Do you have a will? Do you have life insurance, a retirement plan or brokerage accounts? If you answered “yes” to both questions, read on.

 

I recently prepared a revocable trust for a client as a replacement for her handwritten will. Her will stated, in part, “I leave my life insurance and 401k to my grandson.” She was shocked when I told her “Your grandson will get nothing.”

 

The problem was soon corrected but it reminded me just how confusing the subject of probate can be. You probably know that your will needs to be probated so your property can be transferred to your loved ones. But you may not know that probate doesn’t apply to everything you own.

 

Some of your assets can be transferred directly to your loved ones without the probate process. For that reason these assets are called “non-probate assets.” Understanding the difference between probate and non-probate assets can help you simplify your estate planning. If you fail to understand this difference—like our client with the handwritten will—it could cause major problems.

 

A non-probate asset is an asset that already has a beneficiary designation. When you buy life insurance, set up an IRA or open a brokerage account, you will usually fill out a beneficiary designation form. The financial institution promises to pay the money in your account to the beneficiary when you die. Upon your death, the beneficiary becomes the new owner without the need for probate.

 

A probate asset does not have a designated beneficiary. That’s what your will is for. Probate is the process of having a court legally recognize the people named in your will as the new owners of your property.

 

Now that you know the difference between a probate and a non-probate asset, do you see how this could help you simplify your estate planning? A beneficiary of a non-probate asset can inherit that asset without the need for probate. If everything you own is a non-probate asset you may be able to avoid probate entirely.

 

So what about our client with the handwritten will? She wanted to leave her life insurance and retirement plan to her grandson, but she didn’t know those assets would not be controlled by her will. If she had died, the person listed on the beneficiary designation forms would have become the new owner. She had named her sister as beneficiary. Her sister died last year. Ironically, if I hadn’t corrected the problem, the money would have gone to the people named in her sister’s will!

 

Make yourself a note to check the beneficiary designations on your life insurance, retirement plan and brokerage accounts. Are they in conflict with your will or trust?

 

Disclaimer: The information presented in this column may or may not match your individual situation. Be careful not to treat this column as specific legal advice, as it may not meet your individual needs. It may give you a solid basis for discussion with your own attorney. You should consult with your personal attorney before you take any action on this or any legal issue. Also, please be aware that laws change, so this column is valid only as of the date it was published. This communication does not create an attorney-client relationship between the author and the reader.