There are advantages and disadvantages to using non-probate transfers that pass your property directly to your beneficiaries instead of by Will.  Even in states like Maine, that have a less formal will-probate process, lower fees, and fewer delays, there are advantages in using non-probate transfers.  The key advantage is the beneficiaries’ immediate access to property.

With the recent increase of the federal estate tax credit shelter to $5,000,000 and a provision allowing the first spouse who dies to transfer the benefit of any unused credit shelter to the surviving spouse, the use of non-probate transfers and particularly joint ownership with right of survivorship can be extremely helpful.  Maine’s scheduled increase in the Maine estate tax credit shelter to $2,000,000 in 2013 will also make the use of joint ownership arrangements more attractive.  However, because the Maine state estate tax does not provide for a transfer of unused credit shelter, in larger estates you need to think carefully about non-probate or joint tenancy arrangements. There are disadvantages to non-probate transfers.  They stem principally from intra-family dynamics, but also relate to estate tax and creditor’ claim issues.

The advantages and disadvantages of non-probate transfers are discussed below in the context of the two most common forms of non-probate transfers: (1) joint tenancy of land, and (2) joint bank accounts.

Joint Tenancy of Land is a common form of non-probate transfer. One of the more common forms of non-probate transfer of land is joint tenancy, with right of survivorship, where title is held with another individual, and upon one of the owners’ death, the other owner automatically becomes the sole owner.  This form of ownership is not limited to spouses, although such ownership arrangements are quite common for married couples.  In Maine, a joint tenancy in real estate can help protect the surviving spouse from creditors’ claims against the deceased spouse.

In some states, there is a special form of joint ownership between spouses called “tenancy by the entireties”.  The principal distinguishing factor is that, by agreement, the spouses can unilaterally terminate their joint tenancy with right of survivorship and convert it into a tenancy in common, where each has a separate ownership share in the property.

The disadvantages of joint tenancy ownership of land relate principally to estate taxes and family dynamics:

  • In large estates, joint tenancy may not be the best option for minimizing estate taxes:  separate ownership can assure effective use of both parties’ available estate tax credit shelters;
  • Joint tenancy in real estate may create awkward family dynamics with second or subsequent marriages; and,
  • The parties may not wish or intend for the entire interest in property to pass to his or her surviving spouse.

A joint bank account is another form of non-probate transfer.

Another common non-probate arrangement is the joint bank account.  A joint bank account can be useful if you are married or in a domestic partnership, as this allows funds to be readily available to your surviving partner.  However, multi-party accounts are often difficult to deal with because many folks don’t maintain records of their respective contributions to the account, so it can become difficult, in an estate settlement or divorce or other contentious situation, to ascertain the respective contributions of the parties. Also, the terms of the deposit account frequently authorize one or more persons to have withdrawal rights over the entire account without regard to their contributions.

In Maine, the relationship between joint bank account owners and banking institutions is regulated both by the Maine banking statutes in 9-B M.R.S.A. Section 427 and by the Maine Probate Code, 18-A M.R.S.A. VI, Part 1, Section 6-101 et seq.

Under the Maine Probate Code, there are three types of multi-party accounts:

  1. a “joint account” which is an account payable to one or more of two or more parties, whether or not there is a right of survivorship.  During the lifetime of the joint owners, a joint account is considered to be owned by the parties to that account in proportion to their contributions to the sums on deposit, unless there is clear and convincing evidence of a different intention. A joint account may, but is not required to, have a right of survivorship.  Whether or not there is a right of survivorship is defined by the deposit agreement with the bank but it is presumed that a “joint account” will be payable to the surviving owner or owners unless there is clear and convincing evidence that a different result was intended at the time the account was created.
  2. a “P.O.D.” (payable on death) account which is payable to one or more persons during lifetime and at death to one or more designated P.O.D. payees or beneficiaries after the death of all of the lifetime owners. A P.O.D. account is considered to belong to the lifetime payee or payees during lifetime and not to the P.O.D. payees.  If there is more than one lifetime payee, the account belongs to the payees in proportion to their contributions unless there is clear and convincing evidence of a different intention; and,
  3. a so-called “trust account”  which is an account in the name of one or more parties as trustee for one or more beneficiaries where the trust relationship exists due to the form of the account and deposit agreement with the banking institution and not under a formal trust agreement.  The “trust account” is in some places called a “Totten trust.”  In a trust account, the rights of the parties are governed by the terms of the deposit contract.  If the account is not clear, then the account is presumed to belong to the designated “trustee” or “trustees” during lifetime unless there is clear and convincing evidence to the contrary.

There can be pitfalls with joint bank accounts, particularly in cases involving parents and children, such as unauthorized withdrawals, or estate and gift tax issues.  These pitfalls are described below.

Joint accounts carry a risk of unauthorized withdrawals. One complication with a joint bank account is the unauthorized withdrawal.  A very common manifestation of this is with an elderly parent and an exploitive child.

Joint accounts carry a risk of unauthorized closing: In a fraying marriage or domestic partnership one party may seek to close out the account without the permission or notice to the other party, in order to obtain an economic advantage.

Joint accounts carry a risk of gift and estate taxes. Another technical complication arises from the gift and estate tax implications of joint accounts.  Although the current gift and estate tax credit shelter amounts are sufficiently high that very few people actually have to worry about paying a gift or estate tax, a number of complications may arise if someone withdraws amounts in excess of their contributions to the account.

Simply setting up a joint account does not constitute a gift transfer, even if only one party contributed to the account and even if both parties have the right to withdraw.  However, technically, if the second party makes a withdrawal there has been a gift transfer from the original owner.  Or if the original contributor dies and the account becomes payable to the survivor, there has been a transfer for estate tax purposes.

For most married couples who are U.S. citizens and resident aliens, there is really no practical problem since transfers from a U.S. person to a U.S. spouse would qualify for the gift tax and estate tax marital deductions in any event.  Indeed, for estate tax purposes, it is presumed that spouses contributed equally to the joint account.   For unmarried persons, however, or non-resident alien spouses, there are some theoretical gift and estate tax reporting issues if the amounts at issue exceed the annual giving amount (currently $13,000 per donee per year).  For a single person, for estate tax purposes, the individual’s ownership of a joint account requires a determination of that person’s contributions to the account, which is not always easy to ascertain.

Joint accounts owned by an elderly parent and child carry a risk of family misunderstandings and conflict.  Many aging parents often want to have one of their children, perhaps one who lives nearby, assist them with their banking business and help in paying their bills.  Often these folks find it convenient and easy to place their accounts in joint name with the favored child, assuming that any funds remaining at death will be shared with the other children.

This approach works well during lifetime, but, at death, the result of the statutory presumption is that the entire remaining account balance will be paid to the surviving child and will not become part of the parent’s probate estate to be paid out to all of the children under the Will.

Regrettably, it is all too common in this situation for the caregiver child to take the position that he or she should be entitled to keep the account in consideration for all of the caregiving assistance provided.  This scenario almost always leads to unhappiness among the siblings and not infrequently to litigation, typically asserting arguments of fraud, duress, undue influence, mistake, or interference.  These can be quite painful for the family.

The issue whether the account is payable to the survivor is based upon circumstances existing at the time the account was opened.  There must be clear and convincing evidence at the time the account was created that the parties intended a result other than survivorship.  A subsequent statement or declaration, even a statement in a subsequent Will that the joint account should be distributed under the Will, may not be sufficient to rebut the presumption.

Use of durable power of attorney as an alternative to elderly parent and child joint bank accounts: Rather than creating a joint account, the use of a durable financial power of attorney to enable the child to access the account may be a desirable alternative to avoid the question of right of survivorship, and potential tax consequences.

Joint accounts owned by an elderly parent and child carry a risk that the account may become subject to claims of the child’s creditors.  This can often come as a shock to a parent if a child has financial difficulties or becomes involved in an accident.  A prejudgment attachment on trustee process may end up freezing the joint account, at least until the respective ownership rights of the parties can be ascertained, and people sometimes have difficulty in documenting their respective contributions.

Joint accounts only partially shield funds from creditor claims.  Another feature of joint accounts is the extent to which the joint account can insulate money from creditors’ claims.  Because a joint account is payable directly to the survivor and avoids the probate court process, many assume that the account can be protected from the claims of creditors. This is only partially true.

The governing law in Maine, 18-A M.R.S.A. Section 6-107, provides that a joint or payable on death account or a “trust account” is not effective against the estate of a deceased party to transfer to the surviving party sums needed by the estate to pay debts, taxes, expenses of administration, including statutory allowances for the surviving spouse and minor or dependent children, if other assets of the estate are insufficient.  The surviving party, P.O.D. payee, or trust beneficiary is liable to account to the personal representative of the deceased party for the amounts that the decedent was deemed to own immediately prior to death to the extent necessary to enable the personal representative to pay debts and claims.  Such a claim must be asserted within 2 years of death.

The good news is that although the Maine statutes technically permit this right of recovery, in very few cases has it been reported that creditors have attempted to pursue claims into the hands of surviving joint owners or P.O.D. beneficiaries.

A payable on death account may be preferable to a joint account: For persons who simply want to be sure that an account passes to an intended beneficiary at death, the P.O.D. beneficiary designation has advantages over the joint account. The so-called “Totten trust” account was originally a feature of the law of New York and has not been that commonly used in Maine where the joint or P.O.D. account has been considered more useful.

A payable on death approach is also available in Maine for transactions involving investment securities and security accounts.  Maine has adopted the Uniform Transfer on Death Security Registration Act which appears in Title 18-A M.R.S.A., Article VI, Part 3.  The law allows individuals to hold investment securities and brokerage accounts as joint owners with right of survivorship and to designate a payable on death beneficiary. The security will be payable to the designated party and will not become part of the probate estate or governed by the Will.

In addition, just as joint and payable on death bank accounts may be subject to creditors’ claims if the probate estate is insufficient, there is a comparable statute that makes the recipient of a joint or payable on death security registration accountable to the personal representative for amounts necessary to satisfy administrative expenses, debts, taxes, claims and allowances.

Conclusion: Non probate transfers can be very valuable in structuring your estate arrangements but you can best serve yourself, your spouse and loved ones by understanding what your alternatives are, and their advantages and disadvantages.  Your attorney can help you create a plan that works best for your circumstances.