Everyone should have a Will so they can be sure that their assets are distributed to their heirs and chosen beneficiaries. A Will, though, needs to be probated, which is a court procedure to enforce its provisions. The probate process can be lengthy and costly in some cases, so estate planning attorneys often suggest other ways that you can transfer your assets to avoid probate.
There are several non-probate transfer strategies, and the strategy that will work best for you will depend on your goals and family situation. An estate planning attorney should be consulted to determine what will work best for you. In addition, even with the use of these non-probate transfer mechanisms, you still will want a Will, for example, to name guardians for your minor children, or to name a Personal Representative in case a probate would be needed in unforeseen circumstances.
Non-probate transfer strategies include the following:
There are assets that can be transferred without probate so long as you can designate a beneficiary. These include:
Retirement Plans. Nearly all retirement plans permit you to name a beneficiary such as a 401K, IRA, SEP and SIMPLE IRA. Others are annuities and mutual fund holdings.
Life Insurance. Life insurance will also pass to the individuals you name as beneficiaries without probate.
POD Accounts. These are “Payable-On-Death” accounts that are available at any financial institution in Wisconsin. You simply designate who you would like to have funds transferred to upon your passing. Your beneficiary has no rights to the account during your lifetime, and you can revoke or amend the POD designation at any time.
TOD Accounts. Similar to POD accounts, “Transfer-On-Death” designations can be used on any brokerage accounts in our state. Simply designate someone who will gain possession of the account upon your death. The TOD beneficiaries will have to take steps to register the securities in their name after you pass away.
TOD Deed. You can also transfer property to a TOD designee if you own the property by naming the individual as a beneficiary on a Transfer-on-Death Deed (TOD Deed). A TOD 110 must be filed to complete the transfer following your death. This designation can be changed or revoked at any time while you are alive, but a new TOD Deed would need to be filed.
While you can name a trust or entity other than an individual on a TOD deed, retirement account, or mutual fund, it is often simpler to name an individual. If the designee or beneficiary is a minor, then there are other issues to be considered, and these strategies may not be sufficient.
Note, if you list “my estate” as the beneficiary, this asset will go through probate, so this beneficiary designation is generally avoided.
Revocable Living Trusts are commonly used to avoid probate and offer several advantages. By transferring ownership of property to a revocable Living Trust, you no longer own the property, but you may retain total control over the assets as the trustee and may amend or terminate the trust during your lifetime. You may also name a successor trustee upon your death, or a co-trustee to assist you during your lifetime.
A Living Trust can be created to avoid probate for real estate, bank accounts, money market accounts, motor vehicles, boats, stocks, bonds, mutual funds, art, patents, or virtually any other asset.
A “Pour-Over Will” is often used as a companion to a Living Trust. If an asset is inadvertently left out of the Trust, the Pour-Over Will can be used to transfer the grantor’s remaining property into the Living Trust at the grantor’s death. The Pour-Over Will is also used to name guardians for minor children.
Contracts that Avoid Probate
There are provisions that you can include in certain contracts that provide for transferring assets upon death without the need for probate. Some common contracts or agreements that can transfer property and business interests without probate include the following:
Marital Property Agreement. Since 1986, the Wisconsin Marital Property Act allows you to transfer real property to one or more beneficiaries on your death. Married persons may agree that upon the death of either spouse, either or both spouses’ property may be transferred to a designated individual, trust, or any other entity, without probate. Wisconsin does allow living trusts to be funded after the Grantor’s death and avoid probate through the use of a Marital Property Agreement.
Operating Agreement. Operating agreements are the governing document for LLCs or limited liability companies and may include provisions for the transfer of the member’s interest on death. An operating agreement for an LLC is not required but highly recommended. These are similar to the by-laws of a corporation or partnership agreement. Your operating agreement should state who will manage the LLC in case the managing member passes away and what happens to the property on a member’s death.
Title to Assets
Joint Tenancy with Right of Survivorship. A simple and popular way to avoid probate in the transfer of property is to own the property in joint tenancy with the right of survivorship. When a joint owner passes away, the surviving owners automatically receive the deceased owner’s share. An owner, however, could break the joint tenancy by transferring his interest to another party, thus creating tenancy-in-common that has no right of survivorship. Probate also is not avoided when the last owner dies unless that owner uses another form of probate-avoidance method, such as the TOD Deed discussed above.
Survivorship Marital Property. Wisconsin is a community property state meaning that each spouse has a 50% share in marital property. Ordinarily, this would allow the spouse to leave his or her 50% share to any beneficiary he or she designates. However, married couples can hold title to marital property as survivorship marital property. When the first spouse passes away, the surviving spouse receives the entire property without the need for probate.
Life Estate. Another method of transferring real property outside of a Will or trust is to deed the property while retaining a life estate. A life estate creates two interests: a life estate and a remainder. Though both individuals are owners, only the individual with the life estate may possess the property during his or her lifetime. When the life estate owner dies, the person with the remainder interest or future owner now gains possession of the property. There can be multiple life estate owners and multiple remainder beneficiaries. Certain language is needed to ensure that the life estate deed is valid and enforceable.
There are pros and cons to each of these strategies. If you have any questions or would like to discuss any of the strategies discussed in this article, contact one of the estate planning attorneys at the Schloemer Law Firm.