Non-Probate Assets | Fendrick Morgan Law

Non-Probate Assets – Clarifying Certain Misconceptions

A non-probate asset is any asset that passes to a beneficiary outside of the decedent’s Will or estate. This occurs by operation of law at a person’s death and an Executor of an estate does not have any control over such assets. Typical examples of non-probate assets are jointly-owned accounts and account with designated beneficiaries, such as life insurance and retirement accounts. In addition, assets owned by a trust on the date of your death are non-probate assets. There are a few common misconceptions surrounding non-probate assets. Therefore, it is important to consider how such assets will pass to your beneficiaries at the time of your death and ensure the distribution is consistent with your wishes and overall estate plan.

First, as the term makes very clear, “non-probate assets” are not subject to any state’s probate process. In New Jersey and Pennsylvania, the probate process is quick and relatively inexpensive. However, if you are a resident of another state in which the probate process is lengthy, expensive, or otherwise cumbersome, there may be real advantages to having your assets titled or designated in a way that avoids probate. In addition, if you are a New Jersey or Pennsylvania resident, but own real estate in another state, such real estate will be subject to the probate process of the state in which the property is located if you pass away owning it in your individual name. Therefore, depending on your overall estate plan, you may wish to consider making the out-of-state property a non-probate asset. This is often accomplished by adding a joint owner or transferring the property into a trust. As you will see below, however, simply making an asset into a non-probate asset often does not avoid death taxes and, therefore, taxes in your state of residency or an out-of-state jurisdiction may still be incurred at the time of your death.

Second, accounts that are titled jointly or are beneficiary designated supersede a Will. It does not matter if your Will was executed after the account was made joint or the beneficiary designation form was signed. For example, if you have a Will that leaves all of your assets to your three children equally, but all of your assets are held in jointly-titled accounts with only one of your children on the date of your death, all of the assets will pass to that one child who is the joint owner. As a second example, if you executed a beneficiary form for a retirement account naming your sister as the primary beneficiary, it does not matter that you later executed a Will that leaves all of your assets to your children. Your sister would legally be entitled to your retirement account at the time of your death. Instead, you would need to execute a form with the holder of your retirement account specifically changing the beneficiary to be your children. In some circumstances, there may be valid reasons for your retirement accounts or other assets to be designated to different beneficiaries than those named in your Will, just like there are situations in which it is advisable to have a jointly owned account, but these options need to be considered in connection with your goals and your overall estate plan.

Lastly, non-probate assets generally do not avoid death taxes. A decedent’s “probate estate” is different than a decedent’s “taxable estate”. Non-probate assets are generally includable in your estate for federal estate tax purposes and for New Jersey and Pennsylvania inheritance tax purposes. (When New Jersey had an estate tax prior to 2018, non-probate assets were includable in the calculation of assets for New Jersey estate tax purposes as well.) The one notable exception is life insurance. For New Jersey inheritance tax purposes, life insurance is not includable in a decedent’s taxable estate when it has a named beneficiary. If the beneficiary is an estate, the proceeds would be included for inheritance tax purposes in New Jersey. For Pennsylvania residents, no life insurance is includable for inheritance tax purposes, regardless of whether the beneficiary is an individual or an entity (i.e., an estate). Generally, however, if your goal is to reduce or eliminate death taxes, non-probate assets are not the mechanism for accomplishing that goal.

Most people have some assets that will pass outside of their Wills, so it is important to consider how non-probate assets affect your overall estate plan. You may have beautifully-drafted documents that set forth your exact wishes, but if your assets are not titled or designated in a way that coordinates with your documents, such documents will be useless at the time of your death.

If you would like to review your estate plan and the ways in which the current titling and designation of your assets affect such a plan, please call our office at 856-489-8388 to schedule a consultation or contact us here.

beneficiary, non-probate assets
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