Tell me about non-probate transfers…

What are non-probate transfers and should they be part of my estate plan?

If you’ve heard the phrase, “non-probate transfer” or “non-probate property” you might be surprised to learn that you likely already have some in your estate plan.

What is the difference between probate and non-probate property?

An estate plan is supposed to address what happens to all property left behind, right?  Well, all property is categorized into one of two piles upon death: probate and non-probate property.

Probate property is any property solely owned by the person who died, and there is no mechanism in place to direct its automatic transfer upon death.  Non-probate property is property that was held jointly or DID have a mechanism in place to transfer it upon death.

Sorry, that might not have helped.  Here’s some common examples.

The most common types of non-probate transfers are life insurance policies and retirement accounts/IRA’s that have beneficiary designations attached to them (we’ll discuss this more, don’t worry) and property that is owned jointly (we’ll explain this, too).

So let’s take an example.  Mr. Smith owns a $500,000 life insurance policy and he names his wife, Mrs. Smith as the beneficiary on this policy when he starts paying the premiums.  He never changes this and let’s say 8 years later he passes away.  All Mrs. Smith has to do is go to the company that issued the policy and give them the account information, proof of her identity, and proof that her husband passed away.  They then issue the check to Mrs. Smith (assuming there is no dispute that policy is payable – we are NOT talking about that here).  No need to go to the probate court to ask permission – this is automatic.

This is because this is a contractual transfer, meaning the transfer happens because Mr. Smith had a contract with the insurance policy issuer.  There is no question where this is supposed to go. 

Now let’s talk about jointly owned property.  Some common examples are joint bank accounts and real property (think land, houses) that are owned jointly with a right of survivorship. 

So let’s say Mr. Smith and Mrs. Smith jointly owned a savings account and checking account.  As long as they were true joint owners Mrs. Smith will continue to have access to the accounts when Mr. Smith passes away.

And for good measure let’s say the Smith’s purchased their family home together at the start of their marriage and they are joint owners with rights of survivorship.  If that is how they hold title to the property, when the first of the two owners dies, the survivor gets the decedent’s interest in the property.  So Mrs. Smith would own the property entirely upon Mr. Smith’s death.

This is Awesome, Non-Probate Transfers will BE my estate plan! 

Non-probate transfers are a wonderful and pretty much free estate planning tool. They are also favorable because ownership doesn’t change until the moment of death.  So the owner maintains complete ownership for the rest of their life and they can change their mind about who receives it at any time.

Generally all it costs is the time and effort it takes to fill out, notarize, and/or record forms.  If you’ve ever filled out a beneficiary designation form on a life insurance policy or on a retirement account you’ve already done a non-probate transfer all by yourself. 

In Ohio you can transfer houses/land, cars, and various financial accounts all with non-probate transfers. But…

It Can’t be that Easy, I feel Like I’ve heard horror stories before

You know what they say, measure twice (perhaps thrice?) and cut once.  Non-probate transfers are a sharp tool, and while that is what makes them so appealing, it’s also important to handle them with care.

The most common issue is not having beneficiary designations at all, or having out of date designations.  I have heard of ex-spouses or former co-workers being the beneficiary on life insurance policies or retirement accounts when that was obviously not the person’s intent at end of life. I’ve also heard of people trying make alternate beneficiary designations in their will.

That won’t work. 

The same is true if a house is transferred by Transfer on Death Designation Affidavit, usually referred to as a Transfer on Death Deed: the affidavit wins out over a Will.

Bank accounts are the source of a lot of probate issues, too.  It is common for bank accounts to have only one owner and no payable on death beneficiary.  This means the account will have to be probated.  Joint ownership is a common solution to this problem, but it doesn’t work in all cases because then accounts are vulnerable to ALL the owners’ creditors.

These are not the only ways non-probate transfers can go sideways - these are just the common ones I’ve seen. 

again: non-probate transfers should be handled with care

Non-probate transfers need to be reviewed regularly and updated when necessary.  Only you know when you change your mind and when circumstances change.

 It’s a lot of loose ends to manage! 

Some people are really into details and don’t find it intimidating to manage this paperwork.  Non-probate transfers make sense for this type of person. 

Other people can’t stand this stuff and don’t trust themselves with important papers, so they’re more likely to have problems down the line.

And non-probate transfers don’t always make the most sense.  Leaving a particular person a lump sum might be the worst option.  Could be due to poor judgment or perhaps negative tax consequences, or even because it could jeopardize government benefits.  Real property transfers can be especially problematic if left to multiple married parties, and that doesn’t even touch the insurance considerations.

Ok, FINE.  Does a trust avoid these issues altogether?

Yes, and no.

Sorry.  Don’t mean to be difficult, but it truly depends. 

If we’re talking about a situation where someone set up a trust properly and then took the affirmative step to assure that their property was titled properly, then yes, a trust avoids probate entirely.

That’s their primary appeal.

But of course it isn’t always this simple.  Failing to fund (think “fill”) a trust is a common problem.  It’s easy to misunderstand who legally owns of a piece of property, and it might not make sense to put certain types of property into a trust in the first place.  This is why it is so important to work with an estate planning attorney.

The Takeaway

Non-probate transfers are an economical and relatively easy way to avoid probate.  But we’ve all heard that annoying phrase: an ounce of prevention is worth a pound of cure.  It’s only annoying because we all know it’s true from experience.  So talk to an estate planning attorney before DIY’ing your plan.