From GRC’s Spring 2019 Newsletter

As part of the estate planning process, it is important to distinguish between so-called “probate” assets and “non-probate” assets because your Will only controls the disposition of your probate assets. Probate assets are those assets that are owned in your name alone at the time of your death and do not pass by beneficiary designation. For example, real estate, bank accounts and non-retirement investment accounts standing in your own name could all be probate assets. Non-probate assets include jointly held property (which passes automatically to the surviving joint owner), assets held in trust, and life insurance policies and retirement accounts (these last two pass by beneficiary designation).

Estate Planning

A critical part of the estate planning process involves reviewing the beneficiary designations of any retirement accounts and life insurance policies so that they pass consistent with your wishes. In addition, it is important to ensure that your assets are titled in such a way (individually, joint, in trust, etc.) so that the assets pass to the intended recipients. If your assets are not properly coordinated with your estate planning documents, significant tax and non-tax problems may arise.

For example, if your estate is large enough that it could be subject to the Massachusetts or federal estate tax, you likely have a Revocable Trust as part of your estate plan. Such Revocable Trusts typically include a formula that divides any assets which may pass to the Trust upon your death so as to fully maximize your estate tax exemptions and deductions, thereby minimizing the estate tax. However, if all of your property is held jointly with your spouse or other family members, all of such property will pass to the joint owner and will never pass to the Trust.

Similarly, if your largest asset is a life insurance policy that names someone other than the Trust as beneficiary, the proceeds will not pass to the Trust upon your death. In any case, if these assets do not pass to the Trust, they will not utilize the tax minimization provisions thereunder.

Accordingly, the tax provisions of even the most expertly crafted estate plan can be defeated if your nonĀ­probate assets are not aligned with your estate planning documents.

In addition, if you do not properly coordinate your assets with your estate planning documents, the non-tax provisions of your estate planning documents can be undermined. For example:

  • If your estate plan includes a trust to hold assets for minor children – if your life insurance does not name the trust as beneficiary, then the proceeds could be payable directly to the children, thereby triggering the need for a conservator and risking mismanagement by the children when they reach eighteen;
  • If your trust holds assets for your adult children as a means of protecting those assets from their creditors
  • If you name your children (rather than your trust) as beneficiaries of your retirement accounts, then those retirement assets could be subject to attachment by the children’s creditors;
  • If you have been married more than once and you have children from a prior marriage – if you intend to leave some assets to your spouse and some assets to your children, but all of your assets are held jointly with the spouse, then all of those assets will automatically pass to the spouse (leaving the children with nothing).

In all of these examples, the beneficiary designations or manner of ownership override the provisions of the Will and Trust and defeat the key objectives of the estate plan. Therefore, it is essential that you make sure that your non-probate assets are coordinated with your estate planning documents to ensure that all of your assets pass in accordance with your wishes upon your death in the most tax efficient manner.