In the course of my practice, whether it be planning a client’s estate or assisting a family in the administration of an estate, I often have to explain the nature of probate assets versus non-probate assets.
The distinction is important. A probate asset is one which must go through the probate process after the death of the owner of that asset before it can be passed on to a new owner, while a non-probate asset avoids the probate process.
The purpose of probate is protection. Probate essentially freezes an asset before it can be passed on to a new owner. Wills must be proven, heirs are identified and notified, debts are paid, and conflicts are resolved before ownership of the asset can pass on.
Non-probate assets don’t require the same protection, so they don’t need to be probated. Common non-probate assets like IRAs and life insurance policies pass by beneficiary designation. The company that administers the IRA or life insurance policy is contractually obligated to transfer the assets to the named beneficiary. Thus, there is no need for the protection of a probate court. If there is any wrongdoing, sue for breach of contract in a regular civil court.
So which assets are probate assets and which assets are non-probate assets?
The most common non-probate assets are life insurance and qualified retirement accounts such as an IRA, Keough Plan, 401(k), or 403(b). They also include property held in joint tenancy form as well as certain bank accounts that pass my beneficiary designation like a payable on death account (POD). Perhaps most importantly, non-probate assets include assets that are titled in the name of a trust. Probate assets essentially include all other types of assets.
So why is it important to know this?
Wills are meaningless to non-probate assets. For many people, the majority of their estate is constituted by their IRAs and life insurance policies. Many people make the mistake of writing a will and not realizing that it won’t have an effect over most of their estate. The most common mistake I see is where somebody writes a Will but does not change the beneficiary designations on their life insurance policy or retirement account. They may have wrongly expected that their Will would give their entire estate to the beneficiary named in the Will.
It’s also important to realize the benefits of establishing a Revocable Living Trust. While probate serves a legitimate purpose, it is still a time and money consuming process. Take it from a lawyer, the less time your beneficiaries have to spend in court, the better. Assets titled in the name of a Revocable Living Trust are non-probate assets, and, thus, avoid probate upon the death of the owner of those assets.