Will Substitutes (aka Nonprobate Instruments)
Will substitutes (aka nonprobate instruments) are legal instruments that transfer property to beneficiaries at the donor's death, including payable on death (POD) contracts, such as life insurance policies and IRAs, life estates and future interests, joint tenancies, and living trusts. It can also include community property with rights of survivorship.
Section 6-101 of the Uniform Probate Code (2008 ed.) gives the following transactions as being non-testamentary transfers that should not be subjected to the Wills Act formalities:
- insurance policy,
- contract of employment,
- promissory note,
- certificated or uncertificated security,
- account agreement,
- custodial agreement,
- deposit agreement,
- compensation plan,
- pension plan,
- individual retirement plan,
- employee benefit plan,
- deed of gift,
- marital property agreement,
- or other written instrument of a similar nature.
The beneficiaries of most will substitutes only receive the property at the death of the owner of the will substitute, although some will substitutes, such as joint accounts, provide the beneficiary with a present interest.
Except for joint tenancies and their like, the owner of a will substitute has complete control over it: she can destroy the will substitute, or name or change beneficiaries anytime before her death. But when she dies, the designated beneficiary becomes the new owner of the property.
Unlike wills, these will substitutes transfer property without the requirements of the Wills Act formalities; hence, they are called nonprobate transfers, because they avoid probate and its associated high costs. The transfers occur automatically at the death of the donor; they do not need to be probated and the transfer does not require the approval of the probate court.
Because of the simplicity of creating a will substitute, most people have several will substitutes, even if they do not have a will. Indeed, many people have received some will substitutes from their employer, including pensions and life insurance.
A common will substitute is a property interest with a right of survival, including joint tenancies, tenancy by the entirety, and community property with rights of survivorship, which almost every community property state offers. A joint tenancy of realty is a form of ownership of real property where each owner has an undivided interest in the property. Any disposal of the property requires the consent of all owners. When one tenant dies, that person's interest is divided equally among the remaining owners. Only the last owner has the right to devise the property through her will or by some other means of transfer.
A tenancy by the entirety is much like a joint tenancy, but the tenants are spouses and the property is real estate. When one spouse dies, there is no transfer of property interest, since the property interest of the deceased tenant simply extinguishes, leaving only the surviving spouse with an interest in the property.
A joint tenancy of personalty, or personal property, such as a joint checking account, also requires the consent of all cotenants before the property can be transferred. However, some probate courts may try to bring the joint property into probate, under the questionable argument that the deceased didn't really agree to a joint tenancy, but simply signed a form presented by the bank or other institution that listed the owners, by default, as joint tenants. Banks and other financial institutions prefer the joint tenancy since all parties to the account are liable for any deficiencies, but some probate courts may consider evidence that the deceased didn't really want a joint account, but simply signed the institution's default form, and, thus, the account should be probate property.
In community property states, if the couple owns their community property with rights of survivorship, then the deceased spouse's interest passes automatically to the surviving spouse. However, in those states that allow it, the couple must choose the right of survivorship option.
A multiple party account without the right of survivorship (a.k.a. multiple person account) may be better in some situations than a joint tenancy, such as when the child wants to help an aged parent manage their bank account. One of the account holders acts as a fiduciary or agent for the other. The agent must act in the best interest of the other account holders and the account is not subject to any creditors of the agent. Since there's no right of survivorship, the agent does not receive the property in the account when the other account holders die, but rather, it becomes part of their estate. Therefore, a multiple party account does not avoid probate, but it may help to avoid conflicts in certain situations, such as can occur in a joint tenancy, where children who were not co-tenants to a parent's account may feel entitled to some portion of the money.
Unlike the other will substitutes, the beneficiaries of a joint account and the like, have a present interest in the property.
When a payable-on-death contract (POD contract) is signed, the beneficiary of the contract is designated in the contract itself. When the POD contractor dies, the beneficiary of the contract presents the death certificate to the other party to the contract, who then transfers ownership to the beneficiary. Common POD accounts include life insurance, Individual Retirement Accounts (IRAs) and other pension plans, savings and checking accounts, brokerage accounts, and other financial accounts. Note, however, that POD savings accounts can be returned to an estate to pay off debts of the estate.
Many states, such as Nebraska, also provide transfer-on-death vehicle registrations, allowing the owner of the motor vehicle to designate a beneficiary who will become the new owner after the death of the donor.
A future interest in property becomes possessory only after a contingent event happens sometime in the future. Often, a future interest is preceded by a life estate, and only becomes possessory by the holder of the future interest after the death of the life tenant. However, when the contingent event occurs, the property interest transfers automatically.
Another major form of nonprobate instrument is the living trust (aka inter vivos trust), which is created by the grantor (aka trustor), and managed by a trustee for the benefit of one or more beneficiaries. The grantor of the trust transfers his property to the trust while he is still alive. Often, the grantor also serves as a trustee, but when the grantor dies, a successor trustee, named in the trust document, takes over. The trust has legal title to the property and the beneficiaries have equitable title. The successor trustee distributes the property according to the trust documents without the need for court approval.
Applying the Law Of Wills to Will Substitutes
Because the law of wills has evolved over the centuries to deal with common problems in transferring property at one's death, many have argued that the law of wills, such as lapse and anti-lapse, revocation by operation of law, the payment of creditors' claims, and so forth, should apply to will substitutes. Increasingly, the courts are starting to apply this subsidiary law of wills to nonprobate instruments, particularly to revocable trusts.
One such law is the revocation of parts of a will concerning a spouse and her relatives upon divorce. In most jurisdictions, the parts of the will that devise property to the spouse or her relatives are automatically revoked by law when the marriage ends in divorce or annulment. Yesteryear, this automatic revocation did not apply to will substitutes. However, UPC §2-804, which has been adopted by many states, extends the revocation to any governing instrument, including any instrument to transfer property, including nonprobate property.
Nonetheless, it is unlikely that nonprobate transfers will require Will Act formalities, since most of these nonprobate instruments are contracts, and, if contracts in general do not require witnesses, for instance, then why should it be any different for contract-based will substitutes?
Superwills Can Change the Disposition of Nonprobate Instruments
One of the provisions of UPC §6-101 (previously UPC §6-201 in an earlier edition of the UPC) is that the beneficiary of a nonprobate instrument can be changed not only by modifying the instrument itself but also by naming a new beneficiary in a will or other separate writing. Wills that can modify the disposition of nonprobate instruments are being called superwills. Few jurisdictions have allowed wills to change nonprobate instruments, and many have argued that it is unnecessary, because it is very easy to change beneficiaries on the nonprobate instrument itself. Nonetheless, there seems to be a trend to allow superwills.
In 1998, Washington became the 1st state to allow superwills. RCW 11.11.020: Disposition of nonprobate assets under will. However, certain restrictions apply, including that the will was executed after the beneficiary was designated in the nonprobate instrument. However, many nonprobate instruments cannot be modified by will, including community property and life insurance policies. RCW 11.02.005(15)
One important thing to keep in mind is that states have different definitions for what constitutes a nonprobate instrument. Hence, a testator must not only be aware of the limits of the superwill statute itself but also what instruments the statute covers.