WILL SUBSTITUTES AND AVOIDING PROBATE
When many consider estate planning, they immediately think of their Will. After all, the Will controls who receives our assets when we die. In practice, however, the Will may not control the disposition of any of our property. To understand how the Will works, you have to understand that our assets pass at our death in a variety of ways. The Will is only one way to transfer assets at death. Without knowing it, much of your estate may already be arranged to pass to your loved ones by some form of "will substitute".
One common example of assets passing outside the Will is property that is owned "with rights of survivorship". When property is owned by two or more persons, it can be owned in a few different ways. One of the ways to own it is with the so-called " right of survivorship". The right of survivorship means that when one of the co-owners dies, the surviving co-owner automatically becomes owner of the asset. This is the case regardless of the terms of the deceased party's Will. To state it another way, property owned with rights of survivorship passes to the survivor by virtue of the way the property is owned and not under the terms of a Will. In Pennsylvania, property owned with rights of survivorship is called "joint tenancy with rights of survivorship". In Pennsylvania, when the only joint owners are husband and wife, this type of ownership is known as "tenancy by the entireties".
The above rules on rights of survivorship apply to all types of assets, such as stocks, bonds, real estate and automobiles. However, in Pennsylvania, there is a specific law that applies to bank accounts titled in more than one name or to bank accounts titled "in trust for" someone. With both of these accounts, a right of survivorship is presumed so that these accounts generally pass to the surviving co-owner rather than under the terms of one's Will.
Contracts that we make during our life are another example of how property can be directed at the time of our death. For example, life insurance death benefits pass in accordance with the contract we make with the insurance company. That insurance policy is a contract. Part of that insurance contract is the provision where the insurer promises to pay death benefits to the beneficiary we designate in the policy. Therefore, just like assets owned with rights of survivorship, our Will has no effect on the life insurance. Individual retirement accounts (IRAs), employer-sponsored retirement plans and annuities work the same way as life insurance. That is, with all of these arrangements, we have the right to name a beneficiary to receive the amounts payable upon our death.
United States Savings Bonds present another example of how property can pass at death. These bonds can be registered with a so-called "pay on death" or "POD" provision. If titled in this manner, the bonds are yours while living, but at death they will automatically pass to the person you name as beneficiary.
The so-called "pay on death" registration has long been available with savings bonds. Now, however, thanks to a law known as the Uniform Transfer On-Death Security Registration Act, it's an option with other bonds, stocks, brokerage accounts and mutual funds. This Act allows the owner of securities to register the title in "transfer-on-death" or "TOD" form. Although not yet adopted by Pennsylvania (see the update below), this "TOD" registration is available to Pennsylvania residents if issuer of the stock or mutual fund is located in a state, such as Maryland, where the law has been enacted. Like joint ownership with rights of survivorship, this "TOD" registration means a quick, probate-free transfer at death. However, unlike joint ownership, "TOD" registration doesn't mean giving up partial control while you are alive.
UPDATE: Pennsylvania has adopted Uniform Transfer On-Death Security Registration Act. Click here for more information
All contents Copyright © Robert Clofine 1996-98