Effective Estate Plans Take Into Account Probate and Non-Probate Assets

When creating an estate plan, it is a common misconception that all of one’s property will be distributed according to the terms in the will. In reality, as far as estate planning goes, a person has two types of assets: probate and non-probate. Knowing how each type of asset is treated, can ensure that your assets are distributed according to your wishes.

Probate process

Probate is the court process that determines whether the decedent’s will was valid. Before any of the decedent’s assets that are subject to probate may be distributed to the persons named in the will, the court must confirm that the decedent made a valid will. Once the executor of the estate has gathered the assets, located the heirs and paid the estate’s debts, the court ensures that the assets are distributed according to the terms of the will.

If the decedent did not make a will, the probate process is still necessary. In this case, the court’s purpose is to ensure that the assets that are subject to probate are distributed according to the intestacy laws of New Jersey. These laws serve as the “default” distribution rules for assets of persons that die without a will (or who die with an invalid will).

Only certain property must go through the probate process before it may be distributed to the decedent’s beneficiaries. In general, only property that is solely owned by the decedent (i.e. not jointly owned) must pass through probate. Common examples of probate assets are bank accounts, stocks and real estate that are held in the name of the deceased.

Non-probate assets

As the name suggests, non-probate assets do not have to undergo the probate process before they may be distributed. Instead, these types of assets are automatically distributed to the named beneficiaries upon the decedent’s death. In general, non-probate assets are assets that are held jointly with another person or have designated beneficiaries. Some of the common examples of non-probate assets include:

Real estate held as joint tenants
Life insurance
Jointly-held bank accounts
Pensions or annuities
Retirement accounts including IRAs, 401(k)s or Keogh Plans
Accounts with “payable-on-death” (“POD”) or “transfer on death” (“TOD”) provisions

It is important to note that attempting to direct the distribution of a non-probate asset in a will does not override the beneficiary designation. As a result, problems can arise unless an estate planning attorney is not consulted when assets are titled. For example, a will could create a Credit Shelter Trust on the death of a first spouse, but if a brokerage account is titled “TOD” to a named beneficiary, and the named beneficiary retitles the account after the death of the first spouse before consulting an experienced estate attorney, the tax benefits of the Credit Shelter Trust could be lost. Also, a common problem is the failure to name children as contingent beneficiaries of IRA accounts which can result in the loss of valuable income tax deferral benefits for the children. To avoid these types of problems, it is important to have a comprehensive integrated estate plan that is regularly updated to accommodate changes that occur throughout life. An experienced estate planning attorney can offer creative solutions that will ensure that pitfalls are avoided and assets are distributed according to your wishes in a tax efficient manner.