Sandra Reed’s Life Care Planning: What you need to know about non-probate assets

Attorney Sandra W. Reed answers your life planning questions.

Attorney Sandra W. Reed answers your life planning questions.

By Sandra W. Reed

Non-probate assets are assets a person holds at death and that do not become a part of his or her estate. Some examples of non-probate assets are those that designate beneficiaries by contract (such as retirement plans and life insurance policies), bank accounts that are subject to pay on death (POD) contracts and property held as a joint tenancy with right of survivorship (ROS).

Non-probate assets are governed by contractual terms rather than by the laws that govern probate. Therefore, owners of non-probate assets must read agreements carefully to understand who will have the right to receive that property upon death of the owner.

Designations in these agreements need to be reviewed any time a life circumstance, such as a death or divorce, might cause a change of mind as to whom the assets should go upon the owner’s death.  If the designations are not changed properly, the property can go to a person the owner didn’t want to receive it, and, thereby, deprive the person the owner desired to have it.

Following is an example that illustrates the point.

 Oversight in Changing Retirement Account Beneficiary Designation: Disastrous Result

Suppose Billy K. had a retirement plan through the company that employed him. His wife, Lizzy, was designated as the beneficiary on the plan.

Billy and Lizzy divorced. The divorce decree stated that Lizzy waived her right to any of Billy’s retirement plans. After the divorce, Billy never changed the beneficiary on his plan.  When he died, his daughter, as executrix of his estate, requested his former employer pay the money in Billy’s plan over to the estate. Billy’s company instead relied on the beneficiary designation and distributed the plan benefits to ex-wife, Lizzy.

It might seem logical that the estate would be entitled to the retirement benefits given the language in the divorce decree. However, the facts in this example track an actual case, Kennedy v. Plan Administrator for Du-Pont Sav. and Investment Plan (U.S., No. 07-636, Jan. 26, 2009).

Based on the U.S. Supreme Court’s unanimous decision in that case, Billy’s employer had to follow Billy’s instructions naming Lizzy as beneficiary. The court’s rationale was that a person in Billy’s shoes had an easy way to change the beneficiary and chose not to do so.  In this case, the retirement account contained the sum of $400,000.

Assuming Mr. Kennedy intended his daughter to get the proceeds of his retirement account at his death, because of his failure to change the beneficiary designation, his ex-wife received a windfall of $400,000 and his daughter was deprived of her inheritance.

Whether Kennedy did not make the change out of carelessness or from reliance on the divorce decree did not matter. Don’t let this happen to you!

 

 

Bank Accounts Designated with  POD or ROS Designations

A bank account is payable on death if it contains a provision substantially the same as the following: The party to this account owns the account. On the death of the party, ownership of the account passes to the POD beneficiaries of the account. The account is not a part of the party’s estate. 

If a person establishes a bank  account that does not have a POD designation, the assets in the account will go into his or her estate and pass in accordance with a will, if a will exists, and by intestacy, if there is no will.

Multiple party accounts, in which assets are owned in proportion to each party’s contribution, can designate a right of survivorship (ROS).  Upon one party’s death, the ROS causes the decedent’s proportion of the account to pass to the remaining account holders.  These accounts may have a POD designation in addition to the ROS, in which case, on the death of the last surviving party, the ownership of the account passes to the person designated in the POD.

As with the single individual accounts, if the account does not have a POD, the assets of the account go into the estate of the last surviving owner and pass in the same manner as described above.

Many banks will give the customer the choice of having his or her account established with or without a POD or ROS. It is imperative to review carefully the documents establishing each account and to carefully complete any forms provided to do so. Have a bank officer explain what each choice means and what will happen to the account upon death of the owner under each choice.

Joint Tenancy

A joint tenancy refers to property that is owned jointly by two or more persons. These joint owners can agree in writing that the interest of the joint owner who dies will go to the remaining owner or owners. In that instance, the property would not become a part of the dead owner’s estate and instead would be a non-probate asset.

However, if the parties are not husband and wife (community property rules beyond the scope of this column apply in that case) and there is no written agreement that the decedent’s interest goes to the remaining owner, the ownership interest passes either by the decedent’s will, if one exists, or by intestacy, if there is no will.

 Sandra W. Reed is an attorney practicing in Glen Rose.  She is of counsel with the Elder Law firm of Katten & Benson in Fort Worth.  If you have any questions, you may contact her by phone at 254-797-0211 or by email at swreed2@yahoo.com

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