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Probate vs Non Probate – How Assets Transfer at Death

Hello and welcome back to Smart Financial Future.  I’m John Williams, Certified Financial Planner and Senior Advisor at Ironwood Wealth Management and today I want to go over how assets pass on after you pass away.

The law provides each of us with the right to own property since we are alive. However, if you’re not alive, you don’t have property rights. After you pass away, your property has to transfer to someone else or an entity. So who has the authority to decide who is entitled to our property and to transfer it? Let’s look at how assets transfer after you pass away.

Typically there are two ways assets pass at death – through a court and out of a court. Some assets, by their very nature, are out-of-court assets. For example, when someone is designated as the beneficiary of life insurance, that beneficiary collects the money upon the death of the policyholder without it going through a court. The insurance company simply pays whoever your beneficiary is.

I want to mention, you can change an in-court transfer to an out-of-court transfer by how an asset is titled. A good example is when you set up the title to real estate as joint tenants with rights of survivorship. At the death of the first owner, the surviving owner receives the entire real estate interest without going through the court.

Assets that transfer through the court after death are also known as probate assets. Very simply, probate is just the court process of deciding what goes where. If you die with a valid will it is known as testate, and your will generally guides the probate process. On the other hand, if you die without a valid will that is called intestate. When that happens, the court will use the law and its judgment to decide who gets what. In general, if an asset isn’t the out-of-court type, it must pass through the probate process.

Out-of-court assets or nonprobate assets are just as they sound. They are assets that pass outside the court system. Many times, out-of-court transfers occur by a contract of some kind like life insurance, IRAs, retirement plans, annuities, and assets held jointly with rights of survivorship. Your beneficiaries will receive those out-of-court assets directly.

Suppose I listed my son, as my beneficiary on my IRA, but I listed my daughter as the beneficiary in my will. Who do you think gets the money in the IRA? The answer is my son. With assets that pass via contract, whoever is listed as beneficiary, will receive the assets regardless of the will.

Another type of out-of-court asset are those held by irrevocable trusts. These assets do not go through probate, because, you don’t own them – the trust does. When you die, only the assets you own directly are included in your probate estate. Since assets in an irrevocable trust don’t technically belong to you, they are not included your probate. After your death, the trust merely follows your instructions about who gets what and when. So if it makes sense, you can put some or all of your assets in a trust before you die, which turns assets that would’ve passed through the court system into out-of-court assets.

This has been John Williams, with the financial educational blog site Smart Financial Future.  Don’t hesitate to let us know if you have any questions.  We’ll hope to see you next time.