What assets go through probate?
Assets that go through probate include any asset that is individually owned by the deceased and not subject to a contract or a statute (law) governing the transfer of ownership.
For example, let’s compare two types of bank accounts — a single name account vs. a joint account. With a single name bank account, there is no doubt that the only owner is the deceased. Once the owner passes away, the bank will not accept any inquiries or instructions unless a court-appointed executor/administrator exists. The only way to change ownership of the single name account is through the court, so any assets in the bank account must go through probate.
On the other hand, consider a joint bank account. Most bank accounts shared between two people have what is called “rights of survivors.” As the name implies, the account automatically goes to the surviving owner without the need of a court order. The assets in this joint account do not have to go through probate.
Examples of probate assets include:
- Single name bank or investment accounts,
- Assets owned jointly as tenants in common,
- Personal property (contents of home),
- Art and collectibles,
- Real property (house) in single name,
- Automobile in single name,
- Coins (gold, silver, etc),
- Safety deposit box contents
Non-probate assets are assets that transfer by statutes (law) or by contract. The deceased’s will has no authority over their transfer.
Assets that transfer by statute (law)
Assets owned jointly are governed by special statutes that control transfer of ownership after death. There are three basic types of joint ownership: Rights of Survivor, Tenants by Entirety, and Tenants in Common.
Rights of Survivor: As the name implies, under the rights of survivor statute, the joint owner who survives automatically owns the entire remaining account or asset. Keep in mind that there may be multiple joint owners with rights of survival. In that case, each survivor now owns a proportionally larger share of the asset.
Tenants by Entirety: Tenants by Entirety is only available to married couples. It is very similar to the rights of survivor; assets will automatically transfer to the surviving spouse. The difference between “entirety” and “survivor” ownership is how assets are treated while both owners are alive. With “by entirety” ownership, spouses can have unequal ownership of property. The structure is largely used to shelter assets against creditors of one spouse (creditors cannot access the ownership share of the other spouse).
Note: not all states have “by entirety” ownership, and for the purpose of probate, there is no relevant difference between tenants by entirety and rights of survivor.
Tenants in Common: Tenants in common ownership allows owners to hold an undivided (individual) ownership in property. Each owner's share is treated as if it were a separate property they own individually. The deceased’s share is the only part of the asset that is transferable.
With tenants in common, the deceased’s percentage share of the asset is treated as a singularly owned asset and often passes through probate. However, the asset can also bypass probate if it’s transferred via deed or contract.
A contract is simply a written agreement defining what parties will do. In probate law, contracts take precedence over wills when there is a conflict about the transfer of ownership.
Let’s consider an example. In a life insurance policy, the owner enters into an agreement to pay premiums to the insurance company in exchange for a sum of money at death, which is then paid to named beneficiaries. The insurance company is obligated to pay the proceeds of the insurance policy to the named beneficiaries, regardless of what is stated in the will.
Examples of contracts:
- Life Insurance,
- Buy/sell agreements of businesses,
- Structured settlements,
- Transfer on death agreement (often used in bank accounts)
In some cases, a mix of law, contract, and/or probate factors may affect the transfer.
Consider an IRA. By law, the spouse must be the named beneficiary unless the spouse signed (notarized) their rights away. In a scenario where the named beneficiary is not the spouse — and there is no proof that the spouse signed their consent — the probate court would have to make a judgment about the appropriate transfer of assets.
A trust is a legal document that specifies how to manage assets and for whom those assets will be managed. Both contractual and state laws govern trusts. There are three types of trusts: Revocable (also known as Living), Testamentary, and Irrevocable.
Revocable (Living) Trust: A revocable trust is entered into by the Grantor (owner of assets) while they are alive and specifies how assets in the trust will be managed and distributed. While the Grantor is living, the assets are treated as if they were the Grantor's assets with no significant change in practical ownership. The trust can be modified, altered, or revoked (canceled) at any time while the grantor is alive.
Upon the Grantor’s death, the revocable trust becomes irrevocable (i.e, can not be changed), and the instructions must be followed. Assets must be specifically titled and owned by the trust prior to the Grantor’s death for the trust to have responsibility over them. Assets owned by the trust will bypass probate.
Testamentary Trust: A testamentary trust is created by the deceased’s will. As such, it will pass through probate. Only assets that pass through probate will be governed by the trust.
Irrevocable Trust: An irrevocable trust is exactly what it sounds like — a trust that cannot be revoked (i.e., changed or canceled) after it is completed. As with a revocable trust, only assets that are titled in the trust will be governed by the trust. Note: an irrevocable trust can be created either while the Grantor (owner of the asset) is alive or after they are deceased (via a will).