The nature of our clients' assets is changing--in many ways, for the better. We live in an increasingly non-probate world, where more and more assets permit beneficiary designations. There are pitfalls to non-probate planning, to be sure, but clients and planning professionals alike need to realize the benefits of avoiding the typical probate process.
To start, "probate" is both a noun and a verb, with the noun form referring to the process of admitting a Will to the Register of Wills and swearing in a personal personal representative (executor of a Will or administrator if no Will) so that the assets of a deceased person may be administered according to law. The verb form applies to the action of the process. In other words, if my father's Will names me as Executor, I can go to the courthouse and probate his Will after he dies. Once I take that action, I have begun the probate process. Clearer? It's a good start.
Next, what assets are subject to probate--or, phrased differently, what assets of a deceased person require administration via the probate process? Here's a working rule of thumb (that has a few exceptions):
Think of assets as categorized by ownership: Solely owned, Jointly owned, or owned with a Beneficiary Designation. It's as simple as S, J, and B.
Solely owned assets must be probated because there is no other owner and no other directive as to whom they pass. The person's Will is the directing entity, which requires the probate process. (If there is no Will, then state statutes govern the persons who will receive the deceased person's assets. The probate process is still required in such cases.)
Jointly owned assets will generally pass to the other joint owner. Joint ownership is generally conferred in a titling document, such as the deed to real estate, the title to car ownership, or the and/or language in a financial document, such as bank accounts or stocks or bonds. These assets do not require the probate process to direct where they pass, since the joint owner, if he or she is still living, automatically becomes the Sole owner. This is why the Will of the first spouse to die often does not need to be probated. (Here's an important exception: assets such as real estate and vehicles often must be titled jointly "with right of survivorship" to ensure that a surviving interest is created. If a deed simply uses the language "joint owner" or is silent as to survivorship, then no joint ownership with survivorship is created, and probate may still be necessary. Check your deeds!) Thus, these will generally be non-probate assets.
Beneficiary Designated assets have a beneficiary appointed within the document or plan. Examples of assets containing such designations would include life insurance, annuities, IRAs, Roth IRAs, 401(k)s and other retirement accounts. Increasingly, assets such as savings accounts, CDs, mutual funds, investment accounts and others may include a beneficiary designation referred to as "Transfer on Death", "Payable on Death", and "In Trust For". Such designations have the effect of directing that ownership of the asset passes to a particular person or persons upon the death of the current owner. Thus, these are also non-probate assets.
Importantly, while assets may be non-probate in nature (jointly owned or containing a beneficiary designation), there still may be Pennsylvania inheritance tax due on those assets. Specifically, jointly owned assets will be taxed to the extent of the deceased's ownership interest (1/2 or 1/3, etc.), and Beneficiary Designated assets over which the deceased owned the entire asset (IRA, annuity, etc.), the asset will be entirely subject to tax.
Additional downsides to non-probate planning include the inability to create complex distribution schemes, such as specific bequests of cash sums, and ordering of multiple beneficiaries as backups to predeceasing beneficiaries (although some of this may be possible). In addition, to the extent trusts are to be named as beneficiaries, for minors, disabled beneficiaries, or spendthrift beneficiaries, those trusts need to be drafted and created separately and funded through the non-probate designations, which can create additional complexity in estate plans which naturally change over time.
Nonetheless, non-probate planning has benefits. To start, direct non-probate transfer often can avoid the reach of creditors, who have up to one (1) year to present claims against an estate of the deceased. Even more important to many families is the relative immediacy of transfer of such assets from the deceased party to beneficiaries. The probate estate, by its nature, is an entity whose job it is to marshal such assets, hold them for times prescribed by Pennsylvania law, and then distribute them to beneficiaries. Non-probate transfers are considerably faster, in terms of this transfer, since the process skips that probate step.
Also, while many non-probate assets, such as jointly owned assets, may still be subject to spousal elections, assets such as IRAs or other retirement accounts should avoid spousal election, which makes direct transfers possible when the couple desires (Zebe Estate, Montgomery County 1999). This can avoid a potential gifting issue, for Medicaid purposes.
For traditional probate assets, such as real estate or other titled items which cannot be easily manipulated to avoid probate, trusts--especially irrevocable, for Medicaid purposes--can assist in keeping these assets from probate consideration.
The result of these available probate alternatives is a potential non-probate estate, even when a person owns the "standard" asset composite of real estate, cash equivalents, and qualified savings. While the challenges of such planning are evident, and likely require greater contact with planning attorneys over time, the benefits to clients and family members cannot be overlooked, and offers great potential.