Probate vs. Non-Probate Assets: What's the Difference?

Probate and non-probate assets play quite disparate roles in estate planning and the inheritance process and understanding their contrast is crucial in financial and estate planning.

In this article, we delve into the details of each type of asset and portray the salient differences between them, thereby providing an informative guide for individuals planning their estates.

What are Probate Assets?

Probate assets are those owned solely by a decedent at the time of death, without a designated beneficiary. As per legal mandate, these types of assets cannot pass onto heirs without going through probate - a legal process to validate the deceased's will, representative appointment and proper distribution of assets. The supervising probate court assesses that creditors are paid and the remaining estate reaches legitimate inheritance claimants.

The probate process, inherently protracted and expensive, is usually overseen by an executor if there's a will, or an administrator if there isn't. Common examples of probate assets include:

1. Solely owned real estate properties
2. Bank accounts in the decedent's name only
3. Personal items such as vehicles, jewelry, and artwork
4. Investment accounts in the decedent's name

What are Non-Probate Assets?

Non-probate assets, on the other hand, are types of property that automatically pass onto someone else upon the owner's death, bypassing the probate process. These assets are typically owned jointly or have a designated beneficiary. Since the ownership transition is immediate and smooth, there is no need for court intervention to distribute these properties.

Common types of non-probate assets include:

1. Jointly held properties with rights of survivorship
2. Retirement accounts such as 401(k)s or IRAs
3. Life insurance policies
4. Payable-on-death or transfer-on-death accounts
5. Trust assets

Probate Vs. Non-Probate Assets: A Comparative Assessment

Duration

The probate process can be drawn-out lasting months or years to conclude, dependent on the size and complexity of the estate. Non-probate assets, however, transfer almost immediately to the beneficiary following the owner’s death. The time difference adds a significant advantage to non-probate assets, facilitating a quicker, more efficient inheritance procedure.

Cost

Running an estate through probate can prove expensive due to court fees, legal fees, and executor fees and in some instances estate taxes. For non-probate assets, these fees are eliminated as the assets more directly to the beneficiaries, therefore making the transition less costly.

Privacy

Probate proceedings fall under public records making the details of the deceased’s estate accessible to anyone. This can be unfavorable for families requiring privacy. Since non-probate assets bypass the court system, these transfers remain private and only concern the involved parties.

Control

In finalizing estate planning, the control of assets post-death should be taken into account. Probate assets allow the testator to distribute their wealth as they wish through their will. Non-probate assets, however, usually pass to the surviving joint owner or named beneficiary bypassing any specifications in a will.

What Happens if You Include a Non-Probate Asset in Your Will?

Including non-probate assets in your will is a common mistake due to misunderstandings about the probate process. Non-probate assets, including jointly held properties, life insurance policies, and assets placed in a living trust, bypass the need for probate due to their transfer-on-death or payable-on-death designations. However, some individuals, unaware of this distinction, still include such assets in their wills.

Such an inclusion doesn't typically change the asset's non-probate status. Regardless of what the will says, if a beneficiary or joint owner is specified with the asset, the wishes expressed in the will do not apply. This can confuse matters significantly.

Let's look at some examples:

1. Joint property: If you include your home, which you jointly own with rights of survivorship, in your will bequeathing it to a child, the property will still pass directly to the surviving joint owner at the time of your death, not the child named in the will.
2. Life insurance policies: If you name a particular relative as the beneficiary of your life insurance in your will, but another person is named as the beneficiary on the policy with the insurance company, the latter person will receive the benefits upon your death, not the person named in your will.
3. Retirement accounts: Similar to life insurance policies, if a beneficiary is designated directly with the retirement account institution, like your 401(k) or IRA, the assets will be distributed to that individual, irrespective of what your will stipulates.

It's essential to know that any discrepancies between your will and the named beneficiary can lead to familial conflicts, legal issues and delay the asset distribution. Therefore, it's crucial to differentiate your probate and non-probate assets before you draft your will. Consulting with an estate planning attorney or financial advisor is recommended, to help ensure that all assets are appropriately allocated to avoid these complications.

Tips to Update Your Estate Plan

An up-to-date estate plan is essential to ensure that your family and assets are appropriately taken care of in the event of your death or incapacitation. Here are some essential tips to keep your estate plan current and effective:

Review Your Estate Plan Regularly

As a rule of thumb, you should review your estate plan every 3-5 years. This periodic review entails examining your will, trusts, and other critical documents to ensure they're in line with your current needs and goals.

Update Your Will and Beneficiaries

Take the time to review and update your will to reflect any significant changes in your life. This could include the addition or removal of beneficiaries, changes in your choice of executor or personal representative, distribution of assets, and guardianship assignments.

Additionally, revisit the beneficiary designation on your life insurance policies, retirement accounts, and other non-probate assets. Keep them in line with your current wishes and coordination with your will.

Address Changes in Financial Status

Your estate plan should evolve in tandem with your financial status. If you've acquired significant assets since drafting your estate plan, update it to include those assets and carefully assign their beneficiaries.

Consider Changes in Family Dynamics

Marriage, divorce, the birth of a child or grandchild, or untimely death of a spouse or beneficiary necessitate updating your estate plan. Ensure the impacted legal documents are amended to accurately represent your choices and avoid potential disputes among family members.

In conclusion, while both probate and non-probate assets make distinct contributions to estate planning, non-probate is often viewed favorably for its swiftness, lower costs, privacy, and simplicity. However, the appropriateness of probate or non-probate assets heavily depends on individual circumstances, objectives, and the complexity of the estate. Consulting with a financial advisor or an estate planning attorney is recommended to make informed decisions and optimize the estate planning process.