Assets That Often Bypass Your Will: Understanding Non-Probate Transfers

It’s a common misconception that a will governs the distribution of all your assets after you pass away. While a will is a cornerstone of estate planning, a significant portion of your estate might actually pass outside of its direct control. Understanding which assets typically bypass a will is crucial for effective estate planning and ensuring your wishes are truly carried out. These assets are often referred to as “non-probate assets,” meaning they avoid the probate process, the court-supervised legal procedure that validates a will and oversees the distribution of assets according to its instructions.

So, what kinds of assets are we talking about? Several key categories commonly pass outside of a will, primarily due to how they are owned or structured.

1. Jointly Owned Property with Right of Survivorship: This is a very common form of ownership, particularly for real estate, bank accounts, and brokerage accounts held by married couples or family members. “Joint tenancy with right of survivorship” (JTWROS) means that when one owner dies, their share of the asset automatically passes directly to the surviving joint owner(s), regardless of what a will states. For example, if you and your spouse own your home as joint tenants with right of survivorship, upon your death, your spouse will automatically become the sole owner of the house, without it needing to go through probate or be directed by your will. This transfer is immediate and legally binding. It’s important to note that other forms of joint ownership, such as “tenancy in common,” do not have this automatic right of survivorship, and the deceased owner’s share would typically pass through their will.

2. Assets with Beneficiary Designations: Certain types of accounts and contracts allow you to name beneficiaries who will directly inherit the assets upon your death, bypassing your will. The most prominent examples include:

• Life Insurance Policies: Life insurance proceeds are paid directly to the beneficiaries you designate on the policy. The will has no bearing on who receives these funds.
• Retirement Accounts: This category encompasses 401(k)s, 403(b)s, IRAs (Traditional, Roth, SEP), and other retirement plans. These accounts require you to name beneficiaries. Upon your death, the account assets are transferred directly to the named beneficiaries, outside of probate and your will. It’s critical to regularly review and update beneficiary designations on these accounts, as outdated designations can lead to unintended consequences.
• Annuities: Similar to life insurance and retirement accounts, annuities often have beneficiary designations that dictate who receives the remaining payments or lump sum upon the annuitant’s death, bypassing the will.

3. Assets Held in Trust: A properly established and funded trust is a powerful estate planning tool specifically designed to avoid probate. Assets held in trust are legally owned by the trust itself, not by you personally. As the grantor of the trust, you establish the terms for how the assets are managed and distributed, and you name a trustee to carry out these instructions. Upon your death, the trustee continues to manage and distribute the trust assets according to the trust document, without the need for probate. Living trusts (also known as revocable trusts) are particularly popular for probate avoidance and can manage a wide range of assets, including real estate, investments, and personal property.

4. Transfer-on-Death (TOD) or Payable-on-Death (POD) Accounts: Many states allow for TOD or POD designations on certain types of accounts, such as brokerage accounts, bank accounts, and even vehicle titles. These designations function similarly to beneficiary designations for retirement accounts. You name a beneficiary who will automatically inherit the account or asset upon your death, without it going through probate or being governed by your will. TOD/POD designations are a relatively simple and cost-effective way to ensure specific assets pass directly to intended recipients.

Why is this important to understand?

Recognizing which assets pass outside of your will is essential for several reasons. Firstly, it ensures your estate plan accurately reflects your wishes. If you assume everything is controlled by your will, you might be surprised to find that a significant portion of your wealth is distributed according to beneficiary designations or joint ownership arrangements, potentially contradicting your will’s instructions. Secondly, understanding non-probate transfers is crucial for effective tax planning and minimizing potential estate taxes. Finally, it allows you to streamline the transfer of assets to your loved ones, as non-probate assets generally pass more quickly and efficiently than probate assets.

Therefore, a comprehensive estate plan involves not just drafting a will, but also carefully considering how your assets are titled and structured, and strategically utilizing beneficiary designations, joint ownership, and trusts to ensure your estate is distributed according to your intentions, both inside and outside of the will. Consulting with an estate planning attorney or financial advisor is highly recommended to create a holistic plan that addresses all aspects of your estate and ensures your wishes are properly executed.