Assets that are not required to go through probate are commonly referred to as “non-probate assets.” This term causes significant confusion amongst our clients and readers. This term simply refers to any assets which transfer automatically at the time of death, and therefore aren’t considered an asset of the estate.
Here are some common examples of assets that might be classified as non-probate:
- Life insurance –If there is a proper beneficiary named on the life insurance policy, the proceeds of the life insurance do not pass through probate and instead go directly to the named beneficiary (or beneficiaries). This is one reason that life insurance is such a great estate planning tool. One caveat here: Always make sure your insurance beneficiary designations are accurate. If you get a divorce, your beneficiary predeceases you or you fail to name one, the default rule is that proceeds become payable to the estate of the policyholder. In that scenario, you’ve just failed to take advantage of a great opportunity to avoid taxes, probate fees, and creditors.
- Retirement Accounts – Most retirement accounts allow for the naming of a beneficiary. When you name a beneficiary (or two, or three), the beneficiaries are automatically entitled to the assets in the account at the time of death. Similar to life insurance policies, failing to name a beneficiary or not updating your beneficiary can destroy this benefit. It’s important to discuss with your investment advisor and attorney how these accounts should be considered in your estate planning.
- Payable on Death (POD) Accounts – Bank and brokerage accounts can also have designated beneficiaries. While it’s advisable to make sure there is some cash in your estate to handle funeral bills, probate fees and other expenses, transferring the bulk of your cash using a POD account is a smart strategy.
- Property Held Jointly with Rights of Survivorship – We have previous posts that cover this form of ownership in detail. For this discussion, just remember that your real property, vehicles, boats, and other titled assets can be set up in this structure so that upon death, the interest automatically conveys to the other owners. While this is great for a spouse or to transfer assets to an only child, make sure to understand why you should be careful when using this as an estate planning tool if you’re single, remarried or have more than one child! More information on that can be found here.
- Trust Assets – Any asset transferred to a trust prior to death is considered a non-probate asset. The reason is simple, probate only controls assets owned by the decedent at his/her time of death. Assets in a trust are in control of the trust, not the decedent, and therefore don’t require probate.
This information is important both for Personal Representatives handling an estate and for clients doing estate planning. The rules that must be filled to keep them classified as “non-probate” also highlight the importance of checking your titles, beneficiaries and estate plan regularly to make sure everything is in place. So many events can trigger a need to update your planning including the birth of a child, divorce, death of a beneficiary, change of employment, purchase of property and more.