When you’re putting together an estate plan, it’s important to know that your assets can be placed into two categories: probate and non-probate. Knowing the differences between the two asset types will allow you to make better decisions regarding how you want to distribute your estate to beneficiaries and create an individualized estate plan that addresses your specific concerns and goals.
Probate Assets Explained
Probate is a multi-step process. After a court determines that a person’s will is legally valid, the estate is administered by the executor, who carries out tasks such as paying estate taxes and debts, accounting for all assets, and distributing them.
Probate assets are assets that are held in your name only, without any beneficiary designations or rights of survivorship. When you pass, they are distributed according to the terms of your will or, if you did not leave a will, the Texas laws of intestate succession. Examples of probate assets include:
- Real estate that you own, either alone or as a tenant in common
- Bank and brokerage accounts
- Life insurance policies that your estate as beneficiary or that fail to list a beneficiary
- Personal property such as cars, jewelry, or household furnishings
Non-Probate Assets Explained
Non-probate assets differ from probate ones because they have a beneficiary designation or are held as joint tenants with survivorship rights or payable on death. Unlike probated assets, your will does not control how non-probate assets are distributed. Instead, they pass directly to the named beneficiaries without the involvement of the probate court. Examples include:
- Property held in the name of a revocable living trust;
- Retirement benefits with beneficiary designations, such as annuities, IRAs, 401(k)s, 403(b)s, and profit sharing plans;
- Bank accounts with a transfer-on-death or pay-on-death arrangement;
- Property held as joint tenancy with rights of survivorship, will go directly to the remaining joint owner when you pass. Although this often applies to real estate, many bank accounts have a right of survivorship feature. If one of your adult children assists with your care and you add them to your account for convenience, they could own the account and its contents after you die (to the exclusion of your other children) if you make them a joint tenant with right of survivorship (bank employees typically will mark this option by default unless you tell them otherwise – if you would like for all of your children to inherit the account, name the one child as a convenience signer, and name all of the children as payable on death beneficiaries).
- Life insurance policies that list someone other than yourself as the beneficiary.
The ability to distribute assets without the involvement of the probate court has several advantages, the main one being that the named beneficiaries will have access to their inheritances immediately after you die. If you own non-probate property outside of Texas, your executor is spared the time and hassle of participating in an ancillary probate process in those states or territories.
By turning probate assets into non-probate ones, you can enjoy greater control over what happens to them after you die or, in some cases, become incapacitated. Bypassing the probate process is also an advantage if you are concerned that a disgruntled relative might contest your will or that creditors are likely to lay claim to your estate. For example, life insurance policies cannot generally be seized if you or your estate are not named as beneficiaries.
What About Estate Taxes?
In general, all non-probate assets are included in your estate for the purposes of calculating the estate tax. Proceeds from your retirement benefits, life insurance, profit-sharing plans are all taken into account, even when beneficiaries have been designated.
Wills can be structured to minimize or even eliminate estate taxes, so if you have non-probate assets, a Texas estate planning attorney can advise you on how to coordinate and distribute them.
Contact a Texas Estate Planning Attorney
When you are deciding how to distribute the contents of your estate, you need to consider both probate and non-probate assets. Even if you have a trust set up, the assets you want to include could end up as probate assets if beneficiary designations are not properly updated or you don’t fund the trust.
The estate planning attorneys at Romano & Sumner will advise you on how to structure your will, trusts, and other estate planning tools to ensure that your loved ones receive their inheritances in a timely manner and with as little financial impact as possible. We also offer probate administration services that will give you peace of mind and make things easier for your loved ones after you pass. For more information, contact Romano & Sumner today.