Probate? Non-Probate? What's the Difference?

Spring has made an appearance, then shrunk back behind a curtain of white, and then reappeared!  The time has come to clean up the garage, pump the bicycle tires full of air, rake out the flower beds, and begin anew!  The time for indoor activities is coming to a close.

Yet there is still time to complete your New Year’s Resolution and finally get that estate planning paperwork completed!  And if this spring is like every other spring in the history of Northeast Ohio, you’ll have plenty of rainy days that keep you indoors.

You may recall the four basic estate planning documents from my article in the January issue (Vol 01, Issue 7) of this publication:  The Will, the Durable Power of Attorney, the Living Will, and the Healthcare Power of Attorney.  This article concerns one aspect of The Will, properly called the Last Will and Testament.

A Will is the document in which you specify who (an “executor”) will distribute (“give, devise, and bequeath”) your probate property (the subject of this article) to your designated recipients (“heirs, beneficiaries, etc.”).  The goal of this article is to help you understand the difference between “probate” property and “non-probate” property.

Simply stated, probate property passes from the decedent to survivors through operation of a Will and governed by Ohio law and the Probate Court.  Fees for probate are calculated based on a percentage of assets basis, and while some probate cases can be completed within weeks; others can take years. Probate can also be very complex for non-attorneys (and for attorneys who don’t do it often!).  It is for these reasons of cost, complexity, and delay that most people seek to avoid probate by ensuring that as much of their assets as possible are non-probate assets.

Some Non-Probate Options

To get at the difference between probate and non-probate, let’s examine a common example:  the joint bank account.  In a “joint tenants with right of survivorship” or “JTWROS” account, ownership transfers from both account-holders to the surviving account-holder upon death.  As a practical matter, the survivor will have to provide the bank with a death certificate to complete the change.  But by virtue of the form of ownership, the property transfers from decedent to survivor without the involvement of an executor, the court, or time and expense of probate.  JTWROS property is the most common form of non-probate property.

You can use the JTWROS form of ownership to avoid probate at the bank, at your stock-brokerage, with your house, or with your car.

Sometimes, JTWROS is not a good choice, however.  You may wish to give that bank account to someone upon your death, but do not want them to have any rights to it while you’re alive.  This might be because they are too young, or too irresponsible, or they’re in a precarious financial condition where creditors may be seeking to garnish those funds or that property.  In these cases you can use a Payable On Death or Transfer On Death designation.  At the bank, it’s a simple card you fill out and sign, and upon your death, the beneficiary (a person or persons you name) provides a death certificate and takes ownership of the funds.  Importantly, the beneficiary has no rights to your money while you are alive.  You can do this with your house and your car, too.  And most everybody has already done this with their IRA accounts.

Two other non-probate transfers are very common.  First is insurance proceeds.  When you sign up for life insurance, you designate a beneficiary.  Upon your death, the insurance proceeds go to that beneficiary, outside of probate.  The second is property in your trust.  Property in your trust is not a probate asset because it is not technically owned by you at your death.  The trust owns it and will distribute it outside of probate.

So What Is Probate Property?

Probate property is therefore, simply all of the property a decedent leaves behind that did not automatically transfer to another.  Commonly, this includes personal property such as jewelry, artwork, furniture, and even the forks, knives, and spoons in the kitchen drawer.  It could be a bank account held as a sole owner.  Or a house in sole ownership.  Or, for an example of a failed non-probate transfer, an insurance policy where there are no living beneficiaries—the funds will be paid to the estate of the decedent, to be administered via probate.

What Can You Do?

Sit with your advisers, who should include at minimum a financial planner, an accountant or tax preparer, an insurance agent, and a lawyer to inquire into your money and property holdings, and your plans for those holdings.  If you’ve picked your advisers well, they will work together, and avoid taking steps that interfere with the planning each has done for you.  They can help you achieve your financial goals for your life, and for after your passing.  Specifically, I have clients list out their money and property holdings, in what form of ownership they’re held, and who the beneficiaries are. Only after this exercise can we discuss how to plan to better match a client’s goals.

Important Cautions

Changing form of ownership can be simple, but if you’ve had any formal estate planning done, you may frustrate existing plans.  Furthermore, and this is vitally important: questions of probate and non-probate assets are completely unrelated to matters of Estate Tax or Gift Tax law.  Avoiding probate does not mean you avoid Estate Tax.

Finally, I am not a fan of disclaimers and fine print.  However, today’s article has suggestions that may make a meaningful and positive difference in your life or that of your loved ones.  But making a wrong move can result in financial loss and subject you or your money to tax liability.  You should not take this article as legal advice directed toward you, but as information that prompts a discussion between you and your advisers to get specific advice for your situation.

William Ferry

Ferry Legal, LLC offers legal counsel in the areas of estate planning law and entrepreneurial business law to individuals, families, and businesses of Cleveland’s West Side communities, including Northern Lorain County and the West Shore suburbs of Cuyahoga County.

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Volume 1, Issue 11, Posted 4:19 PM, 04.30.2014