Nonprobate Distribution of Assets

By Attorneys Terry L. Campbell & Jennifer M. Jedrzejewski
Published in the Wisconsin Law Journal on November 1, 2006

To the general public, probate is a mysterious and misunderstood concept. "I want to avoid probate" is often expressed as a primary estate planning goal.

In many cases, a trust is utilized to avoid probate. For these clients, there are often estate tax issues or other reasons that lead to a recommendation for a trust. However, a trust is not for everyone; it may be overkill for many clients. For these clients, a will (I refuse to say "simple will") may be the document of choice. However, a thorough plan for these clients may still avoid probate.

Life insurance, annuities, IRAs, and profit sharing plans allow for beneficiary designations. Properly completed forms with primary beneficiaries and contingent beneficiaries will avoid probate. Our office practice is to require clients to bring copies of their current beneficiary designations; at the same time we request that they bring new, blank forms. A fair assumption is that at least one form is wrong, incomplete, or missing in action.

Bank accounts, savings accounts, and certificates of deposit may be distributed to beneficiaries without probate through the use of properly prepared payable on death (POD) forms. Many clients are aware of this concept and just as many confuse POD with POA (power of attorney).

Securities, brokerage accounts, and mutual funds may also be distributed to beneficiaries without probate through the use of properly completed transfer on death (TOD) forms. This designation allows a beneficiary to take ownership of the accounts at the death of the owner or the deaths of all multiple owners. The designation may be canceled or changed at any time by the sole owner or all then surviving owners, without the consent of the beneficiary.

For many years, the sticking point has been real estate. While it was possible to use a transfer on death (TOD) designation with real estate in the form of a TOD deed, until recently, there was very little statutory support for such deeds. 2005 Wisconsin Act 2006 (the Act) provides that statutory support, particularly through the creation of § 705.15 and other related statutes. The Act provides a nonprobate method for transferring real estate at the death of the property owner.

Section 705.15 of the Act applies to certain interests in real estate, namely real estate that is solely owned, owned by spouses as survivorship marital property, or owned by two or more persons as joint tenants. Any of these interests in real estate may be transferred without probate to a designated TOD beneficiary on the death of the sole owner or the last to die of the multiple owners. The Act provides for the designation of a TOD beneficiary on a deed, which may be made on the original deed or at later time through the execution and recording of a new deed. Either way, the deed must be recorded in order to be effective.

While the property owner(s) is alive, the TOD beneficiary has no current interest in the property. The owner(s) may change or cancel the TOD beneficiary designation at any time without the consent of the beneficiary, by executing and recording another deed that designates a different TOD beneficiary or none at all. The recording of a subsequent deed revokes any designation made in a previously recorded deed.

Upon the death of the sole owner or the last to die of multiple owners, the ownership interest in the real estate passes, subject to any lien or other encumbrance, to the designated TOD beneficiary or beneficiaries then living. If a TOD beneficiary should predecease the owner(s), his or her interest would pass to that beneficiary’s issue as set forth in § 854.06(3). If no beneficiary or beneficiary’s issue survives the death of all owners, the interest in the real estate passes to the estate of the deceased sole owner or the estate of the last to die of the multiple owners.

All of these planning decisions must be carefully reviewed with each client as there are pros and cons to any decision. For example, while the TOD deed can help clients avoid probate, if the beneficiary subsequently decides to sell the real estate, he or she will have to use a warranty deed. Defects in the property can expose the beneficiary sellers to a lawsuit. When an estate goes through the probate process and there is a piece of real estate involved, that real estate is often sold using a personal representative’s deed, which does not require that any “warranties” or guarantees be made by the personal representative seller to the buyer.

Another potential problem that can arise with TOD deeds occurs when multiple TOD beneficiaries are named, some of whom may or may not get along. When the property owner dies, the TOD beneficiaries suddenly have to share ownership of the real estate because of the deed. This could result in substantial conflict regarding decision making affecting the real estate.

There are other concerns as well. The real estate owner may have named an individual as a TOD beneficiary who wants to disclaim or reject their interest in the TOD transfer. This might occur where the real estate is environmentally contaminated or in need of substantial repairs. It may not be easy to disclaim, and the result may be that an estate proceeding is necessary after all to accomplish this goal of returning the unwanted real estate to the decedent’s estate.

Armed with this information, one of the biggest challenges facing the practitioner is to explain these options to the client. The most difficult challenge may be to convince your client that one size does not fit all. Each client’s situation will have to be reviewed to determine which estate planning tools are the most appropriate.