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Estates like these require smart, informal estate planning via non-probate property

Informal Estate Planning: Non-Probate Property

Go Above and Beyond During Your Estate Planning with Non-Probate Property

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 Is Not Always Enough

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.

Types of Non-Probate Property

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.

  • Insurance. Insurance is one of the most common assets that pass at death outside of probate. Claims are usually processed promptly, providing a source of funds for loved ones after a death. A simple form submitted online or by hard copy completes the beneficiary designation.
  • Retirement Plans. Qualified retirement plans grow free from income tax. If your retirement plan is a qualified plan, like a section 401(k) plan or a 403(b) plan, the labor law known as “ERISA” requires you to name your spouse as the plan beneficiary. Your spouse may waive this right, but otherwise, you may not appoint a different primary beneficiary. This information only counts if you are married; the process is different if you are unmarried. If you die before you must start taking distributions — now age 70 ½ — your spouse may instead roll the account over into an IRA in their name. The spouse doesn’t have to start taking distributions until they reach age 70 ½. Before then, the account can continue to grow free from tax. If there is no spouse, more thought must go into the question of naming other beneficiaries. This method maximizes the tax-free growth of the account for the benefit of your loved ones.
  • Jointly Held Property. Sometimes, couples own almost everything together. “Joint tenants with rights of survivorship” holds the property, sometimes abbreviated as “JTROS.” Then upon the death of one spouse, the asset is transferred to the other spouse by operation of law at the moment of death. This process minimizes costs and delays, but planning can be necessary. There are more benefits if a couple holds the property as “tenants by the entirety.” This term is a form of title available to married couples only for the couple’s primary home. If only one spouse has creditors, this is helpful. That’s because those creditors cannot reach the asset owned by the marital unit. Doing so is a cheap but effective way of guarding a couple’s home and other assets from certain creditors.
  • Pay-on-Death/Transfer-on-Death Accounts. One simple way to pass property to a spouse, children, or other beneficiaries is to name a transfer-on-death beneficiary. This transfer happens most often with bank accounts. It can also appear on brokerage accounts. Some states have enacted statutes that enable a landowner to put a “transfer on death” beneficiary in a real estate deed.
    • An example of this is as followed. If my mother wants her home to pass to her three children on death, she can record a deed that says that her home should pass to her children. She must also live in the right state. No probate is necessary to deed the house to her beneficiaries.

The Most Common Issue in Informal Estate Planning

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.]

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About Michelle Huhnke

Michelle Huhnke is a Partner at Sugar Felsenthal Grais & Hammer LLP. She focuses her practice on estate planning, charitable planning and wealth preservation.

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