Understanding Non Probate Assets in Massachusetts

A common goal in estate planning is avoiding the need to go to probate court to distribute their assets. Many people do not understand which of their assets will bypass probate anyway. These are known as non probate assets.

There are three critical things you need to understand about non probate assets: what they are, when they might become assets subject to probate, and how they affect your liability for Massachusetts estate taxes.

What Are Non Probate Assets

If you own a home or other real property jointly with your spouse, title to that house will automatically pass to your surviving spouse without the need for probate court involvement. You may need to record the change at the registry of deeds, but you will not need a judge to sign off on the transfer.  Similarly, if you have transferred property subject to a life estateLife Estates in Massachusetts interest, that property will pass immediately upon your death.

If you have a life insurance policy, the proceeds will be transferred to your designated beneficiaries immediately upon proof of death. This too will happen outside of the court system.

If you have retirement savings or other brokerage accounts, you have the opportunity to designate a beneficiary for those funds. If you have a beneficiary, that will also transfer outside of probate.

Your bank or financial institution may also allow you to fill out a pay on death or transfer on death ("TOD") form for your bank accounts. This will allow the funds in those accounts to pass to your designated beneficiary outside of the probate process.

When Non Probate Assets Become Probate Assets

​If you do not keep your beneficiary designations up to date, some of these non probate assets may end up in probate anyway. For example, if you have only one beneficiary on your life insurance policy and that person predeceases you, the proceeds will have to pay into your estate.

If your estate is the beneficiary because of outdated designations, those funds will go to the heirs identified in your will. If you do not have a will, they will be distributed according to the state intestacy laws.

This is why many people list contingent beneficiaries. Most commonly they will list their spouse as primary and children as contingent. This means if the spouse dies first, the children will receive the funds outside of the court process.

Even if you are not ready to tackle a complete estate plan, a simple and critical thing you can do right now is to check your beneficiary designations and make sure they are up to date and reflect your wishes.

Non Probate Does Not Mean Not Taxable

A common misconception is that non-probate assets do not count for estate tax purposes. This is an expensive mistake that you cannot fix after you are gone.

Your home, for example, will pass to the joint owner, but it's value is still counted in determining the value of your taxable estate. The same is true of life insurance and retirement and brokerage accounts. Just because the assets will pass automatically does not take them out of the estate tax calculation.

That means if you have $500,000 in retirement savings, a $250,000 life insurance policy, and $250,000 in equity in your home, you will have a taxable estate in Massachusetts. Even though not a single one of those assets will pass through the probate process.

How to Plan for Non Probate Assets

As we have said, paying attention periodically to your beneficiary designations is critical.

You should also consult an estate planning attorney to understand whether you have to plan for estate taxes. There are steps you can take, especially if you are a married couple, to shelter some or all of those assets from taxes.

Finally, if any of your contingent beneficiaries are children, you should consider establishing a trust to receive the assets. Otherwise, if they receive assets before they are adults, someone will still have to go to court to establish a legal vehicle to hold and manage money for them.

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