Tenth Annual Probate Administration

Transcription

1 Tenth Annual Probate Administration November 13, 2014 Chapter 4 9:45-10:15am Identifying and Administering Nonprobate Assets Jenna Ichikawa, Stokes Lawrence, P.S. PowerPoint distributed at the program and also available for download in electronic format: 1. Identifying and Administering Probate v. Non-Probate Assets (PowerPoint) Electronic format only: 1. Identifying and Administering Non-Probate Assets (Handout)

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3 11/6/2014 IDENTIFYING AND ADMINISTERING PROBATE V. NONPROBATE ASSETS Jenna B. Ichikawa Stokes Lawrence P.S Fifth Avenue, Suite 3000 Seattle, Washington (206) November 13, 2014 Probate: Legal process to determine decedent s ownership interests & testamentary plan. Probate Asset: Asset that decedent owned that passes under his or her Will. Nonprobate Asset: Assets decedent owned that pass under written instrument or arrangement other than the person s Will. RCW (10). 2 Examples of Nonprobate Assets Revocable Living Trust Joint Tenancy with Right of Survivorship (i.e. bank accounts) Government Bonds Community Property Agreements Transfer on Death Deed Note or Contract affected by death 3 1

4 11/6/2014 Examples of Nonprobate Assets Beneficiary Designations: Payable on Death (POD) Bank Account Transfer on Death (TOD) Security Account Individual Retirement Account Life Insurance Contract Employee Benefit Plan 4 Revocable Living Trusts Trust for which decedent is grantor that typically becomes irrevocable at death May operate like a Will Caution: Assets must be titled in name of RLT Tax treatment of RLT 5 Joint Tenancy w/ Right of Survivorship Ownership passes as matter of law at death Banks may establish Joint Tenancy with and without rights of survivorship Statutory presumption that surviving depositors own remaining funds at death Presumption is rebuttable, In re Estate of Kirpes, 155 Wash.App. 598 (Div ) 6 2

5 11/6/2014 Government Bonds Treasury bonds in two names will pass to survivor at first death Caution: months long delay to transfer title when in certificate form 7 Beneficiary Designation Payable On Death Accounts Transfer on Death Security Accounts Individual Retirement Accounts Life Insurance Contracts Employee Benefit Plans Exception: Testamentary Disposition of Nonprobate Assets 8 Uniform Real Property Transfer on Death Act New law as of June 12, 2014, see RCW Allows transfer of real property at grantor s death without probate proceeding Formalities required (1) Interest transfers at death (2) Recorded in county where property is located (3) No delivery required Fully revocable during transferor s lifetime 3

6 11/6/2014 Community Property Agreements Typically 3-pronged: All current property All future acquisitions Disposition upon death CPA prevails over prior and later executed Wills, See Estate of Lyman & Estate of Brown Wills prevail if mutual w/ Will Agreement see Higgins v. Stafford 10 Transferring Nonprobate Assets Contact institution to determine procedure Provide Death Certificate Life Insurance request Form 712 (needed for filing Estate & Gift Taxes) Take care when transferring retirement assets 11 Liability of Beneficiaries PR: no duty to administer nonprobate assets PR has authority to determine value & make a claim for contribution as needed RCW : A beneficiary of a nonprobate asset that was subject to satisfaction of the decedent s general liabilities immediately before the decedent s death takes the asset subject to liabilities, claims, estate taxes, and the fair share of expenses of administration

7 11/6/2014 Testamentary Disposition of Nonprobate Assets (RCW 11.11) Will may override SOME beneficiary designations if SPECIFICALLY referenced Designation must exist PRIOR to Will Does NOT include: Real Property passing under JTWROS Deed or conveyance possession upon death Transfer on Death Deed Community Property Agreement IRA or Bond 13 Testamentary Disposition of Nonprobate Assets DOES include: Joint Bank Accounts With Right of Survivorship Payable on Death or Trust Bank Accounts Transfer on Death Securities or Security Accounts Revocable Trusts Notes or Contracts affected by death Carefully review assets under RCW Estate of Burkes v. Kidd 14 Manary v. Anderson, 176 Wn.2d 342 January 2013 WA Supreme Court case Testator s specific bequest of real estate effective even though title was held in RLT Testator satisfied requirements of Act Nonprobate asset qualified Trust Beneficiary Designation existed prior to Will Testator specifically referenced asset in Will Testamentary disposition prevails 15 5

8 11/6/2014 Plan Ahead to Avoid Administration Calamities Remind clients of impact of JTWROS ownership & beneficiary designations Coordinate transfer of nonprobate assets with overall estate plan Cautionary Example: Parents with Minor Children 16 6

9 IDENTIFYING AND ADMINISTERING NONPROBATE ASSETS November 13, 2014 By Jenna B. Ichikawa Stokes Lawrence, P.S Fifth Avenue, Suite 3000 Seattle, WA (206) JENNA B. ICHIKAWA is an associate in the Trusts and Estate Planning group at Stokes Lawrence, P.S. Her practice focuses on assisting individuals and families with trust and estate administration, as well as, all aspects of the estate planning process, from basic planning to complex planning for taxable estates. Ms. Ichikawa s practice also includes an emphasis on gift and estate taxation and the law of tax-exempt organizations. Ms. Ichikawa graduated from the University of Washington School of Law. She received her B.A. in History from the University of Puget Sound and her M.P.A. from the Evans School of Public Affairs at the University of Washington. JBI-000 \ docx

10 PROBATE V. NONPROBATE ASSETS 1. PROBATE VS. NONPROBATE PROPERTY a. Probate. Probate is a court-supervised procedure by which the ownership of property of a deceased person (the decedent) is determined. Probate takes place in Superior Courts of each county across Washington State. The purpose of probate proceedings is to permit the decedent s Personal Representative to take possession, protect and preserve the decedent s property; pay all debts, claims and taxes necessary to settle the decedent s affairs; and to distribute the decedent s property to the rightfully entitled recipients. The Personal Representative s duties and involvement in distributing such property differs depending on whether the asset is a probate or nonprobate asset. b. Probate Property. The general definition of a probate asset is an asset in which the decedent had an ownership interest that passes under the terms of the decedent s Last Will and Testament at death. c. Nonprobate Property. The general definition of a nonprobate asset is all other assets in which the decedent had an ownership interest. Nonprobate assets pass according to their own terms and are not subject to the dispositive provisions of a Will. The statutory definition of a nonprobate asset is similar to the general definition, but an important distinction is that it specifically excludes the payable on death provisions of a life insurance policy, annuity, or other similar contract, or of an employee benefit plan from the definition of nonprobate assets (see statute below). The exclusion of these assets in the statutory definition is an important distinction to keep in mind when applying Chapter 11 of the Revised Code of Washington to probate and nonprobate assets. JBI-000 \ docx 2

11 "Nonprobate asset" means those rights and interests of a person having beneficial ownership of an asset that pass on the person's death under a written instrument or arrangement other than the person's will. "Nonprobate asset" includes, but is not limited to, a right or interest passing under a joint tenancy with right of survivorship, joint bank account with right of survivorship, transfer on death deed, payable on death or trust bank account, transfer on death security or security account, deed or conveyance if possession has been postponed until the death of the person, trust of which the person is grantor and that becomes effective or irrevocable only upon the person's death, community property agreement, individual retirement account or bond, or note or other contract the payment or performance of which is affected by the death of the person. "Nonprobate asset" does not include: A payable-on-death provision of a life insurance policy, annuity, or other similar contract, or of an employee benefit plan... RCW (10). d. Examples of Nonprobate Assets. Some common nonprobate assets are: i. Revocable Living Trusts. A Revocable Living Trust (RLT) is a trust that is established during the decedent s lifetime, usually naming the decedent as the trustee while alive and competent, and naming a successor trustee to carry out the terms of the trust upon death or incompetence. It can contain the same dispositive provisions as a Will, including the distribution of assets and the establishment of new trusts after the decedent s death. In order for an asset to be governed by the RLT, the asset must be titled in the name of the RLT. A common mistake is for someone to establish a RLT but never change the title on the house, the car, bank accounts, etc. that they intended to place in the trust. For income tax purposes, while the decedent is alive, the RLT is a conduit and treated like any other asset owned by the decedent, but at death, the RLT (or the portion owned by the decedent, in the case of an RLT with more than one grantor) becomes irrevocable and is treated as a separate entity for income tax purposes. For estate tax purposes, since it is a revocable trust, the grantor is treated as owning the assets resulting in inclusion in the grantor s taxable estate. JBI-000 \ docx 3

12 ii. Joint Tenancy with Right of Survivorship (JTWROS). This is a form of ownership that results in the decedent s interest in real and personal property passing to the surviving joint tenant(s) as a matter of law upon the death of the decedent. RCW In the case of bank accounts, note RCW permits the establishment of a joint bank account without the right of survivorship and also permits the establishment of a joint bank account with the right of survivorship. It is very important to examine the documents establishing the bank account to determine whether or not the joint account includes the survivorship provision. RCW gives us a statutory presumption that funds remaining in a joint account with right of survivorship after a decedent s death belong to the surviving depositor (or equally to the survivors if there is more than one surviving joint tenant) unless there is clear and convincing evidence of a contrary intent at the time the account was created. See In re Estate of Kirpes, 155 Wash.App. 598, 230 P.3d 199 (Div ). iii. Government Bonds. Where two people are named on a Treasury bond and one dies, the surviving person becomes the owner as if the survivor had been the only owner from the time the bond was issued. iv. Beneficiary Designation. Several assets including retirement accounts, life insurance, brokerage accounts and bank accounts allow for the funds in the account to pass outside the Will or RLT if the account owner has designated a beneficiary at his or her death. Examples include Payable on Death (POD) or Transfer on Death (TOD) accounts. One exception to the transfer of some of these assets to their designated beneficiary however, comes under Washington s Testamentary Disposition of Nonprobate Assets Act (also known as the Superwill provisions) in RCW Chapter (see below). JBI-000 \ docx 4

13 v. Uniform Real Property Transfer on Death Act. As of June 12, 2014, it is now possible to transfer real property at the grantor s death without a probate proceeding under RCW An individual may transfer real property to one or more beneficiaries, effective upon the transferor s death by executing and recording a transfer on death (TOD) deed. The deed must state that the transfer is to occur at the transferor s death and it must be recorded in the public records office of the county auditor in the county where the property is located. Delivery of the deed is not required and the beneficiary need not be notified of their future interest. The TOD deed is fully revocable during the transferor s lifetime via (1) a new TOD deed that expressly revokes all or part of the earlier TOD deed or is inconsistent with the earlier TOD deed, (2) an instrument of revocation that expressly revokes the TOD deed, or (3) an inter vivos deed that expressly revokes the TOD deed. Any of these instruments must be acknowledged by the original transferor, dated after the original TOD deed and recorded in the county where the original TOD deed was recorded. Beneficiaries have no present interest in the property during the transferor s lifetime and upon transferor s death have 9 months within which to disclaim their interest. If a beneficiary fails to survive the transferor, the interest lapses. vi. Community Property Agreement. A Community Property Agreement is traditionally a 3-pronged agreement between spouses. The first prong converts all current property to community property, the second prong makes all future acquisitions community property and the third prong determines the disposition of the community property upon the death of either spouse. This third prong of a community property agreement usually transfers ownership of all community property to the surviving spouse at the first death thereby bypassing the decedent s Will and bypassing the jurisdiction of the probate court. It should be noted that where a Community Property Agreement is inconsistent with a prior Will, the Community JBI-000 \ docx 5

14 Property Agreement will prevail. See Estate of Lyman, 82 Wn.2d 693, 512 P.2d 1093 (1973). Also, a Community Property Agreement is NOT revoked by a later executed Will - in such situation, the Community Property Agreement will still prevail. See Estate of Brown, 29 Wn.2d 20, 185 P.2d 125 (1947). However, the Washington Supreme Court held in 1994 that where a husband and wife execute mutual Wills and a Will Agreement that demonstrates a mutual intent to abandon the prior Community Property Agreement, that agreement was effectively rescinded per the general rules of contract rescission. Higgins v. Stafford, 123 Wn.2d 160, 866 P.2d 31 (1994). 2. TRANSFERRING NONPROBATE ASSETS a. Transferring Assets. While the transfer of probate assets may not occur until months after the death of a decedent, the transfer of nonprobate assets may occur shortly after the date of death. This generally will include contacting the institutions holding such assets and finding out what they will require to transfer the assets. For example, with insurance proceeds, the insurance company should be notified immediately and a claim form should be requested. While talking to the representative from the insurance company, it is a good idea to also request a form 712, an IRS tax form which may later be needed for estate tax return purposes. Assets held under a joint tenancy with right of survivorship will typically transfer immediately to the surviving tenant without any needed assistance. JBI-000 \ docx 6

15 Extreme care should be taken when assisting with the transfer of Individual Retirement Accounts and retirement assets. This is a complicated area -- well beyond the scope of this presentation. Decisions regarding how to take IRA and retirement assets could affect the income tax liability of the recipient. A good resource for the transfer of IRA and retirement assets is Life and Death Planning for Retirement Benefits by Natalie Choate. b. Liability of Beneficiary of Nonprobate Assets. It should be noted that a Personal Representative has no duty to administer nonprobate assets. RCW However, many nonprobate assets are subject to liabilities and claims, estate taxes and expenses of administration under RCW , so the Personal Representative has the authority to determine their value and location as needed, and to make a claim for contribution from those assets as appropriate. "Unless expressly exempted by statute, a beneficiary of a nonprobate asset that was subject to satisfaction of the decedent s general liabilities immediately before the decedent s death takes the asset subject to liabilities, claims, estate taxes, and the fair share of expenses of administration reasonably incurred by the personal representative in the transfer of or administration upon the asset. The beneficiary of such an asset is liable to account to the personal representative to the extent necessary to satisfy liabilities, claims, the asset s fair share of expenses of administration, and the asset s share of estate taxes... RCW c. Superwill Provisions - RCW In 1989, Washington became the first state to allow for the testamentary disposition of specified nonprobate assets with the Testamentary Disposition of Nonprobate Assets Act, otherwise known as the Superwill provisions, under RCW This Act permits a decedent to override beneficiary designations for certain non-probate assets by including a provision in his or her Will, so long as the beneficiary designation existed prior to the execution of the Will. RCW defines the nonprobate assets that are covered under this statute as those included in the nonprobate asset JBI-000 \ docx 7

16 definition under RCW with the exception of the following: (1) real property passing under joint tenancy with right of survivorship; (2) a deed or conveyance for which possession has been postponed until the death of the owner; (3) a transfer on death deed; (4) a right or interest passing under a community property agreement; and (5) an individual retirement account or bond. It should be noted that community property rights trump any Superwill actions, such that a testator does not have the right, in a Will, to change the beneficiary of a nonprobate asset property that would otherwise pass to the testator s spouse under community property laws (as discussed above). The nonprobate assets a testator may control via a Will include: (1) Joint bank accounts with right of survivorship; (2) Payable on death or trust bank accounts; (3) Transfer on death securities or security accounts; (4) Trusts of which the person is a grantor and that become effective or irrevocable only upon the person s death; and (5) Notes or other contracts the payment or performance of which is affected by the death of the person. For all of these nonprobate assets, the Will only controls the distribution when the beneficiary designation existed prior to the execution of the Will. Best practices suggest carefully reviewing the types of assets that are subject to RCW as it is more restrictive than the general definition of nonprobate assets. In a Washington Division 2 Appellate Court, the Judge overturned a lower court decision and found that the testator did not meet the specific statutory requirements necessary to invoke the Superwill provision. See Estate of Burks v. Kidd, 124 Wash.App. 327, 100 P.3d 328 (Div. 2, 2004). d Case re: Testamentary Disposition of Nonprobate Asset: Manary v. Anderson. In January 2013 the Washington Supreme Court affirmed a Court of Appeals 2011 judgment and held that an owner complies with the Testamentary Disposition of Nonprobate JBI-000 \ docx 8

17 Assets Act (the Act ), when he specifically refers to a nonprobate asset in his Will, even if he does not refer to the instrument under which the asset passes. Manary v. Anderson, 176 Wn.2d 342, 292 P.3d 96 (2013). Here, the testator s testamentary specific bequest of real estate was effective even though title to the real estate was held in the name of the testator s revocable living trust. The facts of the case are as follows: Homer and his late wife held title to their residential real estate in the name of their revocable living trust prior to his wife s death. Upon her death, Homer s wife s share of the trust assets was allocated to her irrevocable family trust per the terms of the trust, while Homer s share was allocated to his revocable survivor s trust. Prior to Homer s death, Anderson moved onto residential real property and became Homer s caretaker. Prior to his death, Homer executed a Will, which bequeathed his interest in the property to Anderson. After Homer s death, a dispute arose between the named beneficiary of the property under the trust and Anderson, the beneficiary of the property under Homer s Will. Each party brought quiet title actions against the other. The Supreme Court held that Homer s right to possess and manage the property rent-free constituted beneficial ownership of a nonprobate asset within the meaning of the Act. Further, RCW (10) (formerly RCW (15)) defined nonprobate assets as including an owner s interest in a trust for which he is a grantor, that becomes effective or irrevocable only upon his death. The Court also held that so long as testator complied with the Act by specifically referring to the nonprobate asset in the Will, he did not need to acknowledge the previously created trust to validate the bequest. By doing so, owner s interest in the nonprobate asset transfers to the testamentary beneficiary named to receive it, notwithstanding any previously designated beneficiary. JBI-000 \ docx 9

18 3. PREVENTING ADMINISTRATION CALAMITIES a. Final Reminders. As a final note, the best way to avert undesirable administration outcomes for nonprobate assets is to plan ahead. Planning attorneys should remind clients of the impact of using the joint tenancy with right of survivorship form of ownership at the time they execute their Wills. A final execution letter might remind clients that assets held in joint tenancy with rights of survivorship will pass outside of the Will, automatically to a joint tenant and that other assets such as life insurance proceeds, retirement accounts and transfer on death accounts will be controlled by their beneficiary designation. Clients often need advice on how to coordinate their nonprobate assets with their overall estate plan. As an example, parents with minor children may create a Trust for Children in their Wills which governs the disposition of assets for their children in case the parents die before the children reach an age of majority. Parents often establish those trusts with staggered distributions at multiple ages, such as 1/3 of the trust corpus at age 25, 1/2 at age 30 and the remaining balance at age 35. If parents however, have life insurance or retirement accounts listing their children as contingent beneficiaries and die without changing those designations, the proceeds would most likely end up in a custodial account that passes outright to children upon reaching age 18. Depending on the size of the insurance payout or retirement accounts, this could significantly defeat the estate plan the clients desired. JBI-000 \ docx 10