Understanding the difference between probate and non-probate assets is vital to ensuring your estate plans are properly executed. Probate is a complicated process that involves locating and collecting assets, reimbursing administrative expenses, paying debts, filing taxes and distributing remaining property to beneficiaries and heirs.
Non probate assets bypass the probate process altogether and typically transfer to a beneficiary through an alternate legal mechanism. Examples include joint ownership with rights of survivorship or assets with a beneficiary designation.
Probate is the legal process that determines how a deceased person’s estate should be distributed. It involves filing a will, appointing an executor or administrator, collecting assets, paying bills and taxes, distributing property to heirs, and filing a final account. The probate process can be expensive and time-consuming.
During this time, creditors may file claims against the estate. The best way to minimize this risk is by ensuring that assets are properly categorized as either non probate or probate.
Assets that go directly to the surviving owner without the need for court intervention are considered non probate assets. This includes jointly owned assets that are held as joint tenants with rights of survivorship, as well as assets that have a beneficiary designation such as life insurance policies and retirement accounts. Non probate assets also include transfer-on-death accounts like 401(k)s, annuities and cars. These assets will pass to the designated beneficiary or beneficiaries upon death. Other examples include personal property and real estate that are left to heirs through testamentary instruments such as trusts or wills.
Generally speaking, non-probate assets are those that do not become part of your estate upon death. These assets are typically those that are jointly owned (like your home or a checking account with your spouse) and/or those that have a beneficiary designation on them (like a life insurance policy or an IRA).
When you add a beneficiary to these types of accounts, it bypasses the probate process completely as the financial institution will distribute the money directly to the heir/beneficiary without going through the court system. However, these assets can be contested by the estate and may revert back into probate assets.
Therefore, when you plan your estate and choose to use these types of assets, it is essential that you have the proper legal documents in place to avoid the probate process altogether. The most efficient way to ensure that this happens is through the use of a living trust. An experienced estate planning attorney can assist you with this.
Assets that pass outside of the probate process are called non-probate assets. They are usually financial accounts with a beneficiary designation, such as a bank or brokerage account, life insurance policies and retirement plans. They also include assets titled as joint tenants with rights of survivorship or with a transfer-on-death (TOD) designation, such as a 401(k) or annuity.
Probate involves filing a Will, appointing an executor or administrator, collecting assets, paying debts, distributing property to beneficiaries and heirs, and submitting a final accounting to the court. The process can be expensive and time-consuming.
Bypassing the probate process can make it easier for family members to receive their inheritance. It can also protect the estate from creditors and disgruntled heirs. However, not all non-probate assets are necessarily free of tax liability. In most cases, the beneficiary of a non-probate asset will need to file a federal income tax return. Some states may also impose their own tax laws.
Probate is the process through which a court determines how a deceased person’s estate is to be managed. This includes identifying the assets in the estate, assigning an executor or administrator, paying bills, filing taxes and distributing property to heirs.
The process can be lengthy and expensive, which is why many people try to avoid probate by ensuring that their estate is comprised of only non-probate assets. However, not all assets that do not go through probate are created equal.
Generally, assets that are solely owned by the deceased or have a shared ownership with another party without a survivorship agreement on title (such as joint bank accounts or IRAs) are considered probate assets. In contrast, assets that are designated beneficiaries or held as a joint owner with rights of survivorship or Transfer on Death are considered non probate assets.