The Importance of Coordinating Probate and Non-Probate Assets

Frequently people will use non-probate mechanisms, like beneficiary designations, to direct non-probate assets to specific heirs. This a very popular technique for people who are in second or subsequent marriages and have children from the first marriage when they want their children instead of their spouse to inherit some portion of their estate.

The Orphan’s Court in Berks County was recently asked to determine whether a POD (payable on death) account, which was directed to the children of a prior marriage, was subject to the second spouse’s right of election under Section 2203(a) of the Probate, Estates and Fiduciary Code.

In Pennsylvania, a spouse has the right to an Elective Share, which is one third (1/3) of any “property conveyed by the decedent during his lifetime to the extent that the decedent at the time of his death had a power to revoke the conveyance or consume, invade or dispose of the principal for his own benefit” during his lifetime.

The purpose of this provision is to prevent a spouse from being disinherited.

The Court concluded that the POD accounts are subject to the spouse’s right of election. Therefore, unless the spouse has executed a Prenuptial or Post-nuptial Agreement, waiving the right to an Elective Share, the designation of individuals other that the spouse could be partially defeated by the surviving spouse.

Of course, I hear “my spouse would never do that” all the time when this principle is explained to clients. But it may not be the spouse. If your spouse becomes incapacitated it may be their Agent (if they have a durable power of attorney) or guardian that exercises the right to the Elective Share, particularly if the Agent is a step-child that is not happy about sharing the total estate with children from the previous marriage.

The case emphasizes the importance of thorough and complete analysis of a couple’s particular circumstances, assets and goals in the estate planning process.

The case in question is Rood Estate, (O.C. Div. Berks), 5 Fiduc. Rep. 3d 15 (2014).

(1/28/2015)