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DISPOSITION OF
PROPERTY OUTSIDE PROBATE
A. Overview.
Many arrangements exist for the transfer
of money or property outside of the probate system. (Such property is
said to be "non-probate" property, and is not part of the "probate
estate.") These arrangements should be made for convenience and to avoid
probate court - not for state or federal death tax savings, because
there will be no such benefit. The definition of "estate" for federal
tax purposes is much different from that in probate court.
BEWARE! A Will
has no control at all over any disposition of property outside
probate. Overlooking this fact is a common and potentially huge estate
planning blunder.
Think of it this way: Your Will disposes
of all property that is NOT disposed of by some other
way. Some of these "other ways" are mentioned below. All are familiar
and in common use. What these legal arrangements have in common is that
each - independently - provides for the disposition of property at or
before the death of the owner. In other words, the terms of these
arrangements themselves dictate who gets the property at the estate
owner's death - not the owner's Will.
Unfortunately, people just forget that
if an asset falls into one of the below-listed categories, the Will
cannot dispose of it. A Will disposes of only the probate estate. If
that consists of little or nothing, so be it. You had better be happy
with the "out of probate" dispositions you have put in place. People
also forget that some very common non-probate property arrangements -
like life insurance and retirement plan beneficiary designations - do
not necessarily become invalid upon divorce, as does a bequest to an
ex-spouse in one's Will.
B. Joint Tenancies
With Right of Survivorship (JROS).
Each of the two or more "tenants"
(owners) has an equal, undivided interest in the whole account or asset.
Most couples own their house and checking accounts in this way. By what
is called simply, "operation of law," a decedent's share automatically
shifts to the surviving joint tenant(s) at the very moment of death. The
transfer of ownership is complete at that point. Nothing the
Will says makes any difference whatsoever, as to this property.
Of course, there is paperwork to be completed before the account will be
switched to the survivor's name alone.
In almost all situations, no
federal tax is saved by using joint accounts. For estate tax purposes,
50% of property held jointly with a spouse is included in the decedent's
estate. If the surviving joint owner(s) is not the spouse, 100%
of the jointly held property is included in the decedent's taxable
estate, unless the surviving joint tenant can prove his/her actual
contribution to the account or property.
So, opening a joint account with an
adult child might be a convenient way to handle business, but it does
not save death taxes. True, upon the parent's death, the account balance
immediately belongs to the child. But the full amount must still be
included in the deceased parent's taxable estate.
One alternative to JROS ownership is
"tenancy in common." This is not what most married couples in common law
states have or want, with respect to their marital property. In this
arrangement, each tenant takes a 50% interest and can sell or bequeath
it independently of the other owner. Community property also can be
bequeathed independently. Tenancy in common is a frequently seen and
appropriate form of ownership in many situations, as when siblings
inherit a piece of real estate from their parents. Recognize, however,
that discord between the tenants in common could lead to a sale of one
of their shares to an outsider.
F.Y.I. If a Will says simply, "I leave
the following property to my son and daughter, Jack and Jill," the
property generally passes to them as tenants in common. The property
would not pass to them JROS, unless specified. (This is fine, as long as
that is what you want.)
C. Qualified
Retirement Plan Benefits and Individual Retirement Accounts.
This money goes directly to the
beneficiary as you specify when enrolling in the plan or opening the
account, bypassing probate court. At one time, these funds enjoyed
special treatment, but are now generally includable in the decedent's
estate for tax purposes.
D. Life insurance
Proceeds.
The policy payoff is part of your
private contract with the insurance company, and it should promptly go
to whomever you direct, with no court involvement. Proceeds from a
policy owned by the decedent to a named person as beneficiary are
excluded from federal income tax, as well as state income or death taxes
in most states.
BEWARE! BUT if the
decedent owns the policy, proceeds are includable in his federal taxable
estate, even though paid to somebody else. The proceeds are likewise
includable if the policy owner names his "estate" as beneficiary. The
latter beneficiary designation is also a bad idea because it exposes the
policy proceeds to creditors of the estate, which would not otherwise
happen.
E. Gifts.
One way to avoid probate of an asset is
to transfer it before you die. If the gift is to young children, you
should be aware of the Uniform Transfers to Minors Act (UTMA), which is
used in most states.
Under this provision, a gift of money or
other property is made by the donor placing the asset in the name of a
person called the "custodian." It is simply a matter of titling the
asset or account initially, to show the world that it is held pursuant
to the UTMA. There are no tax returns to be filed. Legal title is held
by the minor, but the custodian manages the asset until the minor is 21
years old (18 in a few states), at which time the property is turned
over to the minor.
Until then, the custodian is required to
pay to, or for the benefit of the minor as much of the property as the
custodian deems advisable for his/her support, benefit, maintenance and
education.
BEWARE! If these funds
are used to pay for basic parental obligations, this may be considered
taxable income to the parents. The theory is that a taxable benefit
accrues to the parents to the extent they are relieved of their legal
duty of support.
F. Payable On
Death (POD) bank accounts.
The account owner names a beneficiary
(payee) who automatically receives the account balance on the death of
the owner. Until then, the beneficiary has no rights in the account,
since the beneficiary can be changed or the account closed. Many states
(with more surely to come) have also adopted a Transfer on Death (TOD)
law pertaining to shares of stock and bonds that works the same as the
POD arrangement does for bank accounts. Note that these designations
might offer time-savings and convenience, but neither of them saves any
tax.
The
free information contained in these pages is not
intended to be legal advice, and does not create an attorney-client
relationship. You should always consult with an attorney before taking
any action. Feel free to contact an attorney at MOGREN, GLESSNER & ROTI,
P.S. at 425-255-4542 to schedule an appointment and discuss these issues
with you.
Our law firm is conveniently located in Renton, King County, WA, just off the freeway at the intersection of I-405 and I-167, easily accessible from Seattle and Bellevue Washington. Our
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The free information and help contained in these
pages is not intended to be legal advice, and does not create an
attorney-client relationship. You should always consult with a lawyer before
taking any legal action. Feel free to call us at 425-255-4542 for a free
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