This time of year we focus on family and loved ones. Planning for the transfer of your assets after death (while not something I recommend you add to your Christmas to-do list) is very important to prevent conflict and foster continued good relationships between your loved ones when you are gone.
In making this plan, people often believe the planning begins and ends with a will. If this was ever the case, it isn’t any more. Over time, to simplify the obligations of banks, life insurance companies and other financial institutions and to avoid the costs of probate, there has been an increase in the number of assets that pass outside of probate. This means your will does not control who owns those assets after you pass. Let’s begin by discussing some basics.
Generally, planning for the passing of your assets after death is referred to as estate planning. One key to an effective estate plan is understanding the difference between probate and non-probate assets. Probate assets are the assets you own when you die that pass to the beneficiaries named in your will or, if there is no will, to your heirs as determined by law (yes, the state of Texas has written a will for you if you don’t write one for yourself).
Probate assets can include:
- real property,
- personal property,
- bank or brokerage accounts that have no beneficiary designation or that name your estate as the beneficiary, and
- life insurance payable to your estate.
Non-probate assets are assets that pass outside of probate usually pursuant to a right of survivorship, pay-on-death or beneficiary designation. Upon your death, non-probate assets pass directly to the joint owner with rights of survivorship or the designated beneficiaries and are not intended to be part of the probate process.
Non-probate assets typically include: IRAs, 401(k)s and other retirement benefits with effective beneficiary designations; property owned by a living trust; property owned by the decedent in joint tenancy with a right of survivorship (e.g., checking and savings accounts with beneficiary designations or other rights of survivorship); bank or brokerage accounts with pay-on-death or transfer-on-death beneficiaries; and proceeds from a life insurance policy on your life with beneficiary designations. For many, this is the bulk of their wealth — meaning it is possible, without you knowing it, that your will won’t control who inherits most of your wealth.
The benefit of non-probate assets is that you can avoid, in part, the probate process which can be time consuming and expensive. In most instances, you can easily change beneficiary designations on bank accounts in one visit to a bank or sometimes even online — no visit to a lawyer, no witness, no notary required. This benefit, however, can also be a drawback. No formalities to making these changes and not being part of any real deliberate or deliberative decision-making process can result in unintended consequences.
For example, if one of your children assisted with your caregiving and was placed on your checking and savings accounts as a “convenience,” but the account had a right of survivorship feature, then that child would own the accounts in their entirety following your death. This is not as uncommon as you would think and leads to family division and strife when the change makes little sense in the larger estate plan.
For instance, when most of your wealth is held in a brokerage account and you have a beneficiary designation to only one child, a 50/50 split in your will has been rendered meaningless. Worse, when there is inconsistency in the division of your assets (even when that inconsistency was on purpose) between your will and your beneficiary designations on non-probate assets, this often leads to litigation over your estate because your intentions are made unclear by the inconsistency. One child will often allege the changes to beneficiary designations were done fraudulently or based on undue influence. As you might expect, family members accusing each other of fraud is not a good bonding experience so don’t build that possibility into your estate plan.
Because your will does not control the distribution of non-probate assets, you must find out which of your assets are non-probate so you can coordinate the distribution of these assets with the provisions of your will or trust and ensure your assets are distributed according to your wishes. Doing so can help ensure your passing does not diminish the family bonds you have helped your loved ones build.