Probate vs. Non -Probate Assets

For people who are entering their elder years, estate planning can quickly become an important point of interest. Taking the time to sit with an attorney and discuss your various assets should be a priority. This is especially true for individuals with diversified assets, including real estate investments. One critical step of this process is distinguishing between probate and non-probate assets, and making the proper preparations for each. In this blog post, we’ll discuss the differences between probate and non-probate assets, and the implications this carries in the estate planning process.

What’s the Difference Between Probate and Non-Probate Assets?

Assets that become property of a decedent’s estate and are subject to distribution to estate beneficiaries under the terms of the decedent’s will or the state intestacy statute are probate assets. In other words, the decedent has not specifically designated anyone to receive these assets following their death.

Non-probate assets, on the other hand, are those assets that are not a part of the estate subject to distribution. This is because they automatically pass to another by law upon the death of the decedent, or have already been passed on before death.

Why Is This Distinction Important?

After a decedent passes away, the individual serving as the executor of the estate is tasked with distributing assets. When the decedent has planned for this process by creating a will, and having a limited number of probate assets, then it is a fairly straightforward procedure. When decedents do not take these measures, however, the probate court involvement can get a lot more complex. Unfortunately, this can quickly get expensive.

Examples of Non-Probate Assets

When it comes to estate planning, often non-probate assets are preferable to probate assets if you’re primarily concerned with efficiency in their distribution to beneficiaries. This is because they do not require any court involvement, primarily having non-probate assets can streamline asset distribution. Non-probate assets could include the following:

1. Assets a decedent owned jointly with another with rights of survivorship. Upon the passing of the decedent, these assets pass automatically to the other owners by operation of law.
2. Assets a decedent owned jointly with his/her spouse as tenants by the entirety.
3. Assets that a decedent previously titled to a revocable living trust or other entity. Since the asset is not in his/her name at the time of death, it is not subject to probate.
4. Assets in which a decedent transferred to another, while retaining a life estate. Upon the death of the decedent, the life estate expires by operation of law and the remainder interest passes automatically to the previously designated remaindermen (an individual or entity other than the decedent).
5. Assets owned by a decedent, but payable to a designated beneficiary (provided such designated beneficiary has not predeceased the decedent) upon the death of the decedent. Such assets might include: payable on death (“POD”) accounts, transfer on death (“TOD”) accounts, in trust for (“ITF”) accounts, Totten trusts, life insurance policies, retirement accounts, annuities, or health savings accounts. This also includes IRAs, which, if they are Self-Directed IRAs, can be a great way to fund real estate transactions.

So, if you title your real estate properties that regularly receive cash flow, they could be considered non-probate assets. Commercial real estate properties, again if they are properly titled can also be made into non-probate assets. The efficient distribution of these properties is critical in the event tenant problems arise during the estate administration process. We have seen many instances where, tenants get wind of the passing of the landlord and attempt to go on the offense to exploit the confusion that inevitably arises in these situations. Sometimes it’s well worth it to re-title these assets, but not always. It’s critical to speak with an attorney that’s familiar with how these things play out both during the decedent’s life and after they pass.

What Role do the Non-Probate Assets Play?

When dealing with assets of an estate or of a decedent, the determination of whether the assets are probate or non-probate assets is the first question. This classification will determine which assets are subject to a probate or administration proceeding and distribution under the decedent’s last will and testament or under the state intestacy statute.

The next question, which goes more toward taxation of the estate goes to the value of the gross estate. Non-probate assets may not be a part of a probate proceeding. But, they will be included in the value of the gross estate when determining the tax liability of the estate.

Carefully Designating Non-Probate Assets

While it is often beneficial to own non-probate assets, you should maintain a level of caution. Without the discretion that an attorney can provide, jointly owned assets may pass entirely to the individuals that you do not intend. Creditors seeking mortgage or other payments might also have claims to these assets. So, guidance from a qualified attorney is paramount when designating assets.

Classify Your Real Estate Assets Accordingly

Some of the most valuable assets in many estates are real estate assets. Because of this, it’s important to take a proactive approach in planning your estate for this eventuality. As a real estate attorney, Jim Clark has seen myriad real estate deals, and helped clients to take the appropriate steps for estate and asset protection planning. If you’re approaching your later years with real estate investments, then feel free to contact us for advice about how to strategically plan your estate.

Jim Clark is a New York estate attorney. For more information on the process of settling an estate in New York, the probate or administration process, or ways to plan an estate to avoid probate or other will, trust or estate settlement matter please visit our website at https://www.clarkslaws.com, call my office at 631-669-6300 during regular business hours or feel free to e-mail me at jclark@clarkslaws.com.

Legal disclaimer: IMPORTANT LEGAL NOTICE: This post is not legal advice does not create an attorney-client relationship. This and all posts on this website are intended as general information, and are provided for educational purposes of the public, not any specific individual. If you would like to obtain specific legal advice about this issue, please contact an attorney in your state. Mr. Clark is licensed to practice law in New York.