In my experience, there are more important estate-planning objectives than avoiding probate. It’s rarely as bad as portrayed in the movies, the local news, or at the nail salon. That said, if you can avoid probate, I say by all means do so! The first step to avoiding probate is knowing what things avoid probate in Arkansas. This short article about Arkansas estate planning is a short summary of property interests that avoid probate in Arkansas.
Two or more people can jointly own the same property. The question is how do they jointly own it. Unfortunately, the language we use to describe property interests goes back nearly a thousand years to medieval England.
If two unrelated people (who we’ll call “A” and “B”) own a plot of farm land (which we’ll call “Blackacre”) as “tenants in common”, when A dies, A’s interest in Blackacre will go to A’s heirs. So, unless A names B in A’s will, B will not inherit A’s share in Blackacre.
On the other hand, using the same example, if A and B own Blackacre as “joint tenants with rights of survivorship”, B would inherit A’s share in Blackacre no matter what. This is true even if A’s last will and testament said in all caps, “NO MATTER WHAT HAPPENS, B SHALL UNDER NO CIRCUMSTANCES INHERIT BLACKACRE OR EVEN ONE DIME OF MY ESTATE. EH, B IS SUCH A LOW LIFE. GROSS!”
Survivorship property is not subject to probate.
Property Transferred to Trust During Your Lifetime
Assets of a trust transferred during one’s lifetime (such a trust is called an “inter vivos trust”) pass outside of the probate process. A trust is an agreement in which one person owns property on behalf of another person. For example, if A signed a deed that said, “I, A, convey all my title in Blackacre to B to hold as trustee of the A Living Trust, dated October 31, 2016″, that property would be transferred to trust and at A’s death, the succession of ownership would be subject to the trust agreement.
Real Property Transferred By Beneficiary Deed
A beneficiary deed works in a similar manner as the survivorship interest I described above. Let’s suppose that A executes and records a compliant beneficiary deed to Blackacre, and the deed states that, on A’s death, B shall inherit all of A’s interest in Blackacre. In that case, just as with a joint tenancy with rights of survivorship, B would inherit A’s interest in Blackacre when A died. The difference is that when A is still alive, B has no interest in Blackacre. Further, A can always revoke the beneficiary or a make a subsequent and conflicting beneficiary deed that would negate the original one.
I have encountered many estates where an elderly parent sought to avoid probate and gave their children a survivorship interest in their property. Had they sought my counsel, I would have advised that they execute a beneficiary deed.
Payable On Death Bank Accounts
Bank accounts that are payable on death (“POD”) pass outside of probate. POD bank accounts operate in a similar fashion to beneficiary deeds. If you designate an individual to be the beneficiary of a POD bank account, that person has no legal interest in your bank account during your lifetime.
On the other hand, again, if in seeking to avoid probate, you gave that individual a joint ownership interest in your bank account, you would have no legal recourse against that individual if they withdrew the entire account and fled to Mexico.
Life Insurance Proceeds
Life insurance proceeds pass outside of probate. The estate practitioner should be aware that Arkansas law on this subject is trickier than other states. The 1937 Arkansas Supreme Court case of Pedron v. Olds established the rule in Arkansas that a last will and testament can modify the beneficiary of a life insurance policy even though the language of the policy requires strict compliance with its own procedure for changing the beneficiary. Pedron and subsequent cases have established the rule in Arkansas that a will may modify the beneficiary of a life insurance policy if the language of the policy is sufficient to identify (1) the insurance policy involved and (2) an intent to change the beneficiary.
This means that, which distribution of life insurance proceeds does not require the order of a probate judge, in some cases, determining to whom life insurance proceeds should be distributed just might.
The proceeds of IRAs also pass outside of probate. However, practitioners in Arkansas should be aware of the recent case Nunnenman v. Estate of Grubbs, in which the Arkansas Court of Appeals in dicta commented that, in a similar fashion to life insurance proceeds, wills could determine the beneficiary of IRAs.
Dicta simply means extra commentary in a case that is not essential to the court’s decision. The standard rule is that while dicta may be persuasive, it is not binding on subsequent court decisions.
Nunnenman presents a difficult challenge for practitioners. First, we don’t know if subsequent courts will follow its commentary; they certainly don’t have to. Second, because IRAs are the creation of federal statutes, which are generally said to preempt state statutes, it is not clear that the rule in Nunnenman—which we don’t even know is the rule in Arkansas—would be upheld if challenged in a federal court.
Again, IRAs can pass without the order of a probate court. Whether a probate court can determine from a will to whom an IRA should pass is total speculation at this point.
If you have questions about your estate, please don’t hesitate to call Chris McNeal at 501-372-1300.