The question sometimes comes up regarding the difference between non-probate and probate assets. Under Texas law and the law of all other jurisdictions, non-probate assets are those that do not pass through one’s estate at death. They generally pass automatically to a beneficiary by what is called “operation of law.” Probate assets, on the other hand, do not have a beneficiary designation and pass by your will or by the laws of intestacy if there is no will.
Thus, the will does not govern over a beneficiary designation on a life insurance policy, for example. The will only controls assets in the maker’s individual name that are not subject to a prior beneficiary designation. Additionally, if an account is titled in two names such as “husband and wife, as joint tenants with the right of survivorship,” then the survivor is the automatic owner at the other’s death.
Other accounts such as investment accounts that list a specified beneficiary also do not pass through the estate but go directly to the beneficiary. However, if a beneficiary is not named on any of these types of accounts, proceeds will go to the estate by default. It’s sometimes best to have a beneficiary listed on a life insurance account, for example, to keep the proceeds from passing through the estate where it will be subject to inheritance taxes.
An exception may apply where such taxes are minimal and where the intended recipient is a minor, a young adult or a spendthrift. In such cases, it may be better to run the funds through the estate in a testamentary trust that will make distributions in a periodic fashion instead of one lump sum. In that event, there should be no beneficiary designation on the policy or account, or optionally, the estate may be named as beneficiary.
In Texas and elsewhere, it’s necessary to go over all such issues with an experienced estate planning and probate attorney. In cases where there are substantial assets, a financial planner may also be a part of the planning team. Only after reviewing all of the facts and circumstances, will those professionals propose an optimum plan for appropriate treatment of all assets.
Source: nj.com, Biz Brain: Beneficiaries, wills and inheritances, Karin Price, Oct. 23, 2013