Assets Passing by Operation of Contract

In an earlier post, we discussed why Avoiding Probate is an excellent idea.

We also discussed how certain Assets Not Subject to Probate can avoid the Probate process, in certain circumstances.

For those Estates that meet the requirements of the California Small Estate Affidavit procedure, they may be able to Avoid Probate for those qualifying assets.

The next category of Assets Not Subject to Probate are those Assets that Pass by Operation of Contract.

Generally speaking, if an asset has a Beneficiary Designation Form, it is likely that it will pass by Operation of Contract, instead of through Probate.

Here are some assets that may pass by Operation of Contract:

  • Life Insurance
  • Annuities
  • IRA’s
  • 401(k)’s
  • Other Retirement Plans
  • Any Financial Account with a Beneficiary Designation Form

For each of these assets, there exists a Contract between the issuing Company and the Owner or Beneficiary of the account.

The Beneficiary Designation Form is part of this Contract, which means the issuing Company agrees to pay the death benefit amount to the designated Beneficiary.

Since this contract exists to handle who gets the money when the original owner dies, the asset will ordinarily pass by Operation of Contract, and generally are not subject to Probate.

And Now for the Catch

Unfortunately, there is some misleading information out there that assets with Beneficiary Designation Forms are never subject to Probate.

Due to our extensive experience with Probate and Probate Litigation, we can tell you this is not always the case.

When might such an asset be subject to Probate?

  • If the Account Owner does not complete the designated beneficiary form
  • If the Designated Beneficiary predeceases the Account Owner, and no Contingent Beneficiary has been named
  • If the Designated Beneficiary survives the Account Owner, but there is still money in the account when the Designated Beneficiary dies [and no Contingent Beneficiary has been named]

In addition, if you want these assets to follow a distribution pattern that is more complicated than what is allowed on the form, you would be better off using a Living Trust to control the distribution, rather than relying on the form.

We invite you to Contact Our Firm to discuss your family’s estate planning needs.