Legal Focus: Non-Probate Property

Legal Focus: Non-Probate Property

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1. What are types of non-probate property?

In answering this question, it is important to realize what Probate Court does. In simplest terms, Probate Court changes the name on accounts, real estate and other property where no other method exists to legally change that name or title. Any account that a person has at a bank or a brokerage house can be structured so that on the owner’s death, it is transferred to another person by beneficiary designation on the account registration form. Any account in a 401(k) or profit sharing plan can (and should) be set up with a beneficiary designation so that on the employee’s death, the account balance is automatically transferred to a surviving spouse, children or other beneficiaries without resorting to Probate Court. If it is possible to transfer an account or other property by contract, Probate Court is not needed.


A second broad category of non-probate property is that which is owned by trusts. One of the main reasons to establish trusts is to avoid probate court involvement in the settlement of an estate. This is why whenever a person establishes a trust as part of their estate plan, it is good practice to “fund” the trust i.e. change the registration on property from “John Doe” to “John Doe, Trustee of the John Doe Trust.” As soon as property is registered in a trust, it becomes non-probate property and is transferred after a person’s death by contract i.e. the trust.


2. Why is it important to know how your property is owned?
The ownership of property plays a large part in determining how it will be handled after your death. Any property owned by you individually which is not in trust or is not governed by a beneficiary designation can only be transferred by Probate Court in the event of your death. A good estate plan will insure that all property is either in trust or governed by a beneficiary designation.


3. What is an annuity?
An annuity is frequently a product sold by life insurance agents or financial planners. An annuity is a contract that you pay into, typically in a lump sum, that will pay you a guaranteed income for life starting at a certain age typically 70. Annuities have 2 main advantages. First, the money paid in is permitted to grow income-tax free. When distributions commence, typically at age 70, the amount distributed is treated partially as taxable income and partially as a return of your investment which is not taxable. The second advantage is that an annuity shifts at least some of your investment risk to the annuity company. By purchasing the annuity, you are guaranteed a retirement income of some amount each month. This amount will be paid no matter how well or how poorly the investments actually do. You may lose out on large gains that could occur but you will be guaranteed a retirement income.


4. What is the difference between an annuity and an IRA?
The phrase “IRA” stands for Individual Retirement Annuity. The main difference between a traditional annuity and an IRA is that annuities are usually funded with post-tax money (money that has already been taxed) while IRAs are usually funded with pre-tax dollars (money that has not been taxed). Both IRAs and annuities allow the money in the account to grow income-tax free. Distributions from IRAs are fully taxable as ordinary income while distributions from annuities are taxed partially as ordinary income and partially as a return of your investment.


This article is for general informational purposes only, is not for the purpose of providing legal advice, and does not establish an attorney-client relationship. You should consult with an attorney to obtain advice as to your particular issue or circumstances. 530045.1