Estate Planning Basics – Probate and Non-Probate Assets

Estate Planning Basics – Probate and Non-Probate Assets

Published On: March 7, 2024

Written by: Ben Atwater and Matt Malick

The first article in our “Estate Planning Basics” series addressed the three core documents of an estate plan – a Will, a Durable Health Care Power of Attorney and Advanced Health Care Directive (Living Will), and a Durable General Power of Attorney for Finances. Today, in our second article, we turn our attention to probate and non-probate assets.

Probate assets pass under your Will through a legal process where assets transfer from the decedent’s name to the name(s) of their rightful heir(s) and beneficiary(ies) as set forth in a will, or in the absence of a will, by the intestate succession laws in the decedent’s state. The most common type of probate assets are individual assets titled in the owner’s sole name, like bank and brokerage accounts, personal property, businesses, and real estate.

Assets titled as tenants-in-common are probate assets, because each owner has a percentage interest in the property and the percentage you own transfers through probate. Assets titled as joint tenants with rights of survivorship (JTWROS) are non-probate assets since the property passes to the other owner(s) directly.

Transfer on death (TOD) or payable on death (POD) are also non-probate assets. This titling, as it sounds, automatically transfers assets to a named beneficiary when the owner dies, and these assets do not enter probate.

Health savings accounts or medical savings accounts, life insurance policies, retirement accounts, including IRAs and 401(k)s, and annuities should ideally pass outside of probate if you have a properly completed beneficiary designation for each of these assets. If any of these accounts lack a beneficiary designation, or explicitly names your estate as a beneficiary, then they become part of your probate estate.

Non-probate assets, like those listed above, do not need to go through the probate process after you die and will instead pass directly to your heirs. Non-probate property is potentially available to your heirs shortly after your death.

There is often talk about “avoiding probate” so let us address that issue. First, probate in Pennsylvania is not an arduous process, and rarely requires intervention by a judge. Critics of probate overstate the “shortcut” of avoiding probate and can even misrepresent the probate process to sell a product as a “solution.”  Much of the record keeping and tax filings that death necessitates will require your representatives to act regarding both probate and non-probate assets.

While avoiding probate might sound like a good result, sometimes non-probate property will end up in the hands of unintended beneficiaries or creditors.

For example, you have three children that you wish to receive your assets equally after your death. If you own a bank account titled JTWROS with one of your children, after your death, the JTWROS bank account will pass to just the one child. They will be under no legal obligation to divide the account with your other children. No matter how well intentioned or convenient when setting-up, arrangements like this frequently cause discontent among heirs.

Jointly tilted assets can also expose those assets to additional creditors. For example, if you have a joint account with a child and that child gets divorced, their spouse may then have a legal claim to the account. Or in the case of a bankruptcy, other civil court judgments or even a criminal matter pertaining to your joint account holder, you are opening your assets to risk when you add children or others to your accounts.

Be wary of those aggressively advising you to “avoid probate.”  We have seen instances where planners aim to title all your property in the name of a living trust. Or instances where financial advisors attempt to put all your investable assets in insurance products, like annuities. The cry to avoid probate can be a siren song.

You should only adjust titling to avoid probate after you understand exactly who will inherit the property after you die, as well as the legal and tax consequences of adding owners and / or beneficiaries to accounts or other assets.

One instance where avoiding probate often makes sense is between spouses. If a married couple holds most of their assets jointly, it might make sense to be sure that all assets are titled JTWROS, so the death of the first spouse does not trigger probate.

Take this opportunity to review the titling of your assets. Make sure the titling is consistent with your wishes. A common mistake is for people to misunderstand the relationship and the coordination of probate and non-probate assets. A successful estate plan must effectively identify both types of assets and view them as parts of a whole.

Just as importantly, make sure you talk to your advisors, your family and anyone else (charities, friends, etc.) involved in your plan to be sure they understand your intentions, your plans and their responsibilities related to your different assets. Coordination among all your assets is key.

An estate plan is never finished. It is a continuous and evolving process that needs to take into consideration a changing assortment of assets and circumstances. Please let us know if we can be of any assistance. In the meantime, we will be back next week with the third installment of our estate planning series.

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