CHAPTER 3 9:45 – 10:15Am Planning Considerations for Nonprobate

CHAPTER 3

9:45 – 10:15am

Planning Considerations for Nonprobate Assets

Jenna B. Ichikawa Stokes Lawrence, P.S.

PowerPoint distributed at the program and also available for download in electronic format: 1. Planning Considerations for Nonprobate Assets

Electronic format only: 1. Planning Considerations for Nonprobate Assets

Electronic versions of these documents are available on the KCBA website: https://www.kcba.org/cle/EventDetails.aspx?Event=51013

5/8/2013

PLANNING CONSIDERATIONS FOR NONPROBATE ASSETS

Jenna Ichikawa Stokes Lawrence P.S. 1420 Fifth Avenue, Suite 3000 Seattle, Washington 98101-2393 (206) 626-6000 [email protected]

• Probate: Legal process to determine decedent’s ownership interests & testamentary plan.

• Probate Asset: Asset that decedent owned that passes u nder his or her Will.

• Nonprobate Asset: Assets decedent owned S. P. that pass “under written instrument or S. P. arrangement other than the person’s Will.” RCW AW RENCE, L 11.02.005(10). AW RENCE, L STO KES STO KES 3 2006 2006 2 © 201 ©

• Examples of Nonprobate Assets – Revocable Living Trust – Joint Tenancy with Right of Survivorship (i.e. bank account or real property) – Government Bonds – Community Property Agreements S. P.

S. P. – Deed if possession postponed until death AW RENCE, L – Note or Contract affected by death AW RENCE, L STO KES STO KES 3 2006 2006 3 © 201 ©

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• Examples of Nonprobate Assets – Beneficiary Designations: • Payable on Death (POD) Bank Account • Transf er on D eath (TOD) S ecurit y A ccoun t • Individual Retirement Account

S. • Life Insurance Contract P.

S. P. • Employee Benefit Plan AW RENCE, L AW RENCE, L STO KES STO KES 3 2006 2006 4 © 201 ©

• Revocable Living Trusts – Trust for which decedent is grantor and trust becomes effective/irrevocable only at death – May operate like a Will – Caution: Assets must be titled in name of RLT – Tax treatment of RLT S. P.

S. P.

AW RENCE, L AW RENCE, L STO KES STO KES 3 2006 2006 5 © 201 ©

• 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 S. P.

S. P. – Presumption is rebuttable, In re Estate of

AW RENCE, Kirpes, 155 Wash.App. 598 (Div. 3 2010) L AW RENCE, L STO KES STO KES 3 2006 2006 6 © 201 ©

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• Government Bonds – Treasury bonds with “or” designation will pass to survivor – Caution: months long delay to transfer title when in certificate form S. P.

S. P.

AW RENCE, L AW RENCE, L STO KES STO KES 3 2006 2006 7 © 201 ©

• Beneficiary Designation − Payable On Death Accounts − Transfer on Death Security Accounts − Individual Retirement Accounts − Life Insurance Contracts − Employee Benefit Plans S. P.

S. P. − Exception: Testamentary Disposition of AW RENCE,

L Nonprobate Assets AW RENCE, L STO KES STO KES 3 2006 2006 8 © 201 ©

• Community Property Agreements – Typically 3-pronged: • All current property • All future acquisitions • Disposition upon death – CPA prevails over prior and later executed S. P. Wills, See Estate of Lyman & Estate of Brown S. P.

– Wills prevail if mutual w/ Will Agreement – see AW RENCE, L AW RENCE, L Higgins v. Stafford STO KES STO KES 3 2006 2006 9 © 201 ©

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• Transferring Nonprobate Assets – Contact institution to determine procedure – Provide Death Certificate – Life Insurance – request Form 712 (needed for filing Estate & Gift Taxes)

S. – Take care when transferring retirement assets P.

S. P.

AW RENCE, L AW RENCE, L STO KES STO KES 3 2006 2006 10 © 201 ©

• Liability of Beneficiaries – PR: no duty to administer nonprobate assets – PR has authority to determine value & make a claim for contribution as needed – RCW 11.18.200: “A beneficiary of a nonprobate asset that was subject to satisfaction of the S.

P. decedent’s general liabilities immediately before the

S. P. decedent’s death takes the asset subject to liabilities,

AW RENCE, claims, estate taxes, and the fair share of expenses of L AW RENCE, L administration . . .” STO KES STO KES 3 2006 2006 11 © 201 ©

• 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: S. P.

P. • Real Property passing under JTWROS

• Deed or conveyance possession upon death AW RENCE, L AW RENCE, L • Community Property Agreement STO KES

STO KES • IRA or Bond 3 2006 2006 12 © 201 ©

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• 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 S. P. • Revocable Trusts S. P. • Notes or Contracts affected by death AW RENCE, L AW RENCE, L – Carefully review assets under RCW 11.11 STO KES

STO KES – Estate of Burkes v. Kidd 3 2006 2006 13 © 201 ©

• 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 S. P.

S. • Trust Beneficiary Designation existed prior to Will P.

• Testator specifically referenced asset in Will AW RENCE, L AW RENCE, L • Testamentary disposition prevails STO KES STO KES 3 2006 2006 14 © 201 ©

• Final Considerations – Remind clients of impact of JTWROS ownership & beneficiary designations – Coordinate transfer of nonprobate assets with overall estate plan – Cautionary Example: Parents with Minor S. P.

S. Children P.

AW RENCE, L AW RENCE, L STO KES STO KES 3 2006 2006 15 © 201 ©

PLANNING CONSIDERATIONS FOR NONPROBATE ASSETS

May 10, 2013

By Jenna B. Ichikawa

Stokes Lawrence, P.S. 1420 Fifth Avenue, Suite 3000 Seattle, WA 98101 (206) 626-6000 [email protected]

JENNA B. ICHIKAWA joined the Trusts and Estate Planning group at Stokes Lawrence, P.S. in 2012 after graduating from the University of Washington School of Law. Ms. Ichikawa received her B.A. in History from the University of Puget Sound and her M.P.A. in Public Policy from the Evans School of Public Affairs at the University of Washington. Ms. Ichikawa’s practice focuses on assisting individuals and families with all aspects of the estate planning process, from basic planning to complex planning for taxable estates. She also concentrates her practice in the area of trust and estate administration, gift and estate taxation, charitable planned giving, and the law of tax-exempt organizations.

The author would like to thank RoseMary Reed who prepared materials in 2012 that were incorporated into these materials.

PLANNING CONSIDERATIONS FOR 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.

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.

"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, 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 11.02.005(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. Note that under 2009 legislation, terms

referencing marital relationships (“spouse, marriage, marital, husband, wife, widow, widower,

next of kin, and family”) in Washington trust law apply equally to state registered domestic

partnerships. RCW 11.98.930.

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 64.28. In the

case of bank accounts, note RCW 30.22.050 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

30.22.100 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. 3 2010).

iii. Government Bonds. Treasury bonds issued in more than one name with

an “or” designation pass automatically to the survivor.

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 11.11 (see below).

v. 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

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 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.

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 11.11.080.

However, many nonprobate assets are subject to liabilities and claims, estate taxes and expenses of administration under RCW 11.18.200, 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 11.18.200.

c. Superwill Provisions - RCW 11.11.020. 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 11.11. 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 11.11.010 defines the nonprobate assets that are covered under this statute as those included in the nonprobate asset definition under RCW 11.02.005 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 right or interest passing under a community property agreement; and (4) 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 recommend carefully reviewing the types of assets that are subject to RCW 11.11. 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. Recent Case Summary: 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 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 11.02.005(10) (formerly RCW 11.02.005(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.

3. ESTATE PLANNING CLEAN-UP

a. Final Reminders. As a final note, upon completion of Estate Planning, it is

important to remind clients of the impact of using the joint tenancy with right of survivorship

form of ownership. 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. Depending on the planning in the newly drafted Wills, clients may have some question about how to coordinate their nonprobate assets with their overall estate plan. As an example, parents with minor children may create a

Children’s Trust 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 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 in effect, defeat the planning the clients had just completed.