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Understanding the difference between a Probate and a Non-Probate Asset

April 13, 2016 by Timothy A. Costello in Articles

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Understanding the difference between a Probate and a Non-Probate Asset

When people think of inheritance, they typically think about what they may inherit under the Will of a loved one.  However, assets that are distributed by a Will often are not the only assets that a person owned.  Many people who create an estate plan do so in an effort to treat their loved ones’ equally.  Understanding the difference between a probate and non-probate asset is essential in being able to effectively achieve that.

What is a Probate Asset?

To begin with, the concept of “probate” pertains to the process of administering a deceased individual’s assets through the probate process.  In Maryland, the probate process (often referred to as estate administration) is overseen by the Register of Wills and the Orphans’ Court for the county that the individual was a resident of.  How the assets are divided are either determined by the decedent’s Will or by the laws of intestacy.

So what type of assets go through the probate process?  In essence, if the asset was titled in the individual’s name when they died, it goes through the probate process.  These would be things like a bank account held solely in their name, an investment account that does not allow one to name a beneficiary, real estate held only in their name, and many other variations.

So, what is a Non-Probate Asset?

Simply put, they are assets that have a named beneficiary other than the decedent’s estate.  These would be assets like a bank account jointly held with another individual.  Another example would be investment accounts that have a named beneficiary.  Many individual’s retirement plans allow you to name a beneficiary or beneficiaries to them.  Moreover, if someone fails to designate a beneficiary for their retirement plan, the financial institution administrating the plan often will have their own set of rules for how it is to be distributed.  All of these assets pass outside of an individual’s probate estate directly to the pre-named beneficiary.  They are frequently referred to as “payable on death” or “transfer on death” accounts.  These assets are becoming more and more important to an individual’s estate plan as they often represent their most valuable asset.  More importantly, these assets pass to their named beneficiary (or the financial plan’s default beneficiary) independently from one’s Will.

So why does this matter?

Coordinating non-probate and probate assets is critical to ensure that the individual’s objectives for their estate plan are achieved.  For example, assume a widow has four children.  She creates a Will which is designed to leave her estate in equal portions to her four children.  However, many years ago she opened an investment account which has a current value of $800,000.  When she opened the investment account she only had two children and named them as the beneficiaries.  As time progressed and she had more children, she forgot to update the beneficiary designation.

When the widow dies, her estate consists of $150,000 of various probate assets.  These are split equally between her four children with each receiving $37,500.  However, her eldest two children will receive an additional $400,000 outside of probate through the investment account.  Clearly this result is far from what the widow intended.  Beyond that, such an unequal distribution can have serious effects on the relationships between her surviving children.  The two youngest children could feel rejected by their mother and mistrustful of their elder siblings.  The two eldest children could feel guilty or confused as to why they were treated differently. While the two eldest children could remedy the financial disparity through gifts to their younger siblings, they are under no legal obligation to do so.  Moreover, even if the eldest children wanted to make things equal there are certain gift tax considerations which would need to be addressed.  Not only did the widow leave her children in vastly unequal financial circumstances, she also likely strained their relations and left her eldest children with an additional potential gift tax problem to solve.

Even if you took the time to craft a Will, a failure to review your beneficiary designations can lead to unfortunate results.   As you can see, when you are working with your attorney to create an estate plan it is critical that they assist you in reviewing how you have set up your various beneficiary designations.  Without such attention to detail you run the risk of upsetting your carefully thought out estate plan.  Contact me today to review how you can effectively coordinate your estate plan to be inclusive of both your probate and non-probate assets to achieve your ultimate estate panning objectives.