John Madden would be proud.
When I explain the difference between probate and non-probate assets to clients and seminar attendees, I usually produce a diagram that is worthy of the most elaborate of football plays. Life insurance policies, helpfully marked with an “L”, are jumping over probate estates to end up with beneficiaries, “O’s”, and real estate arrows straight downward through the will, “W” of course, to be sold and divided among 5 distributees, all “X’s”.
Here, however, I am limited by the format. Please use your imagination as I try to explain the estate version of a Hail Mary.
What Is a Probate Asset?
A probate asset is subject to the probate process. It is an asset that is disposed of by a person’s will or by the laws of inheritance.
What Is a Non-Probate Asset?
A non-probate asset is every asset that is not a probate asset. It passes by contractual arrangement or operation of law.
That is probably clear as mud, so let’s use some real-life examples.
Common Examples of Non-Probate Assets
Life Insurance Policies
If you have a life insurance policy, then you probably named beneficiaries for it. That is your contract with the life insurance company to pay the beneficiaries when you die. Your life insurance policy is not controlled by the terms of your will and is a non-probate asset.
Joint Accounts With Right of Survivorship
If you own a joint brokerage account with your spouse, and you checked the “right of survivorship” box for your account, then that is your instruction that your share of the account goes to your spouse upon your death. Assets held in two names do not automatically mean there is a right of survivorship; it must be stated in writing. If you did so, then the joint brokerage account is a non-probate asset.
The Pattern Behind Non-Probate Assets
You see the pattern: through an agreement with the company holding the asset, you have provided for the disposition of the asset upon your death. Nonprobate assets are usually life insurance, retirement accounts, payable-on-death accounts, transfer-on-death accounts, joint property with rights of survivorship, annuities, and assets in certain trusts.
Common Examples of Probate Assets
In contrast, probate assets are not directed by contract or law, and disposition is directed by the terms of your will or, if you do not have one, then by the heirship laws of Texas. These are typically personal possessions, vehicles, your house, entity ownership, or land. They will also include assets that are usually non-probate but do not have a beneficiary or survivorship designation.
Why It Matters to Know the Difference
Executor Authority and Asset Control
Why is it significant to know if an asset is probate or non-probate? One reason is that an executor of your estate only has control over the probate assets. Suppose in your will you left $1 million to your church, but your probate assets total only $125,000. Your church is not going to receive the full $1 million bequest because there simply is not enough money to fund it.
Avoiding Distribution Mistakes
Therein lies the problem: many people fumble distributions between their will and beneficiary forms. That can lead to unequal distributions and unintended results.
Creditors, Taxes, and Estate Obligations
There may also be issues with creditors and taxes. If there is insufficient money in an estate to pay creditors, those creditors may have a claim to pull non-probate assets back into the estate. As for tax liability, the IRS is paid one way or another, and the source may include both probate and non-probate assets.
Bringing It All Together
If you’ve been making your own diagram, then by now the X’s and O’s should be jumbled with a bewildering scrimmage of lines, circles, and arrows.
Touchdown! Thanks, John.
Conclusion: Bringing Clarity to Estate Asset Distribution
Understanding how probate and non-probate assets work together is essential to ensuring your estate plan functions as intended. When beneficiary designations and wills are misaligned, even thoughtful plans can lead to unintended results.
At Hammerle Morris Law Firm, we help clients coordinate estate plans to ensure assets are distributed clearly and effectively. Schedule a consultation today to protect your intentions and your legacy.
Virginia Hammerle is an accredited estate planner and represents clients in estate planning, probate, guardianship, and contested litigation. She may be reached at legaltalktexas@hammerle.com. This blog contains general information only and does not constitute legal advice.
