Several assets typically avoid probate. These include Life Insurance, Jointly Held Assets, IRAs, 401ks, Transfers on Death Accounts, Assets with Beneficiaries, and Pensions. Let's talk about these assets and the pros and cons.
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From Our “Ask a Question” Mailbag: “Do all my things at death pass through Probate? Are there not assets that typically avoid probate?”
Probate Attorney Daniella Horn
Assets That Typically Avoid Probate.
Several assets typically avoid probate. These include Life Insurance, Jointly Held Assets, IRAs, 401ks, Transfers on Death Accounts, Assets with Beneficiaries, and Pensions. This short article will address these assets, provide you with some information about the technique, and provide links for more detailed information.
What is Probate?
First, let’s talk about what is being avoided. Every country, many religions, and cultures have rules about dividing up a deceased person’s assets and addressing their debts. Probate is that legal process. Sometimes, using the process is advantageous. For example, probate is how family members who dispute an estate can go to a judge and how a family addresses a deceased person’s creditors. But in some cases, it is better to avoid the process completely.
In the United States, the process is controlled by the states. This means we do not have an “American” probate system. We have 50 different state systems. Some are good, some are bad, and some are ugly. Consult with your Estate Planning Attorney about your state. If you are one of the lucky people in a state where the Probate system is good, you may not wish to spend time and money avoiding it.
Non-probate assets are those that pass outside of the state’s system. They may still be subject to Inheritance or Estate Taxes, but they are not part of the “Probate Estate.” The following are examples of Non-probate assets.
Jointly Held Asset.
Real estate and bank accounts are sometimes held by more than one person Jointly with a Right of Survivorship or Tenants by the Entireties. In general, this means that if one of the owners dies, the survivor need only provide the death certificate to claim the dead person’s share. In this way, there is no need to involve the Probate process. Potential problems do exist. If you own a property Jointly, each person legally owns a share. If one of the Joint Owners gets divorced, sued, or has an IRS audit, then the entire account can be compromised. Further, if a parent adds a child to an account and the child dies first, the parent may have to pay Inheritance Tax on the child’s half. Before adding a joint owner to your asset, consult your Estate Planning Attorney about the pros and cons.
Life insurance policies always offer the chance to name a beneficiary. When the policy owner dies, the beneficiary only needs to provide the death certificate to collect the insurance payout. No Probate process is necessary. But, if the beneficiary collects the funds, they now have the cash payout in their name, unprotected from divorce or creditors. We typically set up a trust to collect the insurance funds so the beneficiary can enjoy the money but have protection from divorce or lawsuits. This can be done in several ways, including a Will (which would require Probate) or a Revocable Trust. Before naming a spouse or a child as a beneficiary, brainstorm options with your Estate Planning Attorney. Follow this link for more information about Revocable Living Trusts.
Pensions, IRAs, 401ks, TIAA CREF, 403bs, SEPs, etc.
There are many retirement plans; each has its own set of rules and regulations. To understand your plan, you must consult your plan manager. But almost all such plans allow you the option to name a beneficiary. Like life insurance, at your death, the beneficiary need only provide your death certificate to claim their inheritance. Probate is thus avoided. Though this sounds simple, you should consider this beneficiary designation carefully after consulting your investment advisor and Estate Planning Lawyer. For example, it is a terrible mess if you die having named your minor child as a beneficiary. Your minor child cannot complete the paperwork, necessitating an expensive visit to a judge. Furthermore, your minor child will gain control over the IRA at age 18. Most 18-year-olds are not yet mature enough to make sound decisions regarding complex assets. We usually employ a trust to hold these assets until the child reaches a more mature age.
TOD, Transfer on Death Accounts.
Bank accounts and investment accounts typically allow you to name a person to whom the account “transfers on your death.” Like the examples above, all the named persons must provide the bank with a death certificate. For example, let’s say you die a Bucks County, Pennsylvania resident. Your bank account and your investment account at Vanguard both have accounts for which you completed a TOD designation naming your daughter. A few days later, your daughter collects your death certificate from the funeral director, provides it to your bank and Vanguard, and collects the money. There is no need to involve the Bucks County Register of Wills. No Probate.
However, these funds go directly to the beneficiary and are NOT protected from divorce or creditors. Instead, we usually use a Will or Revocable Trust to capture the TOD funds. This way, the child can enjoy the inheritance but also be protected. We would happily walk you through this process during your free consultation.
In Conclusion, Assets That Typically Avoid Probate.
I hope you found this short article Assets That Typically Avoid Probate helpful. I have also included some links for more detailed information. Contact us if you want to know more or have an estate that needs our help. Let our Probate and Estate Planning lawyers help walk you through what can be a confusing process. Feel free to contact our office for a free consultation. It’s All We Do:
Peter Klenk is the founding member of Klenk Law, a seven attorney boutique estate planning law firm. We serve clients in Pennsylvania, New Jersey, New York, Minnesota and Florida. Peter Klenk received his Masters in Taxation LL.M. from NYU Law School and his J.D. from the University of Minnesota Law School. He served his country in the Navy JAGC during Desert Storm. Easy to talk to, feel free to call Peter for an appointment. We will make the process as easy as possible!
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