Nonprobate Assets
Definition
Washington law defines nonprobate assets in RCW 11.02.005(10). Generally, the definition captures those assets that “pass on the person’s death under a written instrument or arrangement other than the person’s will.” Often this is a contractual arrangement between the decedent and the financial institution whereby the financial institution agrees to transfer the asset to the person the decedent designated. Other times, it can be a deed executed by the owner of a parcel of land where the owner made a transfer on death designation. RCW 11.02.005(10) provides many examples of such instruments, most of which are discussed below. Note that this definition specifically excludes three common devices that you'd assume would be included as nonprobate assets: life insurance policies, annuities, and employee benefit plans. Despite this exclusion from the definition, these assets still act in all respects like other nonprobate assets. The only difference is that these three instruments are protected from the claims of creditors and the expenses of the estate. This is discussed further below.
Introduction
If you are considering whether to begin a probate, it is critical that you understand the difference between probate and nonprobate assets. As the term implies, nonprobate assets can be obtained without the need for a probate. These assets do not pass according to a person’s wishes in a will, nor do they pass under Washington’s law of intestate succession if there is no will. Rather, nonprobate assets pass according to a document or other instrument in which the owner directed how the asset would pass upon his or her death. Among the most widely understood nonprobate assets is a life insurance policy or a retirement plan. When you have one of these policies or plans, you normally complete paperwork telling the company holding the asset that when you die you want this item to pass to a particular person or persons (i.e., a beneficiary designation). If however a beneficiary is not designated, these assets will usually become probate assets and pass to the estate and be distributed according to the will or the laws of intestate succession if there is no will.
Nonprobate assets come in many shapes and sizes, and different rules often apply to the different types of nonprobate assets. Below is a description of many different types of nonprobate assets, as well as a discussion regarding special issues to consider when dealing with nonprobate assets. If you need even more detailed information, you can go to a presentation I gave to lawyers at a recent probate seminar by clicking here.
Real Property
Joint Tenancy Real Property
Joint tenancy is a form of ownership of real property whereby the ownership of the property immediately vests in the co-tenant(s) upon the death of one of the other owners. This type of instrument is created when two or more owners purchase property together and specifically state on the title that it is “joint with right of survivorship.” It can also be created when one owner executes a deed adding one or more additional owners and declaring them all as “joint tenants with right of survivorship” in the deed. When this type of tenancy is created, the joint owners own an equal interest in the property during their lives. This is different than when the owners are designated as “tenants in common.” As tenants in common, the owners own an interest in the property proportionate to their contribution to the property—during their lives and after an owner dies. When the ownership is held as tenants in common, the owner’s interest becomes a probate asset when that owner dies.
After the death of one of the joint owners, the surviving owner(s) does not create a new deed. Instead he or she records a copy of the death certificate of the deceased owner with the county Recorder's Office, attached to the approved cover sheet that identifies the property. There should be no need to file a real estate excise tax affidavit.
Transfer on Death Deeds
Washington recently adopted a new form of transferring real property (i.e., land and real estate) called the “Transfer on Death Deed” (also known as a beneficiary deed). Ch. 64.80 RCW. With this newly recognized beneficiary deed, a property owner can convert an otherwise-probate asset into an asset that will pass outside of probate. As with joint tenancy, the administrator should carefully review the deed to ensure that it is a proper beneficiary deed. To be effective, the beneficiary deed must meet the elements of a properly recorded deed, must state that the transfer to the beneficiary is to occur at the death of the owner (also known as “transferor”), and must be recorded before the death of the owner in the public records of the county where the property is located. RCW 64.80.060.
After the death of the owner, the beneficiary does not prepare a new deed to show his or her new ownership to the property. It's simpler than that. Instead, the beneficiary records the death certificate of the owner with the county Recorder's Office, using the approved coversheet that identifies the property. The new owner will also need to file a real estate excise tax affidavit, although no excise is due unless the owner prepared the deed to satisfy a contractual obligation to the beneficiary, which is rare.
Financial Accounts
Joint Bank Accounts
A popular, but sometimes misunderstood, form of nonprobate asset is the joint bank account. State law permits banks to establish accounts as joint with right of survivorship and joint without right of survivorship. RCW 30A.22.050(2)-(3). While the joint account holders are alive, they own a share of the account “in proportion to the net funds owned by each depositor on deposit in the account, unless the contract of deposit provides otherwise or there is clear and convincing evidence of a contrary intent at the time the account is created.” RCW 30A.22.090(2). This means that prior to the death of one of the joint account holders, each depositor only owns the amount that he or she deposited into the account, absent some other evidence.
When an owner of a joint account with right of survivorship dies, the share of the deceased account holder vests in the surviving account holder(s). RCW 30A.22.100(3). Joint accounts without right of survivorship, however, are dealt with differently at death. With such accounts, the funds are always held proportionate to each account holder’s contribution—during their lives and after one joint account holder dies. Upon the death of one of the account holders, that person’s funds belong to his or her estate, not the other account holder, and is therefore a probate asset.
U.S. Savings Bonds
U.S. Savings Bonds can be transferred outside of the probate process in a couple ways. First, if two people are named on the bond, the survivor becomes the owner of the bond. The survivor can redeem the bond for cash or can have the bond reissued in the survivor’s name alone. The owner may also register the bond payable on death to another person. RCW 11.04.240. Also, if no probate will occur and the bonds do not exceed $100,000, the next of kin can make application for the liquidation or transfer of the bonds through the use of FS Form 5336. The Treasury Direct website (treasurydirect.gov) is a good source for questions on transferring U.S. Savings Bonds and where the various forms can be found.
Pay on Death (POD) Bank Accounts
A pay on death designation (also known as a POD account) is a way to designate a certain person to receive the funds in a bank account upon the death of the account holder. A POD designation has advantages and disadvantages over the traditional joint bank account. A POD designation brings more certainty regarding the account holder’s wishes upon his or her death. However, the person who is designated on a POD account cannot access or help manage the account like a joint account holder could. Of course, this lack of control can be overcome by executing a power of attorney whereby a family member or friend can manage the account if the main account holder becomes incapacitated. A certified copy of the owner’s death certificate is usually sufficient to obtain the funds.
Brokerage Accounts and Securities
Washington State specifically authorizes the use of transfer on death (TOD) and pay on death (POD) designations for securities and security accounts, aka brokerage accounts. Ch. 21.35 RCW. To determine whether a security account is a TOD account (or a joint account), the administrator should request a copy of the application form and review it. The designations on the quarterly statements are not always reliable. Like bank accounts, a certified copy of the death certificate should be sufficient for a beneficiary to obtain access to the security accounts.
Retirement Plans, Life Insurance and Annuities
Three common assets that act as nonprobate assets are actually exempted from the definition of nonprobate assets in RCW 11.02.005(10): employee benefit plans, life insurance policies, and annuities. The effect of this exemption is to take these assets out of the list of nonprobate assets that can be used to pay creditors and expenses of the estate under RCW 11.18.200. So, these assets are unique -- in a good way.
Life Insurance and Annuities
Beneficiary designated life insurance policies and annuities pass “outside of probate” if a beneficiary is properly designated, and are therefore technically “nonprobate assets” even if they do not meet the statutory definition of the term. Because life insurance policies and annuities are not defined by statute as a nonprobate asset, the beneficial interest passes free of creditors and free from liability for the expenses of the estate. Therefore, such instruments can be especially effective for families with large amounts of debt. Of course, failing to properly designate a beneficiary might result in the life insurance policy or annuity passing to the estate, and thereby becoming a probate asset, subject to the rights of creditors and estate expenses. Following the death of the insured, obtaining the proceeds of a life insurance policy can be relatively simple for beneficiaries. Forwarding a death certificate to the insurance company and completing its paperwork should be sufficient to obtain the funds. Sometimes, the company will deposit the funds into a bank account with the insurance company and send the beneficiary a checkbook to use.
Employee Benefit Plans
A common form of nonprobate asset is the beneficiary designated retirement account, such as a 401(k). If the decedent properly designated beneficiaries, these assets will pass outside of the probate process. The plan administrator will need a certified death certificate. It will then offer the beneficiaries a range of options on how to transfer the plan. If the beneficiary is a surviving spouse, he or she will have the option of creating a new account in the surviving spouse’s name. If the beneficiary is not a spouse, the beneficiary will have the option of rolling the plan into an inherited plan. Cashing out the plan is usually also an option, but for tax-deferred accounts, this can sometimes have a large tax impact on the beneficiary for the year the beneficiary cashes out the plan. If a decedent has named a trust as the beneficiary of the account, the administrator should remember that the plan administrator must receive a copy of the trust documents no later than October 31 of the year following the year of death. When “the estate” is named as a beneficiary, which is rarely advisable, no estate heir will be able to roll the account over into his or her own retirement account (as for spouses) or into an inherited account (for other beneficiaries). Instead, the account will be a probate assets and be required to be distributed within five years following the participant’s death. This five-year rule applies even if the decedent’s will had a single beneficiary.
Other Types of Nonprobate Assets
Revocable Living Trusts
Revocable living trusts (RLTs) have been traditionally used and marketed as probate-avoidance devices. These trusts are very common in states like California where the probate system tends to be expensive and arduous. On the other hand, in Washington, where the probate process is less costly and complex, RLTs are not as widely recommended by practitioners. Still, some people have these.
To use a RLT effectively, property owners must ensure that all their presently owned probate assets (real property, bank accounts, vehicles, etc.) are titled in the name of their RLT. If done properly, upon the death of the creator(s) (the initial "trustee") of the RLT, the beneficiaries receive a possessory interest in the property and the various assets are transferred by a "successor trustee," who is usually a family member, rather than a probate court. For instance if a house is owned by a RLT, then the successor trustee will execute a deed transferring the property to the beneficiaries or selling the property as any other owner would. The same would be true with bank accounts in the name of the RLT. The successor trustee would take over the account or transfer the account to another trust account to properly administer the closing of the trust.
The process of administering the trust involves many of the same steps as a probate, however, without the court involvement. For example, creditors and taxes still need to be paid and the successor trustee is responsible for locating all trust assets and giving the beneficiaries adequate notice of the activities of the trust. Successor trustees need to carefully follow Washington’s trust rules Chapters 11.98, 11.100, 11.106 of the Revised Code of Washington.
Community Property Agreements
The primary reason most spouses execute a community property agreement is to avoid probate on the death of the first spouse to die. Such agreements typically declare all presently-owned and future-acquired property as community property. More importantly, however, they also declare that upon the passing of one spouse, all the community property will pass to the surviving spouse (the “third prong” of the classic community property agreement).
Upon the death of the first spouse, this instrument can be used to access and obtain the deceased spouse’s assets, including funds in a decedent’s bank account, and to transfer and obtain securities. To transfer title to real property from the name of the two spouses to the one surviving spouse, the agreement needs to be recorded with the county recorder’s office, along with a certified copy of the death certificate. WAC 458-61A-202(8)(a). It’s also recommended that an affidavit be recorded that affirms several facts, including that the agreement is still in effect. Excise tax is not due on the transfer according to WAC 458-61A-202(4). Banks and transfer agents will often also require a certified copy of the recorded community property agreement, death certificate, and affidavit to transfer the asset to the surviving spouse. See RCW 30A.22.190(1) & RCW 11.02.120.