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How Non Probate Assets May Impact Your Estate Plan

What exactly are non probate assets and how can they pose a threat to your desired estate plan wishes? Trust & Will explains what you need to know.

Probate is the legal process through which a will is approved and administered, and belongings are distributed to the named beneficiaries. It is a common misconception that everything you own will go through this process– however, there are specific non probate assets.

Certain assets will bypass the probate process entirely, as full ownership switches to another individual. This arrangement can be beneficial for a number of reasons, including that it reduces your executor’s responsibilities as they carry out the will. The following article will take a closer look at everything you need to know about non-probate assets: 

What are non probate assets?

Non-probate assets are any financial accounts, investments, or property that are not legally required to pass through probate after the owner’s death. The way these assets bypass the probate process varies, but typically ownership is either jointly held or the asset is placed in a trust during the decedent’s lifetime. 

In certain circumstances, a survivorship mechanism can be used to transfer ownership of an asset also allowing it to avoid probate. Let’s say  a house is jointly owned by a married couple with the right of survivorship. If one spouse were to pass away, the property would be considered a non probate asset because of the survivorship clause. 

Non probate assets can also be created through beneficiary designations. Essentially, this legal instrument creates a transfer-on-death arrangement whereby the asset is automatically distributed to the named heir after the account holder’s death. Beneficiary designations are commonly used when opening retirement accounts or taking out life insurance policies. 

Probate vs. non probate assets

The difference between probate vs. non probate assets simply comes down to how ownership is held at the time of an individual’s passing. Assets solely owned by the decedent will go through probate and be distributed according to their last will and testament. 

In contrast, non probate assets will become the property of the surviving owner, the named beneficiary, or in cases where a trust holds the asset, a trustee. Each of these arrangements prevents the asset from being part of the decedent’s estate. Read our guide on Probate vs Non Probate Assets to learn more about these differences. 

What are some non probate assets examples? 

We want to share some examples of non probate assets to help provide more context and understanding of how the process works. Unfortunately there are no items or accounts that will always be classified one way or the other.

Instead, the proper legal designations must be applied in order for these assets to officially bypass probate. This means you need to follow the necessary steps to create a beneficiary designation, establish joint ownership, or place the asset in a Trust. 

When properly established, the  following assets will not be subject to the probate process: 

  • Property that is jointly owned with a right of survivorship or tenancy by the entirety, often used for real estate or shared bank accounts

  • Assets placed in a revocable living trust during the decedent's lifetime

  • Assets owned by the decedent with a transfer on death or payable on death designation, this typically includes bank accounts

  • Assets with a designated beneficiary, including IRAs, 401(k)s, and life insurance policies

Are non probate assets taxable?

Non probate assets are taxable as part of your estate. Essentially, any asset, account, or investment will be considered part of your overall estate regardless of whether it directly passes through probate court or not. This includes all life insurance proceeds, property, and investment proceeds.

However, there are still numerous estate planning strategies you can utilize to reduce your overall tax burden. These include the creation of specific trusts, utilizing joint ownership with your spouse and more. Read our overview on reducing Estate taxes to learn more.  

Why it’s important to be aware of non probate assets

It’s important to be aware of non probate assets as you create and update your estate plan. This designation can help you decide which assets to include in your will, guide the creation of any trusts, and help you divide inheritances for your beneficiaries. 

When you get down to it, a major benefit of designating non probate assets is to make the probate process easier for your family members and loved ones. Non probate assets allow property to transfer more smoothly, simplifying the procedures necessary to close an estate. 

There are also numerous situations where being aware of non probate assets is crucial to ensure your estate plan is carried out how you want. For example, Dustin sets up his spouse as a designated beneficiary on his retirement account. Years later, they divorce and Dustin updates his will to leave the account to their only child. 

According to beneficiary designations, that account would directly go towards Dustin’s ex-spouse, avoiding the instructions in the will and bypassing probate. It is crucial to be aware of non probate assets to prevent situations such as this. Not many people think about it, but by avoiding probate these assets also steer clear of any conflicting instructions left in a will. 

Similarly, understanding the difference between probate and non probate assets can help you identify what needs to be explicitly included in your estate plan. If you have an investment account without a beneficiary designation, or an insurance policy that names a minor as the beneficiary you will need to address these items when estate planning to protect your final wishes. 

Safeguard your assets– update your estate plan today

Whether or not an asset passes through probate, it needs to be considered as part of your Estate Plan. This process can help protect your assets, minimize your tax burden, and increase the support left to your loved ones. Non probate assets are able to bypass some legal oversight, but they must be established correctly. 

Many people think they need to list each and every item when creating a Will, but this is not true. As we have gone over, non probate assets are given the distinct ability to bypass the probate process. Instead, these items need to be addressed as part of your larger estate plan, such as through a trust or beneficiary designation.

At Trust & Will, we’re here to help you keep things simple. You can create a fully customizable, state-specific Estate Plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our different estate planning options today!

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