The Nelson Law Firm of Bluffton
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Probate vs. Non-Probate Assets

Coordination of Will and Non-Probate Assets

One of the most common problems with beneficiary designations is that they are not properly coordinated with an individual's other estate planning documents.

For example, if an individual wishes to divide his assets equally among his three children and has drafted his will to do so, a joint account can frustrate that intention. If that individual had owned a joint account with one child (so that the child could assist in paying bills), the  joint account will pass to that child with whom the individual owned the account (and not to the other two children). Such lack of coordination frustrates the intent of the individual and could lead to tension down the road as the children realize that one of them received more than the others.

Another example is assets designated for younger beneficiaries. Often times, individuals wish to hold assets in trust for their children until the children reach a certain age (often beyond age 18). An individual's will can impose such trusts; however, beneficiary designations must also note that the individual wishes the non-probate assets to also pass subject to the trust imposed in the will.  
Assets of a decedent can generally be classified into two different categories: probate and non-probate. Probate assets are those assets which are disposed of by an individual's Last Will and Testament. Non-probate assets are disposed of by some other mechanism.  Because non-probate asests are not disposed of by a will, it is important to coordinate the disposition of non-probate assets so that a total "estate plan" can be implemented. Probate assets, as the name suggests, are required to go through the probate process.

Types of Non-Probate Assets

Various examples of non-probate assets are as follows:

1.  Individual Retirement Accounts and 401(k) Plans: These assets are disposed of by beneficiary designations and therefore are not disposed of by the decedent's will. Because retirement accounts are some of the largest assets for many individuals, having a properly designated beneficiary on such assets is just as important as having a will.

2.  Property owned jointly with rights of survivorship: Upon one owner's death, these assets pass to the surviving owner or owners and therefore are not disposed of by will. Often times this is beneficial because it allows a married couple's house to pass to the surviving spouse outside of probate. However, it is not necessary that the assets be owned by a married couple in order to be owned jointly with rights of survivorship. 

3.  Revocable Trusts: Assets held in a revocable trust are disposed of pursuant to the terms of the revocable trust and not under the terms of the grantor's will. A "pourover" will is commonly used to add any probate assets to the revocable trust.  Those assets held in the probate estate which "pour over" into the revocable trust are probate assets, and therefore subject to the probate process and associated fees. This is why proper funding of a revocable trust is essential.  

4.  Life Insurance: Life insurance, like the retirement assets discussed above, are disposed of pursuant to beneficiary designations.  

5.  Others: This list is not a list of all non-probate assets. Assets held in trust for an individual, even if such individual possesses the ability to determine the disposition of the assets after such individual's death (called a power of appointment) are non-probate assets, and so are various types of annuities, which also pass pursuant to beneficiary designations.