There are three ways to legally distribute property after death:
- Operation of law assets
- Probate assets
- Assets that pass by statute
Operation of law assets
Operation of law assets are assets that pass from one person to another after death without needing to go through the probate process. We already know who the beneficiary is because the beneficiary is named on the instrument or on the account itself. Therefore, all you need to do to effectuate the transfer of the asset is to provide a death certificate to the entity managing the account.
Examples of operation of law assets include joint accounts and jointly held real estate, retirement plans, life insurance, transfer on death (TOD) accounts, and revocable living trusts.
Probate assets are assets for which the beneficiary cannot be identified on a standalone basis. As a result, we have to review the will to determine who receives the assets. The last will document and all the assets that pass through it, intentionally or unintentionally, are made public record as part of the probate process.
Examples of probate assets include real estate, checking or savings accounts without a transfer on death or payable on death record, as well as motor vehicles and other personal property that are not funded into a trust.
Assets that pass by statute
Assets that pass by statute are the top of the pyramid. They are not a class of assets in and of themselves, but rather legal “defaults” that can override operation of law and probate asset distributions or act as a substitute in the event that the deceased individual did not create an estate plan and died intestate.
In addition to intestacy provisions, examples of ways assets may pass by statute are through a spousal elective share, community property rights, and certain family rights.
Why is it important to distinguish between operation of law and probate assets when creating your estate plan?
Operation of law assets are highly efficient and effective transfer mechanisms that work outside of the court probate process. Probate assets, by contrast, can still be passed to another individual after death, but must go through the court probate process to do so.
Never include operation of law assets in your last will and testament. If you do, you’re taking an asset that could have transferred really easily and requiring it to go through a potentially onerous, expensive, and imperfect probate process. Second, including operation of law assets in your last will could lead to disputes and conflict when the beneficiaries designated on the asset do not match the beneficiaries in the will.
Failing to designate beneficiaries for your operation of law assets is an equal blunder. You lose what could have otherwise been a relatively straightforward, quick distribution in exchange for one bogged down by the additional time and expense of the probate process.
The difference in efficiency between operation of law assets and probate assets is one of the primary benefits of creating a revocable living trust. With a revocable living trust, you can convert a probate asset into an operation of law asset by funding the trust and re-titling the asset in the name of your trust. A real estate property owned by "Jane Doe" becomes a property owned by "The Jane Doe Revocable Living Trust, dated January 1, 2020." Jane names the beneficiary of the real estate property in her revocable trust, and so if she passes away there is no uncertainty regarding who receives the property and it never enters the probate process.
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The revocable living trust is the Tesla of estate plans. It's highly efficient, looks great, and all your friends will be impressed when you tell them you have one.