Health & Fitness
Probate and Non-Probate Assets -- What Does Your Will Really Do?
If you’re like most people, you probably have a number of different types of assets. You may own a home, vehicle, and personal belongings, and also have checking or savings accounts, a 401(k) or IRA, stocks, mutual funds, and life insurance policies. While all of these types of assets make up your net worth during your life, they must each be handled differently upon your death. Assets such as a joint checking account, for example, simply pass to the surviving joint account holder after death by operation of law. By contrast, assets with a named beneficiary – such as a retirement account or life insurance policy – pass according to the terms of the contracts that govern them. These differences are vitally important when you consider how best to plan for your loved ones after your death – ignoring them can lead to unintended and sometimes undesirable consequences.
As a general rule for estate planning purposes, most assets can be separated into one of two categories: (1) Probate Assets and (2) Non-Probate Assets. Probate assets are financial accounts, personal property, and any other items that would be subject to a court proceeding (known as “probate”) after your death. Non-probate assets, then, are those that pass to joint account holders, named beneficiaries, or other successors without the need for a probate proceeding.
1. Probate Assets. The easiest way to define what probate assets are is by referring to what they are not. Probate assets are not jointly-owned – they generally do not have a surviving owner who would own the entire asset upon the death of the other owner. Probate assets do not have contractually-named beneficiaries, as would 401(k) accounts, IRAs, some money markets and mutual funds, and life insurance policies. Upon the death of the owner, a court must oversee the distribution of probate assets to the owner’s heirs or other beneficiaries. If the deceased owner had a valid will at the time of death, his/her probate assets will be distributed to the beneficiaries named in the will. If the deceased owner had no will, the assets will be distributed according to an Illinois law known as “intestacy.” There is an exception to the requirement of a probate proceeding in cases where the total value of all of the owner’s probate assets is less than $100,000. In these cases, the executor (or another interested party) can complete and sign a small estate affidavit, which provides for the distribution of the probate assets to the appropriate heirs or beneficiaries. It is important to note, however, that a small estate affidavit cannot be used if the deceased owner owns real estate or has unpaid creditors at the time of death.
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2. Non-Probate Assets. Assets that pass upon the death of their owner without the need for a probate proceeding or a small estate affidavit are non-probate assets. Jointly-owned property (such as joint bank accounts, or real estate held with rights of survivorship) will pass to the surviving joint owner automatically upon the other owner’s death. Assets with contractually-named beneficiaries also pass to the named beneficiaries without the need for a probate proceeding – these assets include the retirement accounts listed above, life insurance policies, and accounts with “pay-on-death” designations. Assets held in trust (such as a revocable or “living” trust) are also considered non-probate assets. Again, these assets pass to named beneficiaries, or are held in trust for their benefit, without the need for the oversight of the probate court or a small estate affidavit.
Why is the distinction between probate and non-probate assets so important? Understanding the difference is crucial to ensuring that your wishes are carried out, and your assets are managed and distributed in the way that you have planned. For example, assume you wish to make specific monetary gifts to certain beneficiaries after your death, such as a gift of cash to each of your grandchildren. With that wish in mind, you ensure that your will lays out all the specific details of the gifts to your grandchildren. Now assume that, upon your death, all of your assets are non-probate assets, such as: a jointly-owned home, joint bank accounts, and retirement accounts that name individuals other than your grandchildren as beneficiaries. As a result, despite your carefully-drafted will, your grandchildren would receive no monetary gifts from you. A will – no matter how well written – can only govern your probate assets. Non-probate assets will pass by either the operation of law (such as joint ownership) or the provisions of a contract (such as named beneficiaries in an IRA). For this reason, it is crucial to understand the differences in probate and non-probate assets when planning for the management of your assets after your death.Have a legal question you'd like to see answered in a future article? Post it in the Comments section below.
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Disclaimer: This article provides legal information of a general nature and is not intended as legal advice, nor does it create an attorney-client relationship with any person or group of persons. Should you wish to obtain legal advice concerning your particular situation, contact an attorney.
