What Types of Assets Pass Through Probate?
In our previous post we outlined what probate means. In short, probate is the process of proving to the court that you have a valid will, and then following the will’s instructions. Only assets that are subject to the deceased’s will, are going to pass through probate. Assets that are subject to a contract, or statute (law) will not pass through probate.
Any asset that is individually owned by the deceased and NOT subject to a contract or a statute (law) governing the transfer of ownership. The best example of this is comparing two types of bank accounts, a single name account vs. a joint account.
In the single name bank account, there is no doubt that the only owner is the deceased. Once the owner passed away, the bank will not accept any inquiries or instructions unless there is a court appointed executor/administrator. The only way to change ownership of the single name account is through the court.
When there is a joint owner with rights of survivors, then as the name implies, the account automatically goes to the surviving owner WITHOUT the need of a court order.
Examples of Probate Assets:
Single Name Bank/Investment Accounts, Joint Ownership as Tenants in Common, Personal Property (contents of home), Art/ Collectibles,
Real Property (house) in Single Name, Automobile in single name, Coins (gold, silver, etc), Safety Deposit Box Contents
Non Probate Assets
As mentioned before, assets that transfer by statutes (law) or by contract, bypass probate, and therefore the deceased’s will has no authority over the transfer of these assets.
Assets that transfer by Statute (law)
Assets owned Jointly have special statutes governing the 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, the joint owner who survives, by law, owns the entire remaining account/asset. Keep in mind that there may be multiple joint owners with rights of survival, in that case the survivors now own a proportionally larger amount of the asset.
Tenants by Entirety: This type of joint ownership is only available to married couples, and is very similar to the rights of survivor and 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 and largely is 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 this and rights of survivor.
Tenants in Common: This joint ownership allows owners to hold an undivided (think individual) ownership in property. Each owner's share is treated as if it were a separate property that they “individually own”. The % of ownership owned by the deceased is the only part of the asset that is transferable. This type of joint ownership is considered as if singularly owned (just % owned by the deceased) and often passes through probate, however, can also be transferred via deed or contract and bypass probate.
Contracts: A simple definition of a contract is a written agreement on what to do. As such probate law places contracts above the will in recognition of transfer of ownership.
The best example of this is Life Insurance. 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 paid to named beneficiaries. The insurance company is obligated to pay the proceeds of the insurance policy to the named beneficiaries, regardless what is stated in the will.
Life Insurance, Buy Sell Agreements of Businesses, Annuities, Structured Settlements, Pensions, Transfer on Death (often used in bank accounts)
In some cases there is a mix of law/contract/probate factors that will affect the transfer. Consider an IRA. By law the spouse must be the named beneficiary unless he/she signed (notarized) their rights away. So imagine a scenario where the named beneficiary is not the spouse, and there is no proof that the spouse signed their consent. Needless to say, the court will have to make a judgment.
We are separating trusts from the types of ownership assets because they are a different entity altogether. First let's start with a simple definition. A Trust is a legal document that specifies how to manage assets and for whom those assets will be managed for. There are both contractual and state laws that govern trusts. There are three types of trusts, Revocable (also known as Living), Testamentary, and Irrevocable.
Revocable (Living) Trust: This is a trust entered 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 alive, the assets are treated as if they were the Grantor's assets with no significant change in practical ownership. The trust can be changed, altered or revoked (cancelled) at any time while the grantor is alive. Upon death the Revocable trust becomes Irrevocable (can not be changed) and the instructions must be followed. Assets MUST be specifically titled and owned by the trust prior to death for the trust to have responsibility over them. Assets owned by the trust will bypass probate.
Testamentary Trust: A trust created by the deceased will, and as such will pass through probate. Only assets that pass through probate will be governed by the trust.
Irrevocable Trust: This is a trust that cannot be revoked (changed or cancelled) 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 while the grantor (owner of asset) is alive or deceased (via a will).
Suggested further readings
EstatePlanning: Do all assets go through probate