The term “probate” refers the legal procedure used by courts to determine whether a person’s will is valid. Probate can also refer to the process by which an executor or personal representative gathers a decedent’s assets to pay the debts, taxes and final expenses and then ultimately distributes the remaining assets to the beneficiaries listed in the decedent’s will.
For many people, once they put a will in place they assume that all of their property will be distributed pursuant to the terms of the will. However, the terms of a person’s will only impact the assets that go through the probate process. The terms of the will do not control the distribution of non-probate assets. It is important to identify and categorize your assets as “probate” and “non-probate” assets so that you can coordinate the distribution of the non-probate assets with the provisions of your will. Non-probate assets generally fall into three categories: (1) assets passing by contract, (2) assets passing by operation of law and (3) assets passing by trust.
Assets Passing by Contract
Assets that pass by contract are one type of a non-probate asset. Generally, assets that pass by contract are assets in which you name a beneficiary. Life Insurance, Retirement Plans, IRA’s and Annuities are generally considered assets which pass by contract because the terms of the contract you have with the insurance or investment company will dictate that the asset pass to a named beneficiary upon the owner’s or insured’s death. Accordingly, for many Americans a significant portion of the wealth that will pass upon their death will actually bypass the probate process because the contract has a named beneficiary.
Another example of an asset that will avoid probate and pass by contract is a financial account that includes a Transfer on Death (TOD) or Payable on Death (POD) designation. Obviously, not all bank accounts have a POD or TOD designation, but when that designation is part of the contract, those accounts will pass directly to the beneficiary and bypass the probate process.
In my experience, most people can tell you who they’ve listed as the beneficiary on their life insurance and their POD accounts (if they have any), but they aren’t quite as clear regarding who is listed as the beneficiary on their retirement accounts. Even fewer people are confident regarding who they’ve listed as the “contingent” beneficiary on any of these types of contracts. It is important to understand that assets, which pass by contract, can become a probate asset if no beneficiary is named or the named beneficiary is predeceased and no contingent beneficiary is named. So, make sure you incorporate the contingent beneficiary into your estate planning analysis.
Assets Passing by Law
A second type of non-probate asset is an asset that passes by operation of law. Typically, this type of asset is titled jointly with another individual or individuals. It is important to understand that there are different ways property can be jointly titled and the outcome can vary greatly. Please consult an estate-planning attorney before changing title on any property. An example of how joint ownership will avoid probate is if a deed lists the owners of a house as “John Smith and Mary Smith, as joint tenants with right of survivorship (JTWROS)”. In this example the house will pass outside of probate by operation of law to the surviving spouse at the first spouse’s death. But the house would then be a probate asset upon the death of the second spouse. This same concept can apply to other assets such as automobiles and bank/investment accounts.
Assets Passing by Trust Terms
The third example of property that will not be included in a decedent’s probate estate is property that was transferred to a revocable living trust during a person’s lifetime. The revocable living trust avoids probate because the trustee of the trust rather than the decedent (or grantor) has legal title to the trust assets. Accordingly, the probate court typically has no authority over the trust assets. It is important to remember that only assets in which title has been transferred to the trust will be controlled by the trust and any asset that remained titled in the decedent’s name will still go through the probate process.
So, as a general rule, probate assets can be defined as any asset in which the decedent has an ownership interest and does not pass pursuant to the terms of a contract (beneficiary designation or a payable on death designation) or by operation of law to a joint owner of the asset. To make sure your estate will pass in a coordinated fashion, it is extremely important that you understand and contemplate the relationship between how assets are titled, beneficiary designations and the role the will plays in the estate planning/probate process.