4, 1994 VOLUME 2, NUMBER 1

In last week’s Elder Law Issues, we told you about various changes to Arizona law made during the most recent session of the state Legislature. This week we will attempt to explain the significance of a single piece of new legislation, the Revised Arizona Probate Code.

This year’s adoption of an updated version of the Uniform Probate Code did not change most provisions of the existing probate law. Several new provisions, however, promise to be beneficial for most elderly Arizonans.

“POD” and “TOD”

It has long been possible to hold bank accounts as “payable on death” to another person. Usually, the acount title will look something like “Mary Jones POD Susie Jones.” Such an account avoids the necessity of probate altogether (since the account goes to Susie Jones automatically on Mary Jones’ death). At the same time, Mary Jones avoids the risks she would have run if she had placed the account in joint tenancy with Susie.

Unfortunately, it has not been possible to hold stocks, bonds, mutual funds and brokerage accounts in a similar fashion. That has meant that people with modest estates are required to go to the trouble and expense of establishing living trusts if they wish to avoid probate without placing stocks and bonds in joint tenancy with their children.

Beginning January 1, 1995, stocks, bonds, mutual funds and brokerage accounts can be held in “transfer on death” (TOD) accounts. This form of account title will work just like POD accounts at banks, and should be very attractive to the modestly well-off older person who does not wish to establish a living trust. With the new law, it is even possible to name a “substituted beneficiary” who will receive the account if the first beneficiary is deceased.

Right of Survivorship

Most married couples hold all or most of their property in joint tenancy. This permits the property to pass to the surviving spouse without having to go through the probate process, and real estate agents and title companies routinely recommend joint tenancy on all real estate.

Unfortunately, there are some modest income tax benefits to holding property (particularly investment property) as community property. The trade-off has been that property titled as community property must be probated on the first death, and the cost of probate often erased any tax benefit.

Now married couples will be able to have it both ways. They can hold property as “community property with right of survivorship,” avoid probate and still get the income tax benefit at the first death.

Other Changes

Without becoming too technical, there are a number of other changes to the probate laws designed to make the process more logical and consistent with modern views. For instance, step-children are treated as more like natural children in some circumstances. Divorce now has the effect of revoking all the provisions of a deceased spouse’s will, trust, life insurance policy or other benefit for the ex-spouse (unless the decedent made it clear he intended to leave things to his ex in spite of the divorce). Slightly larger estates can avoid the probate process altogether. And several archaic common-law principles have been limited or abolished outright.

As always, we welcome general inquiries on behalf of patients, residents and clients. We will try to help caregivers and health care providers determine whether further legal assistance is needed, and provide general information about the effect of the law on the elderly and disabled.

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