How Do Assets Get to My Beneficiaries When I Die?

There are two basic ways a person’s assets pass after they die. You can think of this as two buckets.

Bucket #1: Assets that Pass via Beneficiary Designation

The first bucket holds assets that pass by beneficiary designation.  Perhaps the best-known example of this type of asset is a retirement account. When you open a retirement account, the financial institution or your employer asks you to name one or more people or charitable organizations who will receive the funds in that account after your death, as well as a secondary beneficiary in case the primary beneficiaries predecease you. When you die, the retirement account is transferred directly to whomever you have designated. 

Another example of assets that pass via designation is property you own jointly with another person, such as a joint bank account or real estate you own in joint tenancy.  In these cases, the person you own the property with is the automatic beneficiary of that property on your death.  

Assets with a beneficiary designation do not need to pass through probate to be distributed to your beneficiaries.  The beneficiary simply needs to provide the financial institution or other entity with documentation of the asset-holder’s death, usually a death certificate and social security number.  After receiving sufficient documentation, the assets are transferred directly to the named beneficiaries. 

You also do not need a Will or Living Trust to pass these assets to your loved ones, as the beneficiary designation specifies whom you want to inherit these assets.  Indeed, beneficiary designations supersede any instructions included in your Will or Living Trust. Accordingly, it is important to make sure these designations align with your overall estate plan, which we will discuss in more detail below.

Examples of assets that pass via beneficiary designation include:

• IRAs, 401(k)’s, and other Retirement Accounts
• Annuity Accounts
• Payable on Death Accounts
• Transfer on Death Accounts
• Life Insurance Benefits
• Accounts Held as Joint Tenants with Rights of Survivorship
• Real Property Held in Joint Tenancy
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 Example: Janine set up a 401(k) account when she started her new job.  She listed her daughter Roberta as the primary beneficiary of the account.  When Janine dies, Roberta notifies the financial institution managing Janine’s 401(k) account of Janine’s death.  The financial institution then transfers Janine’s 401(k) to Roberta.
 
Example: Peter and Penelope are married and have a joint checking account.  When Peter dies, Penelope provides the bank with a copy of Peter’s death certificate and his social security number.  The bank removes Peter’s name from the account and the assets in the account pass to Penelope.
 
Bucket #2: Assets that Pass via Probate or a Trust

The second bucket holds everything else! That includes:

• Bank Accounts
• Non-Retirement Investment Accounts
• Real Property
• Tangible Personal Property
• Business Interests
  
  

When you die, the assets in the second bucket pass to the people you designate in your Will or Living Trust or, absent such documents, according to Idaho’s intestacy laws.  These assets are commonly known as “probate” assets, because, absent a Living Trust, they must go through the probate process to pass to beneficiaries after your death. If you use a Living Trust to designate beneficiaries, however, your beneficiaries can bypass the probate process, even with respect to the assets in Bucket #2.
 
Example: Arthur owns a home in Boise and has a Will.  When Arthur dies, his children hire an attorney to probate Arthur’s estate according to the terms of Arthur’s Will.  Arthur’s house is distributed to Arthur’s children in equal shares according to his wishes after the probate is concluded, a process that takes about six months.
 
Example: Abe owns a home in Lewiston and has a Living Trust.  When Abe dies, the successor trustee of his Living Trust reviews its terms and distributes the home to Arthur’s children in equal shares within a month after Abe’s death.


Planning for Assets in Both Buckets

Some people with very simple estates only have assets in Bucket #1.  In this case, these people may be able to direct all of their assets to their loved ones by beneficiary designations.  Most people, however, have assets in both Bucket #1 and Bucket #2.   An important part of the estate planning process is making sure that you properly direct the assets in both buckets in a way that achieves your goals.  

For more information on planning for assets in both buckets, check out our blog post on The Importance of Aligning Beneficiary Designations With Your Estate Plan.