Oct 6, 2022
The difference between probate and non-probate assets is one of the most misunderstood areas in estate planning and elder law. Making informed decisions is critical to smart asset handling when planning your estate, so let’s clear up any confusion.
Jeff defines key terms, outlines the probate process, and explains how it differs from the direct transfer of assets to beneficiaries. You’ll learn how to protect assets for survivors, avoid surprise tax bills, and ensure that your assets are distributed and used as intended.
Key Takeaways
Takeaway 1: Avoiding probate does not mean avoiding state tax - 01:23
- In Pennsylvania (PA), the inheritance tax applies when wealth is transferred. The tax rate varies depending on the recipient’s relationship to the decedent.
Takeaway 2: Most of us don’t need to worry about federal estate tax - 03:09
- Wealth less than $12.06 million (or $24.12 million for a married couple) is not subject to federal estate tax.
- For assets greater than $12.06M (or $24.12M), the federal tax is about 40%.
Takeaway 3: Probate applies to assets where the decedent has sole ownership (no joint owners), and no beneficiary is designated - 04:18
- Probate is the state’s way of ensuring the proper and lawful distribution of assets.
- The probate process tells the executor what needs to be done and provides a timeline for activities (e.g., filing inheritance tax, issuing notices to heirs and creditors, etc.).
Takeaway 4: Non-probate assets are jointly owned or have designated beneficiaries - 08:04
- Non-probate assets transfer directly to the joint owner or the beneficiary.
- Non-probate assets are taxable (except for life insurance).
- When assets are transferred to a surviving joint owner, the PA Department of Revenue (DoR) is notified. The DoR issues a tax notice.
- A beneficiary that receives a tax bill should check to make sure that the inheritance rate is correct based on their relationship to the decedent. Provide the correct information to the DoR if an adjustment is needed.
Takeaway 5: Probate and revocable trust administration are similar in process – 12:56
- Some financial advisors regularly recommend a living trust instead of probate. This makes sense in some states more than others, depending on the fees and complexity of a state’s probate rules.
- Pennsylvania’s probate process is similar to the process of administering a revocable trust
Takeaway 6: Know the differences in managing probate and non-probate assets when estate planning – 17:51
- Avoiding probate protects assets from the state when the decedent has been under long-term care via Medicaid.
- Probate gives the decedent more control over how the assets are distributed and used after death.
- Probate can safeguard the beneficiary by ensuring that the tax liability will be managed properly.
Links and Resources Mentioned
Bellomo & Associates workshops, including Medicaid: https://bellomoassociates.com/workshops/
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