Understand non-probate assets now to avoid later conflict

My parents have all of their assets in joint accounts. Both of their names are on the deed to their apartment. The rest of their assets are in retirement accounts. Do they need a will?

There are two basic types of assets when someone dies: probate and non-probate. Probate assets are those that are distributed in accordance with the terms of a will, if any, or under the laws of intestacy. Non-probate assets are those that pass by operation of law to a designated beneficiary or a surviving joint tenant, regardless of what is stated in a will.

Non-probate property include bank accounts held jointly with rights of survivorship; “in trust for” accounts; “payable on death” accounts; most IRA, 401(k), and 403(b) accounts; any asset held in a revocable or irrevocable trust; and any jointly held real property.

Structuring your assets as non-probate can sometimes allow money to be distributed to a beneficiary without waiting for the probate process, but such assets can cause conflict and litigation if not properly structured. Usually bank accounts are opened or modified following a routine exchange with a bank employee and not an attorney. Depositors are presented with a dense packet of materials that they “acknowledge” they read, but few do.

Contrary to popular opinion, joint accounts are not immune from challenge by someone who can show the account was not a “true” joint account, but rather a “convenience account.” A “convenience account” is one where deposits are made for the convenience of the depositor, which do not affect title, are not deemed a gift of one-half of the deposit or any additions or accruals, and do not confer a right of survivorship.

The establishment of joint accounts can transform otherwise straightforward estate administrations into complicated messes. So, for example, assume a mother has a joint account with her daughter, in which most of mom’s assets are deposited. Mom dies. A second child challenges the joint account, arguing that the sister was put on the account solely for convenience purposes to help mom with bill paying and other financial tasks. If proven, the presumption would be rebutted and the remaining funds in the joint account would pass to mom’s estate (to be distributed by her will) and not to the surviving joint tenant.

In trust for accounts

In contrast to a joint account, an in trust for account is essentially a revocable trust created by deposit. Deposits in an in trust for account are not completed gifts, and the depositor can modify, amend, or revoke the account, or change or delete the beneficiary, during his lifetime, or in a will.

The account may be revoked by the depositor’s withdrawal of the account proceeds, in an acknowledged writing naming the beneficiary and the banking institution delivered to the bank during his lifetime, or in a will also identifying the account, banking institution, and change of beneficiary. Although in trust for account designations to a former spouse are automatically revoked by divorce or annulment, account holders should certainly take steps to re-title the account or change the beneficiary to avoid any potential disputes.

Another thing to consider when dealing with joint accounts are the tax consequences. The Internal Revenue Service presumes that 100 percent of a joint account between unmarried persons is includible in the estate of the first person to die.

In the example of the mother holding a joint account with her daughter, assume that the daughter dies first, but the account consists entirely of mom’s funds. The full amount of the account will be taxable in the daughter’s estate.

Another dilemma is presented when an asset passes outside of probate, but the estate owes estate tax as a result of the non-probate distribution. Sometimes, a non-probate beneficiary is unwilling to voluntarily contribute his fair share of the tax liability. This could require the executor to have to chase down the joint account holder to get a proportionate contribution of the estate tax liability, which would impose an additional cost on the estate. The executor or person acting as executor may be held liable for unpaid estate tax if he distributes assets to a beneficiary of the estate before payment of the New York State estate tax.

Non-probate assets are often created for convenience, but prove to be anything but convenient when disputes arise. Take care to ensure that the existence of non-probate assets is consistent with your intentions for how you want your estate to be distributed.

Alison Arden Besunder is the founding attorney of Arden Besunder P.C., where she assists new and not-so-new parents with their estate planning needs. Her firm assists clients in New York City, Nassau, and Suffolk Counties. You can find Besunder on Twitter @estatetrustplan and on her website at www.besunderlaw.com.