Posts Tagged ‘transfer on death’

Avoiding Probate — A Good Idea, But Not Always Effective


Some people really don’t like city traffic, and will go out of their way to get on the freeway whenever possible. Of course, that approach can backfire — freeway traffic is sometimes snarled, and sometimes in unpredictable ways (and at unpredictable times). Avoidance of surface traffic can be a good practice, but of course isn’t itself the end goal; the real point is to get where you’re going quickly and efficiently, with a minimum of frustration along the way.

We’ve been looking for a good metaphor to explain our view of “probate”, that vilified court process that often (though much less often than you probably think) has to be undertaken upon a family member’s death. Maybe the freeway/city street metaphor isn’t perfect, but we think it might be suggestive of the real goal. You probably want to make administration of your estate as simple as possible, while minimizing cost and aggravation for your family. You also want your wishes carried out, and you might add “no squabbling” to your list of goals. Those are your goals; “avoid probate” is no more the goal than “get on the freeway” is a goal in driving.

Why the extended traffic metaphor? Because of a case we read this month from the Missouri Court of Appeals. We thought it was a good case study in how probate avoidance sometimes is ineffective (and, in the reported case, probably even drove up the cost and complication).

Susan McCauley (not her real name) had a modest estate. In fact, her debts apparently exceeded the value of her assets. She had three children, a home, a commercial rental property, a brokerage account and three bank accounts. She and her late husband had borrowed money against the commercial property and also had a signature loan with the bank; the amount of those two loans exceeded the value of the property itself.

Whether avoidance of probate was Susan’s primary goal or not, she took several steps to accomplish that result. She made her bank accounts “payable on death” to her three children. She put a “transfer on death” titling on her brokerage account, again naming her three children. She executed beneficiary deeds naming the children as beneficiaries for all of her real estate (Missouri, like Arizona, is one of the minority of states that recognize a “beneficiary deed” or “revocable transfer on death deed” on real estate).

When Susan died in 2008, her son filed a simplified probate proceeding allowed under Missouri law, in which he recited that her probate assets consisted only of her personal property with a value of about $16,000. Since that amount was well under the Missouri limit of $40,000, he sought an order allowing transfer of all of her remaining personal property to the three children.

Not so fast, argued the bank which held Susan’s two notes. The bank claimed that Susan owed over $370,000, and asked the probate court to order her son to bring all of those non-probate transfers (the beneficiary deeds, the POD and TOD accounts) back into the probate proceeding to satisfy their claim. Meanwhile, the bank went ahead and foreclosed on the one property it had most direct control over — the commercial real estate, which secured one of its loans.

After sale of the rental building, the bank’s remaining claim was a little over $164,000. It continued to insist that it should be able to get her house, bank and brokerage accounts to defray the remaining debt.

Susan’s son explained to the probate court that there really hadn’t been all that much left in her estate. After payment of about $22,000 in other debts (presumably, but not clearly, including her final medical and funeral/burial expenses), the three children had split the house and about $60,000 — including about $30,000 in equity in Susan’s house. The bank asked for judgment against the three children for the $60,000.

The probate court disagreed about the equity in the house, noting that the children had borrowed $50,000 against the house in order to pay those last expenses and that values were lower than the bank thought (remember that all this was taking place in 2008/2009). It ordered that the house be listed and sold, and that any net proceeds after repayment of the loan taken out after Susan’s death should be given to the bank. The probate court also removed Susan’s son as personal representative and appointed a new, neutral personal representative.

The bank appealed, arguing that (a) the probate court should have entered a judgment against Susan’s children and ordered them to repay the estate, rather than ordering sale of the house for whatever it might raise, and (b) the proper valuation of damages should be based on the value of the house on the date it was transferred (that is, on the date of Susan’s death), not months later as property values slid. The Missouri Court of Appeals agreed on both points.

The result: the probate court was directed to calculate and enter a judgment against Susan’s three children for the amount they received (up to the bank’s debt, which clearly exceeded any valuation of the amount they received). Rather than ordering sale of the house and distribution of any net proceeds, the children would be liable for the value of everything they got — and that valuation would be as of the date of their mother’s death, not based on what they held at the time of resolution. Merriott v. Merriott, August 19, 2014.

Would the same result have occurred if Susan had lived and died in Arizona? Probably. Missouri’s statutes on bringing assets back into an estate to satisfy creditors are very similar.

In hindsight, Susan would have made a better plan by simply writing a will leaving her estate to her three children and keeping all of her assets in her name alone. Her son could have been appointed personal representative, listed her home and sold it for what it would have actually fetched on the market, identified the priority of claims against her estate (paying funeral and last-illness expenses first, plus his own — and his lawyer’s — fees for administration) and simply paid any remaining balance to the bank (and other creditors, if there were any). He (and his siblings) would not have borne the risk of a falling real estate market, would not have incurred additional administrative expenses, would not have suffered the indignity of being removed as personal representative of his mother’s estate, and would not have had a money judgment leveled against him (and his siblings). But sometimes you don’t know what traffic is going to look like until you’re already on the on-ramp.

“Vest Pocket” Deed Is Valid to Transfer Family Farmland

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.

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.

Creditor Files Claim Against Parent’s Joint Tenancy Account


Ruth Libros, like many parents, wanted to make it easy for her children to manage her affairs if she became incapacitated. She also wanted to make sure there would be no costly or time-consuming probate proceedings upon her death. She decided one way to achieve both results was to put her largest assets, including her Morgan Stanley Dean Witter brokerage account, in joint tenancy with her two children.

One of the reasons lawyers often give for not establishing joint tenancy accounts is the possibility that one’s own assets may become exposed to one’s children’s creditors. Ms. Libros learned about this problem the hard way.

Three years after Ms. Libros opened the joint tenancy account a Philadelphia law firm specializing in personal injury actions (Deutsch, Larrimore & Farnish, P.C.) secured a judgment against Ms. Libros’ daughter Joyce Johnson. The $300,000 judgment represented the law firm’s attempt to recover funds stolen by Ms. Johnson while she was a bookkeeper at the firm. For some unspecified reason, Ms. Libros paid a portion of the judgment against her daughter; the law firm noticed that the brokerage account on which the check was drawn listed Ms. Johnson as a joint owner.

Deutsch, Larrimore & Farnish  filed a Writ of Execution against the brokerage account—in other words, they sought to seize the account to satisfy their judgment against Ms. Johnson. Ms. Libros objected, citing Pennsylvania law on joint tenancy bank accounts. She prevailed, but the law firm appealed to the Superior Court (in Pennsylvania, the intermediate appellate court).

Pennsylvania law, like that in Arizona and most other states, makes it clear that a joint bank account belongs to the listed account holders in proportion to their contributions. In other words, Ms. Libros’ account did not belong to her children because they had not put in any of the money. That merely restates an ancient common-law principle about joint accounts.

The law firm, however, pointed out that the Pennsylvania law did not specifically mention brokerage accounts, and it argued that Ms. Libros had made a gift to her children when she put their names on the account. Ms. Libros pointed out that neither of her children had put any money into the account, nor had either of them ever withdrawn funds or otherwise acted as if they owned any portion of the account. Her children’s names were on her account, explained Ms. Libros, only as a “convenience,” to make it easier for them to gain access to her money in the event she became incapable of taking care of her own finances, or upon her death. The Superior Court dismissed the law firm’s claim and agreed with the lower court—Ms. Libros’ account could not be seized by her daughter’s creditors just because she had put it in joint tenancy. Deutsch, Larrimore & Farnish, P.C., v. Johnson, January 22, 2002.

Ms. Libros’ legal dilemma should not be lost on parents facing the same question in Arizona. While Ms. Libros was successful in protecting her account, she incurred significant legal fees and suffered years of anxiety over the possibility that her life savings might be lost.

A far better approach for someone in Ms. Libros’ situation would be to establish a “Transfer on Death” title on her brokerage account. That, along with a well-drafted durable power of attorney, would have accomplished what she set out to do without exposing her account to legal challenges.


On April 29, 2004—seven long years after the issue first arose—Ms. Libros finally obtained some finality in the legal defense of her Morgan Stanley Dean Witter account. On that date the Pennsylvania Supreme Court affirmed the ruling described above, agreeing that Ms. Libros’ brokerage account should enjoy the same protection that a bank account or any account at another financial institution would receive. Although Ms. Libros prevailed, the uncertainty and financial cost to defending her position was almost certainly incalculable. Just to underscore the uncertainty, two of the Justices of the Pennsylvania Supreme Court would have reversed the earlier decisions and directed the trial judge to review whether Ms. Libros’ account might actually have been available to the law firm holding the judgment against her daughter.

Retirement Plan Beneficiary Designation Controls Despite Will Provisions


“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


“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


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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