Understanding the Difference Between Probate and Non-Probate Assets: The Two Bucket Approach

When creating your own estate plan or administering the estate of a loved one after they have passed, one of the most crucial distinctions to understand is the difference between probate and non-probate assets. This distinction can significantly impact how assets are distributed after death and whether beneficiaries need to go through the court-supervised probate process.

We have found that understanding how assets transfer after death is simpler when you think of it as two distinct "buckets."

Bucket #1: Assets with Beneficiary Designations

The first bucket contains assets that pass directly to beneficiaries without court intervention. These assets have built-in mechanisms for transferring ownership upon death through beneficiary designations or joint ownership. The transfer process is typically quick and straightforward, requiring only a death certificate and the beneficiary's identification.

Examples of Bucket #1 Assets include:

• Retirement accounts (401(k)s, IRAs)

• Life insurance policies

• Payable-on-death bank accounts

• Transfer-on-death investment accounts

• Joint accounts with rights of survivorship

• Property held in joint tenancy

Bucket #2: Traditional Probate Assets

The second bucket contains everything else, assets that must either go through probate or transfer according to a trust agreement. These assets typically don't have built-in transfer mechanisms and require additional legal steps to pass to beneficiaries.

Examples of Bucket #2 Assets include:

• Individual bank accounts

• Personal property

• Real estate in your name alone

• Non-retirement investment accounts

• Business interests

Beneficiary Designations Override a Will or Trust Agreement

A will or trust agreement primarily controls assets in Bucket #2. However, it's crucial to understand that beneficiary designations (Bucket #1) override what a will or trust agreement says. This is one of the most common misunderstandings we encounter and it can lead to disastrous results.

For example, we recently assisted with the administration of an estate in which the deceased mother had named her eldest child as a joint account holder on an investment account that held the bulk of her assets. The only reason she did so was because she wanted that child’s assistance in managing the investments. She did not intend to gift the account to that child alone. In her will, she stated that at her death she wanted all four of her children to share the funds in the investment account equally.

Unfortunately, no one had advised her that the joint account designation would override her will. At her death, the account custodian immediately transferred all of the assets in the joint investment account to the eldest child as the joint account holder. Although in this situation, the eldest child ended up making gifts to her siblings to fulfill their mother’s wishes, not everyone is going to be that magnanimous nor will it always be feasible to make such gifts.

Good Planning Can Clarify Which Assets Are in Which Buckets

An experienced estate planning attorney can help ensure your estate plan effectively addresses both types of assets and achieves your specific goals for asset distribution. And if you are the one administering an estate that contains assets in both buckets, an experienced estate planning attorney can help you and the beneficiaries navigate the transfers.