While most people know a well-thought-out estate plan is essential, they often skip over planning for their non-probate property.
Consider your first day at a new job. With this new position, you may become insured under your company’s life insurance policy. You fill out a beneficiary designation form as part of the onboarding process. You also choose to contribute a portion of your earnings to the company 401(k) retirement plan. For that, you need to fill out a different beneficiary designation form. Just like that, you’ve done estate planning.
But what about the other things you own, the stuff that your will doesn’t include?
A will controls all the property that you hold in your name that does not pass by a contractual arrangement or as joint property. In the past, a person’s will controlled the bulk of their property.
As Americans acquire, save, and invest in different kinds of property, we hold it in increasingly various forms. Often, that property passes wholly outside of the terms of the will. Defined as non-probate property, this type of property does not have to go through the probate process at your death.
Does this non-probate property require another beneficiary designation form, and should it be filled out identically to the previous one? Are there different consequences to the beneficiaries for receiving those assets? These might be a few of the questions you have about this part of estate planning.
These are some of the most common ways that property passes outside of probate, without doing anything more costly than filling out forms. Too good to be true? Sometimes. If there are foreseeable problems, more planning should happen.
The most common issue in informal estate planning is what happens if there is no spouse, and the non-probate property passes to minors. Children are not legally able to own property.
Here’s an excellent example of this. If a parent names the children as primary or contingent beneficiaries of a life insurance policy, complications can arise if the policy is silent regarding minors. If that happens, a court-supervised guardianship must happen so that a guardian can take possession of the life insurance proceeds on behalf of the child. There are significant legal fees involved. Plus, the assets are subject to strict court supervision. Funds will not be freely available for the minor’s care.
Other issues can arise when a lot of assets pass outside of probate. Sometimes, there are estate expenses that cannot be paid. When this happens, it might be because all the assets have passed to third parties jointly or by beneficiary designations.
If there is family disharmony or no immediate family, it can be difficult to collect those assets. Examples of this include paying for a funeral, a final income tax return, and other necessary tasks. If the estate is large and estate taxes are due, these beneficiaries are the parties liable under tax law.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Estate Planning & Asset Protection-101 2019 and The Legal & Tax Aspect of Investing: Asset Protection; Estate Planning, and Tax Efficiency. This is an updated version of an article that was published on September 15, 2016.]
Michelle M. Huhnke is a partner at Sugar Felsenthal Grais & Helsinger LLP. She focuses her practice on estate planning, charitable planning, and wealth preservation. She works with clients and their families to develop estate plans that address varied family circumstances in a caring, detailed way and include efficient estate, gift and generation-skipping tax planning.…
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