Estate planning is an opportunity for a family member to ensure that the estate’s assets are distributed exactly as the planner wishes. Estate planning may create a valid will and/or trust(s) which provide care for family members. Estate planners also want to avoid unintended consequences while maximizing the value of assets for beneficiaries. Knowing, for example, what is a probate asset and what is a non-probate asset makes certain that all assets are valued and distributed as the testator wishes.
Probate assets are those assets that pass under the will. A will is probated in Court, which means its validity is affirmed; it is presented in court, the estate is inventoried, debts are paid, and then assets are distributed to the beneficiaries of the will. When most people think about inheritance for beneficiaries, they are thinking only in terms of probate assets. However, not all assets are probated.
Non-probate assets, by contrast, pass outside of the will. Accounts which are non-probate assets include insurance policies, 401(k) plans, pensions, funds held in trust, and Joint Tenants with Right of Survivorship (JTWROS) and Payable on Death (POD) bank accounts, to name a few. If the account includes a beneficiary designation form, then the assets likely pass directly to the beneficiaries without probate. This paperwork often replaces the instructions in the will because the paperwork functions contractually.
Non-probate assets may be tangible or intangible. Correctly categorizing and valuing assets is vital to ensure that those assets are distributed as the testator desires. Chapter 111 of the Texas Estates Code includes the full list of non-probate assets, along with examples.
Avoiding probate may save time and money for beneficiaries, but non-probate assets also carry significant risks, particularly for multi-party accounts, such as JTWROS and PODs. Litigation often results from these multi-party accounts because of disputes over ownership. Sharing a JTWROS account with a child or sibling may create unintended consequences, especially if a spouse claims the account as part of community property. In addition, any trusts funded by multi-party accounts may not receive the funding as the trust designates if the beneficiary of a POD claims the money intended to fund the trust. If a testamentary special needs trust is not funded, the beneficiary may lose not only those funds but also government benefits.
In addition to beneficiaries not receiving assets as planned, claims against the estate may go unpaid. Funds from a multi-party account may be earmarked to pay an estate’s debts, such as property taxes, income taxes, or even funeral expenses. The beneficiary of a non-probate asset may choose not to pay those expenses. Even if the party does not follow the will, the beneficiary of a multi-person account has a legal right to claim and use the funds from the account as she or he wishes.
Estate planning is a gift to family members struggling with grief and loss. Working without guidance of an expert, however, may be fraught with pitfalls and unintended consequences. A probate attorney understands all aspects of the Texas probate process and will ensure that the estate plan reflects the wishes of the planner while protecting the estate and its beneficiaries from confusion and even litigation.
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