In the typical farm family, the parents’ estate plan is as follows:
Farm assets to my farm son, Andrew, and non-farm assets in two (2) equal shares to each of my non-farming children, Susan and Charlie. While the intentions are clear, and while the wills that are prepared are clear, it is not guaranteed that such intent will be carried out. What is not clear is that, in such a situation, the will is often times not enough — it does not dictate where every asset will go in the event of someone’s passing.
It is a common misconception that a will dictates where the entire bounty of one’s estate will pass. In reality, a will only provides for the disposition of probate assets, and has no bearing over the disposition of those assets which are considered non-probate assets.
Probate assets are primarily those that are owned solely by a decedent in his or her individual name and contain no beneficiary designation. These assets are subject to Pennsylvania’s intestacy laws (laws which the Commonwealth prescribes for the distribution of assets upon death) and require a will directing distribution in order to avoid such intestacy statutes. Examples of probate assets are business entity interests (e.g. LLC interests) and personal property (e.g. machinery), as well as bank accounts and real estate owned solely by the decedent. Additionally, nonprobate assets (defined below) can be considered probate assets if they name the decedent’s estate as the beneficiary.
Non-probate assets are those which bypass the intestacy laws and the need for a will and go directly to predetermined and designated beneficiaries. These assets include real estate or personal property that is held as joint tenants with the right of survivorship or, in the case of married couples, as tenants by the entirety. Further examples of non-probate assets include retirement accounts, life insurance, jointly owned bank accounts and investment accounts which are either jointly owned or which have payable on death (POD) or transfer on death (TOD) beneficiary designations.
Probate vs. Non-Probate
The distinction between probate vs non-probate assets requires a comprehensive understanding of an individual’s entire estate and a joint relationship with one’s attorney, accountant and financial advisor to ensure all assets pass as intended upon one’s death. For example, assume a surviving spouse has $2,000,000 of farm assets and $300,000 of non-farm assets held in an investment account, but with the three (3) children named as beneficiaries of that account.
Only the farm assets are probate assets, all of which will pass to the farm son, Andrew. Nothing will pass under the will to Susan and Charlie. Each of the three (3) children will receive $100,000 as beneficiaries of the investment account. In the end, Andrew will receive $2,100,000 of assets and Susan and Charlie will each only receive $100,000 instead of the $150,000 they were intended to receive.