NON PROBATE TRANSFERS OF ASSETS AT DEATH

Atty. Donal M. Demet Demet & Demet, LLC 815 North Cass Street Milwaukee, WI 53202 414-291-0800 NON PROBATE TRANSFERS OF ASSETS AT DEATH WHAT IS PROBATE? The traditional method of accomplishing post death transfers of a decedent s assets is Probate under the Wisconsin Probate Code, Wis. Stat. Ch. 851 & following. Probate is a court-supervised procedure for transferring ownership of someone's assets after he or she dies. This process validates the person's will and distributes property as the will directs. If the decedent left no will or other legal arrangement for transferring assets upon death, the estate may still go through probate. If there is no valid will, the estate will be an Intestate estate, and distribution will follow Wis. Stat. Ch. 852 (Intestate Succession). The goal of probate is to protect the rights of heirs or other beneficiaries and others who have an interest in an estate. Interested parties receive notice of the proceedings and have a right to appear, and object. Interested parties are defined in Wis. Stat. 851.21. SUMMARY PROCEDURES: Before commencing a probate proceeding, you should ask whether you can accomplish the client s goals through a less cumbersome procedure. Wis. Stat. Ch. 867 Probate - Summary Procedures is a veritable goldmine of techniques to solve smaller probate problems. Generally significantly easier and less costly than Probate. Examples are: -TRANSFER BY AFFIDAVIT. Wis. Stat. 867.03. Where solely owned property of a decedent is less than $50,000. See Circuit Court form PR-1831. Advantage: Simple. Disadvantage: Dollar limit. -TERMINATION OF JOINT TENANCIES AND MARITAL PROPERTY WITH RIGHT OF SURVIVORSHIP through the register of deeds office using Form HT-110. See, Wis. Stat. 867.045. Advantage: No value limit. Disadvantage: Does not allow transfer of solely owned property. -SUMMARY SETTLEMENT AND SUMMARY ASSIGNMENT under Wis. Stat. 867.01 & 867.02 for small or bankrupt estates with solely owned assets that do not otherwise qualify for Transfer by Affidavit. Advantages are that you get the finality and protection of a court order. Also, if there are likely to be severe creditor problems, these sections of the statutes lend themselves well to cram downs, with far less work that a formal probate. 1

NON PROBATE TRANSFERS Numerous transactions are exempt from probate. These do not require court supervision as a matter of course. These assets transfer by non-probate means, sometimes stated as, by operation of law, at death. Examples are: -JOINTLY OWNED PROPERTY. Property titled in joint ownership either as joint tenants, or martial property with rights of survivorship, which automatically passes to the surviving owner at death. See, Wis. Stat. 700.18 and 700.19; for bank accounts and securities, see also, Wis. Stat. Ch. 705; for married couples, see, Wis. Stat. 766.60 and 766.605. The potential problem is that a joint owner, or their creditors, can access and exercise management and control of the property prior to death. -TRANSFER ON DEATH DESIGNATIONS. Wis. Stat. Ch. 705. Bank Accounts, Securities, Real Estate are all covered by Wis. Stat. Ch. 705 which provides a mechanism for designating a transfer on death payee. This differs from joint account ownership, in that the beneficiary has no ownership rights until after death. -WASHINGTON WILL MARITAL PROPERTY AGREEMENTS. See, Wis. Stats. 766.58(3)(f) and 867.046. Spouses can contract with each other for non-probate transfers. -BENEFICIARY DESGINATION ASSETS. Life insurance proceeds, funds in an IRA, pension, 401(k), or other retirement plan will bypass probate if the decedent has named beneficiaries other than the estate. Those beneficiaries would receive the funds directly. The insurance contract or plan usually sets forth the formalities for designation of a beneficiary. There are marital rights under state law, generally in Wis. Stat. Ch. 766. See, Wis. Stat. 766.61 for insurance policies; see, Wis. Stat. 766.62 for employee benefits. Typically the contract or plan documents indicate a beneficiary designation form, and require that the form be filed with the insurance company or plan administrator prior to death. The beneficiary normally is required to submit a subscribed and sworn claim form to obtain the proceeds after death. FAILURE OF BENEFICARY. Not having any valid beneficiary designation. Many clients and attorneys are surprised to learn that insurance contract, retirement plan and IRA documents set forth default beneficiaries. It may be a next of kin type designation, and may also be the estate. If the beneficiary is the estate, a probate or summary procedure may be necessary to claim the proceeds. FEDERAL PREEMPTION UNDER ERISA Almost all private retirement plans are regulated by the Employee Retirement Income Security Act (ERISA), 29 U.S.C. 1001 et seq. Moreover, Congress expressly provided that ERISA shall supersede any and all state laws insofar as they apply to qualified employee benefit plans. 29 U.S.C. 1144(a). The Retirement Equity Act of 1984 (REA) amended ERISA to require that 2

survivor benefits be paid automatically to a surviving spouse upon the death of the pension participant, unless the spouse consents in writing to an alternative beneficiary. See, 29 U.S.C. 1055(c)(2)(A). Because of this mandate and ERISA s anti assignment provision, a pension participant may not unilaterally designate a nonspouse survivor beneficiary. Lefkowitz v. Arcadia Trading Benefits Pension Plan, 996 F.2d 600 (2d Cir. 1993). The fact that a married couple might have had a bad marriage is immaterial. See, John Deere Deferred Savings Plan v. Est. of Propst (E.D.Wis. 12-28-2007). Case No. 06-C-1235. December 28, 2007. No state law offsets are allowed due to preemption. ERISA preempts both state statutory law and state common law causes of action. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 44-48 (1987). So, no state law offsets are proper when a spouse assert ERISA rights. In 2009, the United States Supreme Court reemphasized, in a unanimous decision, that an ERISA plan s documents control, even in the face of clear evidence of the plan participant s intentions to the contrary. See, Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 U.S. 286, 129S. Ct. 865, (2009). This differs from state testamentary law, where the intent of the testator is paramount. Lohr v. Viney, 174 Wis. 2d 468, (Ct. App. 1993). WHAT IS A QUALIFIED DOMESTIC RELATIONS ORDER? A "qualified domestic relation order" (QDRO) is a domestic relations order, usually issued in connection with a divorce, that creates or recognizes the existence of an alternate payee's right to receive, or assigns to an alternate payee the right to receive, all or a portion of the benefits payable with respect to a participant under a retirement plan, and that includes certain information and meets certain other requirements. Reference: ERISA 206(d)(3)(B)(i); IRC 414(p)(1)(A) GOVERNMENT EMPLOYEE PLANS Government employee plans are usually not subject to ERISA due to federalism principles and home rule concepts. They are generally created by ordinance or statute, which may impose requirements or limitations on the ability to make or change beneficiary designations. Also, they may or may not recognize Qualified Domestic Relations Orders. Government plans generally have their own set of rules. See, for instance, http://www.opm.gov/retirementservices/publications-forms/pamphlets/ri83-116.pdf which sets forth the ground rules for court orders concerning Federal Employee Retirement Plans. LIVING TRUSTS Assets transferred to a trust prior to death will pass by non-probate means. Usually referred to as a living trust. These trusts are normally revocable trusts that the settler can change during his/her life. Title to the assets is transferred into the legal ownership of the trust. At the settlor s death, 3

successor beneficiaries succeed to the beneficial ownership of estate assets. Irrevocable trusts are rarer, and typically utilized for tax benefits or creditor protection. If a living trust is not funded by actually transferring title of the assets into the trust prior to death, solely owned assets may have to be probated in order to end up in the trust. A living trust is usually accompanied by a pour over will that provides that the trust is the beneficiary of any solely owned assets, so that the solely owned assets follow the dispositive plan in the trust document. CREDITOR ISSUES Probate assets are generally subject to the claims of creditors. Creditors actually receive actual or constructive notice. Some non-probate assets, such as life insurance and retirement plan assets are exempt from creditor s claims. See, Wis. Stat. 815.18 for a list of exempt assets. Also, there is no formal notice procedure for non-probate assets. There are also provisions for Medicaid Estate Recovery that apply to non-probate assets. The law regarding Medicaid recovery is in a state of flux. 2013 Act 20 contained an expansion of the estate recovery to nonprobate assets. These may apply if the decedent or their spouse received Medicaid benefits while alive. TAX ISSUES The general rule is that probate and non-probate assets are both subject to estate tax, and receive similar treatment with respect to step up in basis. Federal tax law takes a substance over form approach. If the decedent retained incidents of ownership prior to death, the assets are included in the taxable estate. The gross estate consists of the value of all property (real or personal, tangible or intangible) owned by a decedent or in which the decedent had an interest at the time of death. See, for instance, I.R.C. 2042 regarding non-probate insurance. You generally combine probate and non-probate assets to determine estate size. In 2014 the Federal Estate tax unified credit exemption amount is $5,340,000, so very few estates are affected. Non probate transfers typically obtain a step up in basis under I.R.C. 1014 A beneficiary can end up with a big income tax bill if they inherit IRA s, retirement plan assets or other assets which are considered Income in Respect of a Decedent. I.R.C. 691. The beneficiary usually includes these items in the year of receipt. It is usually tax wise to postpone the actual receipt as long as possible, and spouses generally have the most advantageous distribution elections. PERILS OF MULTIPLE OWNERSHIP OF REAL ESTATE Before you transfer title to a parcel of real estate to multiple owners, consider some of the potential problems you may be creating. The bundle of rights constituting ownership, (use, management, expense, taxes and enjoyment of property), must be shared with co-owners. The co-owners may not get along, or might be unable or unwilling to agree on the use, maintenance, apportionment of expense, sale, or mortgage of property. 4

Can t sell or mortgage the entire property without the consent and cooperation of all of the owners. Very difficult to sell or mortgage a partial interest in a property. Few buyers are willing to buy a partial interest in a residential property, and this author has never seen a lender make a mortgage loan against a partial interest. Also, liens and encumbrances of a partial owner can inconvenience all of the owners. For example, judgment and tax liens filed against one owner can render the property effectively unmarketable. POSSIBLE SOLUTIONS TO MULTIPLE OWNERSHIP ISSUES Co-ownership agreement if the parties can come to terms. These are best negotiated at the beginning of the joint ownership. They become very difficult to negotiate when you know who the buyer is and who the seller is. Instead of co-ownership, consider having title held by an entity, such as a trust, LLC or corporation. Ownership of the entity can be divided with clear management and control rights. This avoids the ability of each and every co-owner to stymie the other owners. Entities such as these are also used to provide liability protections, as well as to avoid transfer tax, and to attempt to avoid property tax reassessment upon sale or transfer. Instead of co-ownership, consider giving one heir or owner the fee simple, with a mortgage granted to the other heir of heirs. This clarifies the rights of all concerned. Domestic Partnership under Wis. Stat. Ch. 770 does not seem to deal with management, control and division of property. CHALLENGING TRANSFERS POST DEATH WILL CONTESTS AND SIMILAR CHALLENGES. There are 3 main challenges to the validity of a will. Failure to comply with the formalities; Lack of Competency, and Undue Influence. The formalities are minimal, and are recited in Wis. Stat. 853.03. Formalities for non-probate transfers appear in the governing documents (insurance policies, retirement plan documents, etc), as well as in the various statutes recognizing or creating a mechanism for non probate transfers. Typically, the plan will require delivery of a properly completed beneficiary form to the insurance company or plan administrator prior to death. LACK OF COMPETENCY. The testamentary capacity necessary to execute a valid will requires that the testator have the mental capacity to comprehend the nature, extent and state of affairs of his/her property, an understanding of his relationship to persons who are or might naturally be expected to be the objects of his/her bounty and that the testator understand the scope and general effect of the provisions of his/her will in relation to his legatees and devisees. Estate of O'Laughlin, 50 Wis.2d 143, 146, 147, 183 N.W.2d 133 (1971); 5

UNDUE INFLUENCE. Undue influence is established by proving: (1) susceptibility to undue influence, (2) opportunity to influence, (3) disposition to influence, and (4) coveted result. In Matter of Estate of Becker, 76 Wis.2d 336, 347, 251 N.W.2d 431 (1977); or alternatively, by proving the existence of (1) a confidential relationship between the testator and the favored beneficiary and (2) suspicious circumstances surrounding the making of the will. Will of Faulks, 246 Wis. 319, 360, 17 N.W.2d 423 (1945); Factors to be considered are age, personality, physical and mental health and ability to handle business affairs. Estate of McGonigal, 46 Wis.2d at 213; Estate of Hamm, 67 Wis.2d at 288, 289. INTER VIVOS CONVEYANCES CAN BE CHALLENGED IN THE SAME WAY. Lack of Competence and/ or Undue influence in the execution of an inter vivos conveyance is proved in the same way that undue influence is proved in the execution of a will. First Nat l Bank of Appleton v. Nennig, 92 Wis. 2d 518, 536; Ward v. Ward, 62 Wis 2d 543, (1976). Hauer v. Union State Bank of Wautoma, 192 Wis. 2d 576, 589, 532 N.W. 2d 456, 460-61 (Ct. App. 1995). ABUSE OF FIDUCIARY RELATIONSHIP. Self Dealing. Exceeding authority by POA. See Praefke v. American Enterprise Life Ins., 257 Wis.2d 637, 655 N.W.2d 456, 459 (Wis. 2002). Can an agent change the beneficiary designations of non-probate assets? The issue is whether the agents actions exceeded the express powers granted by the four corners of the document. But there also may be an issue of who has standing to contest the acts of the agent. See, Methodist Manor v. Ruth Ann Py, 2008 WI App 31 and Methodist Manor v. Martin, 2002 WI App 130. INTENTIONAL INTERFERENCE WITH AN EXPECTED INHERITANCE. See, Harris v. Kritzik, 166 Wis. 2d 689, (Ct. App. 1992). Where by fraud, duress or other tortious means one intentionally prevents another from receiving from a third person an inheritance or gift that he/she would otherwise have received MAIN HURDLES TO OVERCOME IN BRINGING A POST DEATH CHALLENGE. CONSTITUTIONAL RIGHT TO WILL YOUR PROPERTY. Will of Wright, 12 Wis.2d 375, 380, 107 N.W.2d 146 (1961). This right reflects a strong concern that people should be as free as possible to dispose of their property upon their death. There are limitations on this right to transfer, such as Martial and family support obligation. See, Stat. Chapter 766, and Chapter 861. Also, transfers may violate obligations to creditors. Chapter 242 Fraudulent Transfer Act. Interests in a retirement plan must be transferred in a manner that complies with ERISA. Medicaid Recovery. PRESUMPTION OF COMPETENCY. Everyone is presumed be competent until satisfactory proof otherwise. Nyka v. State, 268 Wis. 644, 646 (1954).Lack of capacity must be proved by clear, convincing and satisfactory evidence. Estate of Persha, 2002 Wi App 113 6

LACK OF NOTICE OR KNOWLEDGE OF TRANSFERS. Unlike probate proceedings, most lifetime transfers can be accomplished in secret without any notice to heirs and other interested parties. This, and injured party may never discover their loss. Good for privacy, bad for protection of inheritance rights. PROCEDURAL ISSUES. In probate proceedings, as noted before, interested parties receive formal notice. Where nonprobate transfers are involved, a potential beneficiary may have to commence an action, or appear in an Interpleader action filed by the insurance company or plan administrator. ATTORNEY AIDING AND ABETTING LIABILITY See, Tensfeldt v. Haberman, 2009 WI 77, where the attorney who knew of the terms of a divorce judgment, yet prepared estate planning documents inconsistent with the required estate planning terms of a divorce judgment was liable for aiding and abetting the violation. The Court noted: [An attorney] is duty bound... to exercise good faith. He must not be guilty of any fraudulent acts, and he must be free from any unlawful conspiracy with either his client, the judge, or any other person, which might have a tendency to either frustrate the administration of justice or to obtain for his client something to which he is not justly and fairly entitled. [citations omitted]. What does that tell us? Can you assist a client in preparation and filing of documents that you know are in violation of???????????. Does this case apply only to Divorce Judgments? What if you assist in the preparation of documents which obtain for your client something to which they are not justly and fairly entitled. 7