Last time we were together, your Partner Beth Westfall talked to us about probate and non-probate assets, can you tell us what kind of planning we should do for non-probate assets?
Sure, as you recall, non-probate assets are assets that vest automatically upon the death of the owner. Under that category, one popular type of non-probate assets are assets where you can designate a beneficiary or beneficiaries. These are contracts with a company that upon your death, pay these specific people. Where it gets tricky is sometimes people die with a non-probate asset are there are either no beneficiaries listed, or no living beneficiaries. In that case, the asset actually becomes a probate asset and would be governed either by a Will, or by our intestacy laws.
So that is good, right?
Not always… especially when we are talking about tax deferred assets like IRAs, 401(k)s or 403(b)s…
Well, what is so special about those assets?
Those are assets where the owner has never paid income tax, so when the asset is passed on, the recipient becomes responsible to pay income tax on the entire account. If it is a probate estate that has to pay income taxes, the options for liquidating it are not as favorable, and in fact the income tax brackets for probate estates are such that you quickly move up the brackets and hit the top bracket (39.6%) with more than $12,500 in income. To give this context, individuals do not pay 39.6% in taxes until a little over $240,000 in income, and a little over $480,000 in income for married couples. From a tax perspective it is much better to pass pre-tax assets via beneficiary designation than to allow it to go into your probate estate. I recommend to clients that they not only put on primary beneficiaries, but also contingent beneficiaries on these assets.