Non-probate Assets

April 1, 2001 Advisory
Certain assets can be held in ways that will result in ownership of the
asset passing directly to an intended beneficiary upon the death of the
owner without going through a probate process. One of the most common
types of "non-probate" assets is a family home held by spouses jointly
with a right of survivorship. If real estate is held jointly with a
right of survivorship, at the death of one owner the other owner
automatically becomes the sole owner of the entire property. Individuals
may also own bank or brokerage accounts jointly with a right of
survivorship. The other widely-owned class of assets that can be
transferred at death without probate court involvement are assets that
pass by beneficiary designation, such as life insurance and retirement
accounts. These assets may pass under the terms of an individual's
Will, but usually only if the individual names his or her estate as the
beneficiary. Otherwise, life insurance proceeds and retirement accounts
will be paid directly to the named beneficiary.
Inter vivos or "Living" Trusts. Individuals may also reduce the
likelihood of probate court involvement in the management of their
affairs by creating trusts during life and transferring assets to these
trusts. The most flexible way of doing this is to create a revocable,
"living" trust. Such trusts are generally subject to tax at the death of
the person who created the trust (called the grantor or settlor), but
are not usually subject to probate court oversight unless the trustee or
a beneficiary specifically petitions the court for review. Revocable
trusts can serve multiple purposes, in addition to reducing probate
court involvement. Revocable trusts that are funded during life can
avoid the necessity of a conservator appointment in the event of the
grantor's incapacity. Instead, the trustee can simply manage the assets,
which affords the family greater privacy and spares the family the cost
and inconvenience of a separate probate court proceeding. If a grantor
owns real estate in more than one state, it is often a good idea to
transfer the property to a revocable trust during life so as to avoid a
separate probate proceeding in each state where the grantor owns
A revocable trust may also be set up so that it is not funded until
after the grantor's death. In such a case, the probate court would be
involved in supervising the initial administration of the decedent's
estate, but would not exercise oversight over any continuing trusts,
unless specifically asked to do so. This latter approach can be
particularly useful for business owners, who may not want to complicate
their lives by having assets, such as company stock, currently owned by
a trust, but who want the comfort of knowing that a trustee will manage
the assets in the event of their untimely death. Likewise, a person with
substantial wealth may want to protect his or her intended beneficiaries
by setting up such an arrangement to ensure that there will be
professional management of his or her assets at death.