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Probate Property and Non-Probate Property

Probate property is controlled by your will. Non- probate property is not controlled by your will. Therefore, unless you coordinate the ownership of your property with the provisions of your will, your will may not work the way you intended.

Joint property is the most common form of non-probate property. Normally it will pass to the surviving joint owner, regardless of the terms of your will. Joint property can cause problems:

Example: Widow's will leaves her estate equally to her two children. But because of concerns about her own health, widow has placed her bank accounts in joint name with her daughter, who lives nearby. At widow's death, these accounts will normally go to daughter, giving her an unequal share. Daughter may refuse to share them, feeling that she earned them by living nearby and helping her mother. Distant son may choose to fight about it, in court or within the family. (Widow should have given daughter a power of attorney for use in case of illness.)

Life insurance is another common form of non-probate property. Proceeds are paid, according to contract, to the designated beneficiary, regardless of what your will says. Here again, problems can arise:

Example: Husband's will creates a "credit trust", to be funded with $650,000.00,(1) which will provide income to Wife, but which will not be subject to federal estate tax at her later death. This $650,000.00 in trust is also free of tax in Husband's estate because of the unified credit against the federal estate tax. Thus this $650,000.00 is intended to pass to the children untaxed. However, Husband neglects to designate "my estate" as beneficiary of his life insurance. At his death, his assets consist of the $450,000.00 residence in joint name, the $1,000,000.00 life insurance payable to Wife, and miscellaneous tangible assets. All goes to Wife. Feeling insecure after loss of her spouse (the normal reaction), she refuses to disclaim any of the insurance, and the chance to put $650,000.00 in trust is lost. At her later death, the unnecessary tax on the $650,000.00 will be $258,500.00 to $357,500.00,(2) depending on the size of her estate.

We have seen and experienced situations like these. In these cases the time and money spent writing the will was wasted because property was not titled properly, or beneficiary designation was overlooked.

Other forms of non-probate property include pension, profit sharing and IRAs. Like life insurance, they will pass to a designated beneficiary. If there is none, they may be paid to spouse or to the estate of the decedent, depending upon the terms of the plan and local law. (Note: spouses have statutory rights in qualified retirement plans, and must consent to being omitted as beneficiary.)

Trusts are also non-probate property. Frequently trusts are substitutes for wills, so that the overall estate plan is followed. However, your taxable estate may include a trust created for your benefit by someone else (parent, spouse). In this case it is particularly important to coordinate your estate plan with the terms of the trust. We have also seen forgotten life insurance trusts, created by the decedent, at variance with his final estate plan.

Estate planning often involves more than just writing a will. You must consider the nature of your property, its title, contractual provisions, the amount, and potential taxes.

1. This figure is being increased, and will reach $1,000,000 by year 2006. Regardless of the figure, the concept remains the same.

2. As the "credit shelter amount" or "exemption equivalent" increases to $1,000,000, the potential tax savings will increase to as much as $550,000.

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