Estate Planning For Non Probate Assets

Everyone knows how important it is to have a will. After all, we know that if we have children we need a will to designate guardianship for them if we should pass away while they are still minors. And, we think we need a will to ensure our property goes to the people we want it to. And, a will is good for that to an extent.

But most don't realize that their will actually will be irrelevant to the disposition of many of their assets. Wills only affect probate assets. So, if an asset is "non-probate" then it will pass outside of the will. People often assume that all assets will pass in accordance with their will. But, that's not the case with non-probate assets. So, for estate planning purposes, it's really important to think about which of your assets are non-probate assets and ensure they are going where you want them to. Otherwise, you could end up unintentionally disinheriting someone you intended to leave an inheritance to.

So, what are non-probate assets?

Non probate assets are assets that won't need to be probated after you die. This means they will pass to someone regardless of what the will says. The primary examples of non probate assets are your 401(k) plan; IRA and life insurance. Each has different rules.

401(k)

If you're married, your husband or wife has the right to the assets in your 401(k) plan after you die. Period. It does not matter what your will says or what your beneficiary form says. And this includes all your 401(k's) -- even ones you might have established before you even met your spouse.

By the way, a prenup probably wouldn't change the rule since generally a pre-marital waiver of this spousal right will generally be ineffective.

Now, it is possible to pass a 401k to someone other than your spouse, but you will have to get their written approval (waiver) and give that to your plan administrator. There are also a few 401k plans that require the marriage to be at least one year old before spousal rights vest -- but for the most part, if you are married, your spouse gets the 401k when you pass. Period.

IRA

Individual Retirement Accounts (IRA's) are also non-probate assets. However, these do not automatically go to your spouse. Instead the IRA will go to whomever you named on the beneficiary form -- regardless of what your will says. It is not unusual for a wife to discover after her husband has passed away that he had an old IRA that he never got around to changing the beneficiary form -- and it goes to someone very unexpected....

A bright bulb may have gone off in some of your heads as you think: "aha, so I can get around the 401k spouse precedence rule by transferring my 401k assets to my IRA and then designating whoever I want." Sorry, that won't work -- again, without the written consent of your spouse.

Life Insurance

Similar to the IRA, whoever you designate as beneficiary will get the life insurance proceeds.

Other non-probate assets include:

Assets in Revocable Living (intervivos) Trusts; Health Savings Accounts (HSA's) and Medical Savings Accounts (MSA's). Also, property titled "joint with right of survivorship" or "tenants by the entirety."

Accounts that are Pay on Death/Transfer of death (P.O.D. / T.O.D.) are usually non-probate, although some states might require it to be probated if the estate has debts for instance. You might make an account POD or TOD in situations where you don't want creditors to be able to reach the property during life but want to pass it automatically at death. For instance, you could give make a bank account POD or TOD to your brother or sister upon your death. That way, during life, if he or she gets into debt, the creditor can't get at your account as they could if you'd titled it as a joint account.

Tax Implications of Non-Probate Property

There really are very few; none in most cases. Non-probate property, just like probate property, is considered part of your estate for estate tax purposes. You can read more at What Assets Are Subject to Estate Tax?

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