Items Not Disposed of by a Will (Nonprobate Property)
Like under the intestacy statutes, wills do not apply to the disposition of nonprobate assets. As such, these assets are not subject to administration by the decedent’s personal representative.
As previously covered, when one joint tenant or tenant by the entirety dies, the survivor becomes the sole owner of the property. The joint tenant’s interest cannot be devised by will. If a right of survivorship is not the desired disposition of the property (i.e. the testator doesn’t want his share to go to the joint tenant), the joint tenancy must be changed to a tenancy in common during the testator’s lifetime.
Regarding joint ownership in a bank account, there is a rebuttable presumption that the funds should pass to the survivor upon the death of the depositor. However, if the joint account was created for convenience without the intention of conferring a gift to the other party, the funds would instead become part of the decedent’s estate. See, e.g., In re Harley, 186 A.D.2d 1020 (4th Dep’t 1992). If this is the case, the testator should document this fact during his or her lifetime to avoid messy litigation later on.
EXAMPLE: Mary, who is 88 years old and in frail health, has 6 children and has $300,000 in assets. Mary’s youngest son, Dave, lives with her and cares for her. In order to make it easier for Dave to buy food and medicine for Mary from her money, Mary opens a joint bank account in her name and in Dave’s name and deposits all her money into that account. This account will most likely be looked at as an “account of convenience.” It is pretty clear that Mary did not mean for Dave to get all $300,000 when she dies. Instead, she just put Dave’s name on the account to allow him to access the money to care for her. Therefore, the presumption that a joint account all goes to the survivor of the account holders will be rebutted and the account money will be distributed with the rest of Mary’s estate.
A Totten trust is a bank account in the depositor’s (testator’s) name “in trust for” a beneficiary. See In re Totten, 179 N.Y. 112 (1904). During the depositor’s lifetime, he has exclusive ownership of the account. Upon his death, the account automatically goes to the beneficiary. A Totten trust can be revoked only by a complete withdrawal of the funds by the depositor during his lifetime or by a provision in the depositor’s will identifying the “in trust for” account and expressly revoking it. The beneficiary can waive the right to the account, but it must be done in explicit terms or the waiver is not effective.
EXAMPLE: A dispute arose between the named beneficiary, who happened to be the depositor’s former wife and the depositor’s estate over who was entitled to the funds in a Totten trust. See Eredics v. Chase Manhattan Bank, 100 N.Y.2d 106 (2003). In Eredics, the decedent and the beneficiary had a separation agreement; however, it did not specifically mention the Totten trust. For some unknown reason, the testator continued to leave funds in the account even after the separation agreement was executed, thereby defeating revocation by emptying the bank account. Given this oversight, the Court held that the former wife (a.k.a. the beneficiary) was entitled to the funds. One argument made was that a provision in another paragraph of the separation agreement stated that each party waived any claim against the other’s estate. Naturally, this argument was unsuccessful, as the Court noted that “Totten trusts pass outside the estate.”
Property that passes at death pursuant to a contract is not a probate asset. The most common example is a life insurance policy, provided the proceeds are payable to a named beneficiary, as opposed to the testator’s estate (either by designation or default after any named beneficiaries predecease the testator).
EXAMPLE: Stewart has a $250,000 MetLife life insurance policy that names his twin brother, Adam, as the beneficiary. Stewart dies leaving a will that contains a provision that states the life insurance proceeds should be paid to his stepson, Carl. The will provision is ineffective and Adam takes the insurance proceeds as a valid nonprobate asset. Beneficiary designations for life insurance proceeds are governed by the contract between the insurance company and the insured. A will provision cannot override the designation in the insurance policy itself.
Retirement plan benefits
Retirement plan benefits are treated in the same manner as life insurance policies. The proceeds pass to the designated beneficiary rather than to the testator’s estate. However, there are income tax implications if the plan is “qualified,” such as a 401(k) or 403(b) plan. See I.R.C. § 402. As such, those rules must be taken into account when preparing an estate plan that contains qualified benefits.