People sometimes come to me unsure about the distinction between probate and non-probate assets. The primary distinction is that probate assets are considered to be within your probate estate and therefore are controlled by the terms of your Will. Non-probate assets are not considered to be within your probate estate and therefore are not controlled by the terms of your Will.
In order to better understand the distinction, I often describe assets as falling into one of three different baskets.
ASSET BASKET NUMBER ONE: Asset basket number one includes all the assets you have which are titled in your name only. They are not jointly held with anyone else and they are not payable to a named beneficiary in the event that you pass away.
ASSET BASKET NUMBER TWO: Asset basket number two includes all the assets that you have which are jointly held with someone else. These assets generally will automatically pass on to the other joint owner upon your death.
ASSET BASKET NUMBER THREE: Asset basket number three includes all the assets you have which are payable to a named beneficiary outside of your Will. These assets will pass to the named beneficiary upon your death, regardless of what your Will says.
These distinctions are important because your Will only controls the assets in basket number one. Examples of basket number one assets includes things such as: a car titled just in your name, stock which is only held by you, and any bank account that you have not titled in any way with someone else. Basket one assets are probate assets.
Examples of basket two assets include things such as: a home you own jointly with your spouse, a bank account you have jointly with a parent, and jointly held securities. None of these assets will be controlled by the terms of your Will if you die and are survived by your joint asset owner. Basket two assets are non-probate assets.
Examples of basket three assets include things such as: life insurance payable to a specific person or persons, retirement accounts (like an IRA or 401k) payable to a specific person or persons, and anything you have in a Trust – when the trust provisions do not make the assets payable to your estate upon your passing (which they generally do not). Basket three assets are non-probate assets.
Understanding these distinctions are critical to proper estate planning. If you meet with an attorney to discuss drafting estate planning documents like Wills and/or Trusts, you must make clear to that attorney exactly what assets you have and which basket they fall into.
People sometimes make the mistake of thinking that their Will can override the non-probate asset character of a basket two or basket three asset. For example, they may think that regardless of who they list as a beneficiary on their IRA, if their Will leaves all their assets to their spouse, then their spouse will receive all their assets of any type. This is not true. If an asset falls in basket number two and is joint with someone other than their spouse, then that joint owner will receive that asset upon their death. As an additional example, if an IRA is payable to someone other than their spouse, then that other person will receive that IRA upon their death.
It is critical as part of your estate planning to review the status of all your assets. To the extent you own anything jointly with someone else, you need to confirm who that joint owner is. To the extent you own anything payable to a named beneficiary, you need to confirm that the beneficiary listed is the one you wish to receive that asset upon your passing.
As you can imagine, sometimes people lose track of the status of their basket two or basket three assets. For example, they may have forgotten that the designated their four children as the beneficiaries of their IRA, even after they had a falling out with one of the children and intended to remove them as a beneficiary. These types of mistakes can lead to significant assets going to beneficiaries who should not ideally receive them.
If you are getting ready to consider estate planning, you should get together a list of your assets and determine which of the three baskets each asset falls into. That information will be invaluable in working with a professional to develop a plan that is right for you.
Matthew J. Dorsey, Esq. is a Senior Partner with O’Connell and Aronowitz, 1 Court Street, Saratoga Springs. Over his twenty-five years of practice, he has focused on the areas of elder law, estate planning, and estate administration. Mr. Dorsey can be reached at 518-584-5205, This email address is being protected from spambots. You need JavaScript enabled to view it. and www.oalaw.com
