Transfer on Death and Probate

I got into probate practice on accident.  It all started when I worked for my previous employer as a law clerk (after I had taken the bar but before I had received my results).  Our firm had received a telephone call from a client/investor.  Our client had an investment property and the person staying in the property had passed away.  Our client needed us to somehow get the property released from administration so that our client could re-rent the property without having to foreclose (actually, you have to open probate to foreclose but that is a long, complicated story.  He definitely did not want to foreclose if he could avoid it).

Since working on that case (and since receiving my license) I have worked on several similar cases, I have administered several estates and now my firm is expanding into estate planning.  A very common question that I am asked (usually from financial advisors) is about retirement accounts and probate.  People want to know the following: if they set up their retirement account to transfer on death to the designated beneficiaries, will the beneficiaries still have to pay “probate fees and taxes” on that money?

If a retirement account is set up to transfer on death, that money is still taken into consideration for federal and state estate tax purposes.  However, setting up the account so that it transfers on death, still keeps a considerable amount of money in the beneficiaries’ pockets.  Attorneys fees are generally calculated as a percentage of the probated and non-probated estate.  The percentage paid for non-probated property is much lower than for probated assets because the amount of legal work required to liquidate and distribute non-probated assets is much less.  In addition, the fiduciary of the estate gets paid according to a percentage of the probated and non-probated assets.  By keeping large accounts outside of probate, you are paying less to the attorneys and the fiduciary.

Transfer on death designations keep money in the family in other miscellaneous ways as well.  Less paperwork will be required for filing, which saves the family money because probate courts generally charge per page.  Also, if a bond is required, the bond will cost less.  Bonds are required to be secured for double the amount of the probated assets; the more in probated assets, the more the bond will cost.