Some Facts on Probate and Non-Probate Assets

Texas is one of the most liberal states in the country when it comes to probate and the probate process. Probating a person’s Will is usually very streamlined and straightforward. However, there are some types of assets that make up a person’s estate that are considered “non-probate” and pass outside of what is controlled by the person’s Will. There are also strategies that can be utilized to have normally “probate” assets pass outside of the Will as well.

Pay on Death for Bank Accounts

Almost any bank will establish a pay on death for savings, CDs and checking accounts. This is not automatic and this option must be initiated by the owner. This is not a joint account and the person or persons who are listed on the pay on death card has no access to the funds while the owner is alive. At death of the owner, the beneficiary on the account presents a death certificate and evidence of identity and can take over the account.

Tax Qualified Retirement Accounts

These accounts are such things as IRAs, 401(k)s, 403b’s, 401(a)s, SEPP, SIMPLE and so on. Contract provisions of these accounts are governed by the IRS. All of these qualified accounts allow for naming a beneficiary or beneficiaries in the event of death. As a result, these accounts automatically bypass probate. Keep in mind that if the account was acquired and funded while the couple was married, half of any of these accounts belongs to the surviving spouse.

Transfer on Death of Securities

Texas has adopted the Uniform Transfer on Death Securities Registration Act. The provisions of this act allow a person to name someone to inherit ownership interest in stocks, bonds, brokerage accounts and mutual funds. This bypasses probate. When setting up these accounts, the owner must request what’s called a “beneficiary form” to set up appropriate beneficiaries. As with the pay on death accounts, the beneficiary has no access to the assets while the owner is alive. At death, the beneficiary provides proof of death and identification to the transfer agent or other entity that controls the investment. The beneficiary becomes the new owner.

Simplified Ownership Transfer for Motorized Vehicles and Trailers

For conveyances — including mobile homes — that are registered with the Department of Motor Vehicles, there are strategies to bypass probate for a change in ownership. Title transfer is simply done after death by presenting a death certificate and evidence of the relationship of the person requesting the title change. Texas has a standard form available for just this purpose.

Joint Tenancy with Right of Survivorship

Many folks are tempted to place their children or someone else on the title of their home as joint tenants with rights of survivorship. This certainly works to bypass probate. It also has its pitfalls as we have discussed above. As long as the choice of joint owners is a judicious one and there is no anticipation of experiencing any of the pitfalls discussed above, this strategy will work. On the other hand, a better plan might be one that involves the use of specialized deeds such as the one discussed below or strategies involving trusts.

Revocable Living Trusts

Generally in the past the sole purpose of setting up these trusts was to avoid probate and to avoid the pitfalls of joint tenancy with rights of survivorship. With simplified probate being instituted in Texas, these trusts are not as valuable as they once were. However, there are still situations where using a revocable living trust makes sense like when a person has real property located in many different states and they want to avoid having to go through the probate process in every single one.

Small Estates and Simplified Procedures

Real estate and other property below a certain value can easily be transferred in many states without the formal probate process. Usually the change in title is accomplished through presenting a death certificate and signing an affidavit that proves relationship and the title is changed or the money in the account is released.

Enhanced Life Estate Deed

This is a very simple strategy for transferring real property at death. This deed is also commonly known as the “ladybird deed” — named in honor of former first lady, Ladybird Johnson. Apparently, her husband Lyndon Johnson, transferred his property in Texas using one of these deeds.

Essentially, the grantor gifts the property to a beneficiary at his or her death. In order to maintain rights to control the property, the grantor retains a life estate on the property as well is the right to sell or mortgage or deal with the property in any other way. Because the grantor retains these rights, this is not considered a gift for Medicaid purposes or for IRS purposes. Therefore, the grantor retains the right to obtain Medicaid as well as retaining favorable tax treatment if the property is a principal residence. At death, the property goes to the beneficiary and bypasses probate. Because there are no other people on the title, the disadvantages of joint tenancy are avoided.

This strategy works well for a single individual under Medicaid. However, be careful:  It may be too simple for more complicated Medicaid cases or for complicated estate planning. In fact, the existence of the deed may actually interfere with a sophisticated estate plan!