When you begin to plan your estate, you’ll quickly encounter two different types of assets: probate assets and non probate assets. However, the distinction may not be obvious at first. The asset type dictates the manner in which a particular asset will pass to its beneficiary. Therefore, understanding the difference between probate and non probate assets is critical. Keep reading to learn why non probate assets are unique from probate assets, as well as 6 common types of non probate assets.
What Are Probate Assets vs. Non Probate Assets?
A probate asset is any type of estate property or asset that must pass through the probate process. In contrast, a non probate asset does not pass through probate court. Not only does a non probate asset remain private, it can pass directly and automatically to its beneficiary without court adjudication or intervention.
The advantages of a non probate asset is best explained by describing the disadvantages of a probate asset. A probate asset becomes a part of public record as it goes through the probate process. This means that any creditor, entity, or individual has an opportunity to file a claim to contest the asset. When no claims or liens are present, the asset will eventually pass to an heir of the decedent. However, the probate process can take several months to several years. This means that the rightful beneficiary may have to wait a long time before they can receive their inheritance, and without any discretion.
If you are planning your estate and want to exercise more control over how assets are passed to your loved ones, then it’s wise to understand what types of assets don’t have to go through the probate process.
Read our guide Probate vs Non Probate for more information.
6 types of non probate assets
There are several types of assets that typically do not have to go through the probate process. Have you ever opened a financial account, after which the financial institution required you to name a beneficiary? This is typically a great clue that you’ve just created a non probate asset. However, there are other types of non probate assets that don’t necessarily work in this way.
The following reviews a variety of non probate assets you might encounter.
Most personal property, such as real estate, jewelry, or furniture will become probate assets by default. However, you can convert property such that they become non probate assets.
This can be done by setting up a Trust. A Trust is a fiduciary agreement in which another entity agrees to “own” and manage assets on your behalf, for the benefit of the beneficiaries of the respective assets. Any assets you use to fund the Trust are removed from your personal estate because you are technically no longer the owner. Thus, these assets do not have to pass through probate. A Revocable Living Trust is a recommended option because it allows you to access, control, and use these assets as if they were your own during your lifetime. Further, you can make changes to or close the Trust during your lifetime if you choose to do so.
This is a popular estate planning tool used by many, and often for the sole purpose of avoiding the probate process. Click here to learn about the many advantages of creating a Trust through your Estate Plan and gain more control over what happens to your assets.
2. Bank accounts
A bank account, such as a checking or savings account, can also be a non probate asset. This largely depends on the policies of the financial institution that holds the account. For instance, certain bank accounts may have a transfer-on-death or payable-on-death policy. This allows the asset to pass directly and automatically to a named beneficiary upon the account owner’s death.
To take advantage of such policies, you must take care to designate a beneficiary. Some banks may make this action optional, while others make it mandatory. If you do name a beneficiary, be careful to keep it updated. Further, you should be careful not to create any conflicts through your Estate Plan, such as naming a different beneficiary for the same account in your Trust or Will.
Read our guide on beneficiary designations for further explanation and best practices.
3. Retirement benefits
Retirement benefits and savings accounts also typically require a beneficiary designation, thus making it a non probate asset. This might include your employer-sponsored pension plan, IRA, 401(k), or a retirement savings account that you set up on your own.
Being able to distribute your retirement savings and benefits directly to your loved ones after your passing can be a great benefit. When a family member passes away, the sudden loss of income can create financial strain for their partner and dependents. Passing a source of income directly to a loved one outside of the probate process can help provide some financial stability and comfort during a challenging time.
4. Life insurance policies
Life insurance policies are a well known type of non probate asset. You may not have realized that they were a non probate asset per se, but you are likely familiar with the concept of how a life insurance policy works.
By purchasing a life insurance policy, you are ensuring that your loved ones will receive financial proceeds when you pass away. This is done by taking out a policy, naming your beneficiaries, and paying into the policy over time. Many individuals take out a life insurance policy for the sole purpose of providing financial relief for loved ones in the event that they pass away.
A life insurance policy typically does not pass through the probate process and the proceeds are paid out automatically to beneficiaries.
5. Any other assets that are owned jointly with others
Assets that are co-owned by two or more persons do not usually pass through probate. This is because if one of the owners passes away, their share of ownership in that asset will be redistributed proportionately amongst the remaining owners.
A common example of jointly owned property is real estate. For instance, a married couple could buy a house together. If one of them were to pass away, the property title would not go through probate to determine whether it should be passed to an outside individual or entity. Instead their share of the property interest will automatically get absorbed by the surviving co-owner.
6. Any other assets that have post-death designation in place
There are also assets that can have a post-death designation in place, such as the right of survivorship, or transferable- or payable-on-death. Examples of assets with such designations include specific types of house deeds and financial accounts.
Learn more about payable-on-death assets here.
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Knowing the difference between probate assets and types of non probate assets is important because it dictates which pieces of your estate will pass through probate, and which won’t. Individuals who study their estate planning options typically realize that they want to maximize the number of non probate assets represented in their estate. This is because the probate process can be lengthy and taxing, thus negatively impacting their loved ones.
Luckily, there are solutions. First and foremost, there are a number of asset types that typically do not pass through probate. This includes life insurance policies, bank accounts, and investment or retirement accounts that require you to name a beneficiary. The proceeds are paid out directly to your named beneficiary when you pass away without having to pass through probate.
Second, there are methods that you can leverage to convert probate assets into non probate assets. The key way of doing this is by setting up a Trust and transferring as many assets into the Trust as possible. Not only do these assets not have to go through probate, you get to control the timing and manner in which these assets are distributed to your loved ones. Many Trust owners rest more easily at night knowing that they have exerted control about what should happen to their legacy.
Trust & Will can help you ensure that your assets are protected and covered, regardless of whether you want to set up a Will, a Trust or both! If you choose to set up a Trust, we’ve made this process as easy and accessible as possible. Find out how to set up a Trust-based Estate Plan through Trust & Will today!
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