Fifty years ago, most assets passed from an individual who died to his or her family by way of Probate (by Will or Intestacy both of which require Probate). Probate is a strict, expensive and time-consuming Court process that must be completed before assets can ultimately being transferred to family members.
But today, we own assets differently than we did fifty years ago. Most of us have bank accounts, retirement accounts, life insurance, and perhaps Living Trusts. These four types of assets (or financial vehicles) constitute the core of the so-called “Nonprobate Transfers” or “Will Substitutes”, meaning each of these assets pass outside Probate if properly designated.
California law expressly allows these Nonprobate Transfer assets to pass outside the probate process, even though these assets do not comply with the formal requirements for execution of a Will (read more about the Formalities and Intentionalities of Will creation.) Accordingly, individuals can rely on beneficiary designation forms that identify who gets his or her bank accounts, life insurance, and retirement accounts at his or her death without regard to what a Will states. As a result, with proper planning, an individual’s entire estate can pass at death to his or her family members outside of the Probate system. In fact, this is one of the primary reasons why estate planners created Revocable Trust—to avoid Probate altogether.
Let’s take an example, Stewart owns the following assets:
- a home worth $400,000;
- a rental property worth $350,000;
- two bank accounts totaling $60,000;
- a retirement account totaling $500,000; and
- life insurance with a death benefit of $1 million.
Stewart’s total estate is worth $2,310,000. If Stewart’s estate passes by a Will or Intestacy, it must go through the Probate system. The attorney’s fees on this size of an estate would result in fees of approximately $40,000 (read more on how Probate fees are calculated.)
On the other hand, Stewart’s entire estate could pass by way of Nonprobate Transfers (also known as Will Substitutes), as follows:
- Stewart’s (i) home and (ii) rental property are owned by his Living Trust, which designates the beneficiaries of his home and rental property.
- Stewart’s (i) bank accounts, (ii) retirement account, and (iii) life insurance have “beneficiary designation” cards filled out designating who gets these assets on Stewart’s death.
Now Stewart’s entire estate passes outside of the Probate Court process.
Ultimately, these types of Nonprobate Transfers (or Will Substitutes) function as a private system of transferring assets at death—usually requiring less time, fewer rules, and a lower cost than Probate requires.