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3/19/2014 1

Brown Bag CLE Series

NON PROBATE TRANSFERS OF ASSETS AT DEATH

Presented by:

• Atty. Donal M. Demet

Demet & Demet, LLC

Thursday, March 20, 2014

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WHAT IS PROBATE?

• 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.

• 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 (defined in 851.21) receive

notice of the proceedings and have a right to appear, and object.

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SUMMARY PROCEDURES

• 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.

SUMMARY PROCEDURES, Cont’d.

• 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.

SUMMARY PROCEDURES, Cont’d.

• TERMINATION OF JOINT TENANCIES AND

MARITAL PROPERTY WITH RIGHT OF SURVIVORSHIP through the register of deeds

• ffice using Form HT-110.
• See, Wis. Stat. § 867.045.
• Advantage: No value limit.
• Disadvantage: Does not allow transfer of

solely owned property.

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SUMMARY PROCEDURES, Cont’d.

• SUMMARY SETTLEMENT AND SUMMARY

ASSIGNMENT under Wis. Stat. §§ 867.01 & 867.02

• For small or bankrupt estates with solely
• wned assets that do not otherwise qualify

for Transfer by Affidavit.

• Advantages: finality and protection of a court
• rder.

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.

NON PROBATE TRANSFERS, Cont.d

• JOINTLY OWNED PROPERTY. Joint tenants or

martial property with rights of survivorship 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.

• Potential problem: a joint owner or their

creditors can access and exercise management and control of the property prior to death.

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NON PROBATE TRANSFERS, Cont.d

• TRANSFER ON DEATH DESIGNATIONS.
• Wis. Stat. Ch. 705: Bank Accounts, Securities,

Real Estate

• Ch. 705 provides a mechanism for designating

a transfer on death payee.

• Differs from joint account ownership in that

the beneficiary has no ownership rights until after death.

• NON PROBATE TRANSFERS, Cont.d
• 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.

NON PROBATE TRANSFERS, Cont.d

• BENEFICIARY DESIGNATION 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.

• 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.

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FAILURE OF BENEFICIARY

• Not having any valid beneficiary designation.
• Insurance contracts, retirement plans 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.

• The Retirement Equity Act of 1984 (REA)

amended ERISA to require 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).
• ERISA preempts state law (statutory & common)

FEDERAL PREEMPTION UNDER ERISA, Cont’d.

• ERISA plan’s documents control, even in the face
• f 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).

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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 all or a portion of the benefits payable with respect to a participant under a retirement plan.

• 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 EMPLOYEE PLANS

• Government plans generally have their own set of

rules.

• See, for instance,

http://www.opm.gov/retirement- services/publications-forms/pamphlets/ri83- 116.pdf which sets forth the ground rules for court orders concerning Federal Employee Retirement Plans.

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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
• wnership of the trust. At the settlor’s death,

successor beneficiaries succeed to the beneficial

• wnership of trust assets.

LIVING TRUSTS, Cont’d.

• 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
• ver” will that provides that the trust is the

beneficiary of any solely owned assets, so that the assets follow the dispositive plan in the trust.

CREDITOR ISSUES

• Probate assets are generally subject to the claims
• f 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.

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CREDITOR ISSUES, Cont’d.

• See, Wis. Stat. § 815.18 for a list of exempt assets.
• No formal notice procedure for non-probate

assets.

• 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. Hot issue in “Elder Law.”

TAX ISSUES

• General rule: probate and non-probate assets are

both subject to estate tax, and receive similar treatment with respect to “step up in basis.”

• The gross estate consists of the value of all

property (real or personal, tangible or intangible)

• wned 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.

TAX ISSUES, Cont’d.

• 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.

3/19/2014 9

TAX ISSUES, Cont’d.

• A beneficiary can end up with a big income tax bill

if they inherit IRA’s, retirement plan assets or

• ther 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.

Pause For Attendance Code & Announcement

• A MVLC Student Advisory Board Member will read

part one of the attendance code for online viewers.

• Upcoming Events:

– Friday, April 11th – Volunteer Appreciation Party – Thursday, April 24th – Alumni Awards reception – Friday, April 25th – Annual Pro Bono Society Induction

PERILS OF MULTIPLE OWNERSHIP OF REAL ESTATE

• 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.

3/19/2014 10

PERILS OF MULTIPLE OWNERSHIP OF REAL ESTATE, Cont’d.

• 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.

• Also, liens and encumbrances of a partial owner

can inconvenience all of the owners. For example, judgment and tax liens filed against one

• wner 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.

POSSIBLE SOLUTIONS TO MULTIPLE OWNERSHIP ISSUES, Cont’d

• Instead of co-ownership, consider giving one heir
• r owner the fee simple, with a mortgage granted

to the other heir of heirs. This clarifies the rights

• f all concerned.
• Domestic Partnership under Wis. Stat. Ch. 770

does not seem to deal with management, control and division of property.

3/19/2014 11

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 or relevant statutes.

CHALLENGING TRANSFERS POST DEATH, Cont’d

• 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

• f 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

• f 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);

CHALLENGING TRANSFERS POST DEATH, Cont’d

• 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)

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CHALLENGING TRANSFERS POST DEATH, Cont’d

• UNDUE INFLUENCE, Continued

– 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
• f Hamm, 67 Wis.2d at 288, 289.

CHALLENGING TRANSFERS POST DEATH, Cont’d

• 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).

CHALLENGING TRANSFERS POST DEATH, Cont’d

• 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).

3/19/2014 13

CHALLENGING TRANSFERS POST DEATH, Cont’d

• ABUSE OF FIDUCIARY RELATIONSHIP, Continued

– 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.

CHALLENGING TRANSFERS POST DEATH, Cont’d

• 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

Pause For Attendance Code

• A MVLC Student Advisory Board Member will

read part two of the attendance code for

• nline viewers.

3/19/2014 14

MAIN HURDLES 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 marital and family support obligations. See, Stat. Chapter 766, and Chapter 861.

MAIN HURDLES IN BRINGING A POST DEATH CHALLENGE, Cont’d.

• CONSTITUTIONAL RIGHT TO WILL YOUR

PROPERTY, Continued

– 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.

MAIN HURDLES IN BRINGING A POST DEATH CHALLENGE, Cont’d.

• PRESUMPTION OF COMPETENCY. Everyone is

presumed be competent until satisfactory proof

• therwise. 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

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MAIN HURDLES IN BRINGING A POST DEATH CHALLENGE, Cont’d.

• 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.” Thus, an injured party may never discover their loss. Good for privacy, bad for protection of inheritance rights.

MAIN HURDLES IN BRINGING A POST DEATH CHALLENGE, Cont’d.

• 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

• 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 fairly entitled.” [citations omitted].

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ATTORNEY AIDING AND ABETTING LIABILITY, Cont’d.

• 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.

ATTORNEY AIDING AND ABETTING LIABILITY

• The Court noted in Tensfeldt:

“[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.”