How Assets Pass to Heirs

People often have misconceptions about how assets pass after death. Some even believe that if they do not transfer property they own to their children, it will go to the state. There are many instances where misinformed individuals engage in transactions that lead to unintended results and unnecessary tax liability. Understanding how assets pass after death is essential for putting together a sound estate plan. In doing so, it is particularly important to distinguish a probate asset from a non-probate asset, because that determines to whom the asset passes and how quickly it passes.

Probate assets consist of property that was owned by the decedent solely in his or her name. They may include cars, boats, stocks, bank and investments accounts, business interests, and any interest in real property owned by the decedent.

Probate assets are so called because they pass under the decedent’s will as a part of probate. Probate is a process through which a court oversees the transfer of decedent’s assets to his or her heirs, in accordance with the will. Probate assets are also those assets that pass under intestacy (i.e. under a “statutory will” created by New York law for people who died without leaving a will.) See What if Someone Dies without a Will? In essence, probate assets are those assets that cannot be inherited without going through the court proceedings. This means that it could take weeks, months, and in some cases even years, before the title of the probate asset passes to the new owner.

In contrast, non-probate assets are assets that were owned by the decedent, but do not become a part of the court-supervised process, because they immediately pass to designated persons by operation of law.

The following are some types of non-probate assets:

1. Joint Assets with Right of Survivorship

These include joint bank accounts, joint investment accounts, and jointly owned real property (typically property purchased by a married couple). Upon death of one of the joint owners, that owner’s interest in the asset passes to the surviving owners.

2. Assets with Designated Beneficiaries.

Life insurance policies, retirement accounts, and annuities always provide for a designation of beneficiaries. Designations of beneficiaries can also be used for bank and investment accounts. These accounts pass to a named beneficiary upon death.

3. Assets Transferred to a Revocable Trust

Once an individual-owned asset is re-titled to a revocable trust, the trust becomes that asset’s new legal owner. The trust authorizes a trustee (who is, in most cases, the individual who transferred the asset) to manage the trust’s property. It also provides for distribution of property after death by a successor trustee, therefore avoiding the court’s involvement.

4. Life Estate

A life estate is a type of ownership that is limited in duration to the life of the owner. For instance, it could be the right to own and enjoy real property without paying any rent. Upon death, the ownership of the asset terminates and the asset does not become a part of the decedent’s estate. It typically reverts to the original owner’s estate, or passes to a person designated by the original owner.