One of the most common questions clients ask us is what is the difference between a probate and non-probate asset?
Most clients own a mix of assets that fall into both categories or would fall into both categories with the passing of their spouse. As you will see below, it is very important to understand the difference between these assets so that your plan functions as intended when you pass away.
Probate assets are the items that you own solely in your name and which do not pass by way of beneficiary designations when you die. These are called probate assets because when you pass away, they will pass through probate to your beneficiaries if you have a Will, or to whomever your state law names as your intestate heirs if you do not.
Some typical examples of probate assets are as follows: bank accounts with no joint owner, real estate with no joint owners with the right of survivorship, and life insurance policies, retirement accounts, and other investment accounts that do not have valid beneficiaries named. Accounts that you have failed to name a beneficiary for, or have chosen to name your estate as the beneficiary for are also probate assets.
Non-probate assets are the opposite of probate assets because when you die they do not require probate to wind up in the hands of your beneficiaries. These assets pass directly to another person or entity when you pass away and are not subject to the terms of your Will or the law of intestacy.
Examples of non-probate assets include real estate held joint tenants with right of survivorship or tenants by the entireties, bank accounts with joint ownership, life insurance policies, retirement accounts, and other investment accounts with valid beneficiary designations, accounts that have transfer on death or payable on death designations, and accounts that are owned by a trust.
Why Does it Matter?
In order to make sure that your plan works the way you want it to, it is critical that you understand what assets that you own will pass through your probate estate and which will not.
A common mistake that I see is that clients take the time to draft a Will which names multiple beneficiaries, but then they add just one child onto a bank account as a joint owner. Typically, this is done so that the chosen child can write checks for them or otherwise help manage their primary bank account. The downfall is that they have innocently thwarted the estate plan they created by doing so because at death only the child with joint ownership of the bank account will have any legal right to benefit from it.
Another thorny issue is that a parent may owe inheritance tax on part of their own bank account if their joint owner child passes away unexpectedly before them. It is important to understand that in Pennsylvania, non-probate does not mean non-taxable for purposes of the Pennsylvania Inheritance Tax. Unfortunately, just as a child would have to pay inheritance tax on the inheritance they receive from a parent, a parent would have to do the same on what they “receive” from their child under these circumstances.
Are You Ready to Plan?
As you can see, there are many issues to consider when crafting your estate plan. Whether you are creating your plan for the first time, interested in reviewing your current planning, or just have questions about estate planning we would love to meet you. Our goal is to help make your entire planning process as simple as possible.
We recommend registering for one of our free workshops to get your questions answered and learn more about our process.
Contact an Experienced Pennsylvania Estate Planning Attorney
If you have questions about probate vs. non-probate assets, contact an Estate Planning attorney at Cardinal Estate Planning by calling 570-252-9043 to schedule an appointment.