Probate Assets, Non-probate Assets, and Beneficiary Designations
What is the difference between a probate and non-probate asset? What do those terms even mean? Do I really need to list a beneficiary on my accounts? These are questions we commonly hear from our clients who are creating their estate plans. The reality is that probate assets and nonprobate assets are treated differently when you die, and this can have a large effect on how your estate is administered by the personal representative. Read ahead to learn about the distinction between probate and non-probate assets.
What is a Probate Asset?
A probate asset is simply an asset that is not transferred automatically upon your death. These are assets that are usually titled only in one person’s name and do not have any beneficiaries designated to take the property upon death. These assets, as the name implies, require the probate court to transfer ownership to the desired beneficiaries.
What is a Non-probate Asset?
You can probably deduce that a non-probate asset is an asset that transfers automatically to a beneficiary that does not require involvement by the probate court. Common examples of non-probate assets are life insurance policies, IRAs, 401Ks, bank and/or brokerage accounts with beneficiaries designated, real estate held as joint tenants (or community property) with right of survivorship, real estate subject to a beneficiary deed, and any assets transferred into a trust. In Arizona, the MVD also offers a beneficiary designation form for your vehicles.
What are Beneficiary Designations?
A beneficiary designation is typically available for bank and brokerage accounts, as well as IRAs and 401Ks, and it simply acts as a way for you to tell the financial institution exactly who you would like to reset that asset upon your death. A key thing to remember is that most of the time a beneficiary designation will override a will. This means that if your will states that your son is to receive your life insurance death benefit, but your daughter is listed as the beneficiary on the policy, your daughter will receive the death benefit regardless of what the will says.
Do I Need to Keep My Beneficiaries Up to Date?
Absolutely. It is crucial to make sure your beneficiary designations are up to date so that the intended person receives the asset and to ensure the asset can avoid the probate process. We have seen scenarios where a life insurance policy had a beneficiary listed who had already passed away. While life insurance is typically a nonprobate asset, that is even exempt from estate creditors in most cases, the benefit will have to be paid to your estate if the beneficiary designation fails. Not only does this subject the benefit to the probate process, this also subjects it to the estate’s creditors, meaning your beneficiaries may never see a dime of the money if there are significant debts.
If you are still confused about how to handle your probate and non-probate assets, or if you are unsure about your beneficiary designations, contact us to schedule a consultation today.