Considerations For Non-Probate Assets

Creating an estate plan is one of the best ways to ensure your family is cared for after you’re gone. One of the first things you may want to sort out is how you’d like to distribute your assets after you pass away. You may think that a will is all you need to organize the distribution of your estate, but that’s not the case. 

After you pass away, your wealth will be separated into two different categories: probate and non-probate assets. To ensure your legacy passes to the right people, it’s crucial to understand the differences between probate and non-probate assets.

What is probate?

After you pass away, some of your assets will have to go through probate before being distributed to your heirs. Probate is a legal process that involves getting court approval to distribute a deceased person's estate. 

A local judge will review and organize the assets left behind and settle any taxes or debts you may have before any money reaches your heirs. One of the main drawbacks of probate is that it can be time-consuming — depending on the size and complexity of your estate, your assets can be tied up in probate for months. 

Your last will and testament governs probate assets. For example, if you want to leave your house to your children, you can state this in your will. After you pass away, there will be a probate proceeding at the courthouse, where a judge will order the transfer of the house from you to your children. If you don’t have a will when you die, your estate will pass to your heirs according to your state’s intestacy laws, which are the laws that govern estates of those that pass without a valid will. 

When you create a will, you name someone to administer your estate according to your wishes, known as your executor or personal representative. Even if you have a will, it only allows you to control your probate assets — non-probate assets are a different story.

What are non-probate assets?

Non-probate assets pass directly to your heirs outside of any court-supervised probate proceeding — regardless of what’s in your last will and testament. Non-probate assets pass outside the traditional probate process, getting money to your heirs faster. 

Non-probate assets pass directly to your beneficiaries without the need to involve the court system — so what assets can avoid probate? 

Non-probate assets include: 

• IRAs 

• 401(k)s 

• Annuities 

• Life insurance 

• Joint accounts 

• Accounts with a named beneficiary 

• Assets with a payable on death (“POD”) or transfer on death (“TOD”) designation 

• Assets owned at the time of death by the owner’s revocable living trust. 

If you focus all of your estate planning efforts on creating a will (which only controls probate assets) while failing to address your non-probate assets, it could result in a more complicated estate settlement for your heirs. An effective estate plan will help you organize your probate and non-probate assets.

Executor responsibilities

The executor of your will has several responsibilities regarding the management and distribution of your estate, including: 

• Managing the probate process 

• Gathering information on your assets 

• Filing your tax return 

• Settling your debt 

• Paying your tax bills 

• Distributing assets to your beneficiaries 

Many states have restrictions on who can serve as executor of a will. The basic requirements are that an executor must be: 

• 18 years of age or older 

• Of sound mind 

You want to choose an executor who is responsible, trustworthy, and fair. Many people name a spouse, parent, sibling, or child as their executor. However, your executor doesn’t have to be a relative — you could ask an attorney or other trusted professional to act as your executor.

How to name beneficiaries

It’s essential to name beneficiaries on your accounts to help avoid probate. You’ll want to name both primary and contingent beneficiaries in case the primary beneficiary predeceases you or is otherwise unable to accept the inheritance. Your contingent beneficiary will receive the asset if your primary beneficiary cannot. 

You can name family members, friends, and charitable organizations as beneficiaries. Keep in mind that if you want to leave assets to minor children (under age 18 in most states), they can’t legally inherit, so it’s best not to name them as your beneficiaries. Instead, designate a custodian or establish a trust and name someone to manage the assets until your child is old enough. 

Every institution has its own process for naming beneficiaries. Some require you to fill out a beneficiary form; others simply ask for the person's name and date of birth. Call the institution’s customer service number and tell them you want to name a beneficiary on your account. Some may have a form you need to print and mail back, while others allow you to complete the process from your online portal. 

Aside from naming beneficiaries, it’s equally important to keep them updated. If you don’t routinely check and update your beneficiaries, your assets may end up in the hands of someone unexpected — an ex-spouse, for example.

What are probate assets?

Though some assets can avoid the probate process, others cannot. Probate assets are typically held solely in your name and don’t have a beneficiary designation. This includes assets such as: 

• Real estate 

• Vehicles 

• Household items 

• Business interests 

• Stocks and bonds 

• Personal possessions (jewelry, clothing, etc.) 

Final thoughts

Not understanding the key differences between probate and non-probate assets can lead to unexpected and undesired results when it comes time to distribute your wealth. It’s critical to plan for the distribution of your probate and non-probate assets to ensure a smooth estate settlement for your loved ones.

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