We recently got this question from a former client:
Would my bank accounts, Roths or IRAs, avoid probate and the $$ go straight to whoever my beneficiaries may be, or would that have to go to probate?
While we can’t provide specific legal advice based on a question like that, we can direct people to general information, like this section of Karen’s book, Your Legacy: Meaningful Estate Planning.
(a) Beneficiary assets
The probate process only applies to probate assets. To explain what a probate asset is, it helps to explain what is not a probate asset, and then to provide some examples. Non-probate assets include assets that transfer at death based on a beneficiary designation. Common examples of beneficiary-designated assets include life insurance, retirement plans, and some bank or brokerage accounts that are designated “payable on death” or “transfer on death.”
Colorado is one of several states that allows for beneficiary deeds. Through the use of this deed, the owner of real property can designate one or more beneficiaries who will own the property upon the death of the original owner. A beneficiary deed can make real property that would otherwise be a probate asset a beneficiary asset. However, beneficiary deeds have some disadvantages. Property that is subject to a beneficiary deed will become a countable resource for the purposes of Medicaid qualification, even if the asset would not otherwise have been countable. The beneficiary designation may also make the beneficiary listed on the deed ineligible for Medicaid or other government-financed medical assistance. Also, if the beneficiary deed names several beneficiaries, all of the beneficiaries have some control over the property, leaving no one clearly “in charge” as there would be if there were a trustee of a trust or personal representative under a will in control of the property.
(b) Assets that transfer by virtue of law
Other assets that bypass probate are those that transfer automatically by process of law, such as assets held in joint tenancy or community property. Joint tenancy property is property that is held by multiple parties and the title or ownership document of the property clearly states that it is joint tenancy property. Upon the death of a joint tenant, ownership of the property automatically passes to the surviving joint tenant(s), and no probate is needed.
Community property is a form of property ownership between spouses only. Colorado is not a community property state, but Colorado law does recognize the community property status of property that was treated as community property in another state. Colorado law also recognizes the community property status of property that is acquired in Colorado with the direct proceeds of community property. Like joint tenancy, community property passes automatically to the survivor upon the death of the one of the owners. There are tax implications to community property that should also be considered, so it is important to make your estate planning team aware of any community property you might have.
If an asset is held by more than one person and it is not specified as joint tenancy property, and it does not qualify as community property, then Colorado law will treat it as tenancy in common. Tenancy in common means that each owner owns his or her specified share of the property as a probate asset.
(c) Assets in Trust
Assets held in trust are also not probate assets. This means that if someone was the grantor or beneficiary of a trust, upon that person’s death the property in the trust will transfer according to the terms of the trust without going through the probate process. This is one of the benefits of using a properly funded living trust in your estate plan.
When we take away the non-probate assets that are beneficiary-designated assets, joint tenancy or community property assets, and trust assets, that leaves three types of assets as probate property: (1) assets owned in your own name only; (2) assets owned by you as a tenant in common; and (3) assets that would normally pass by beneficiary designation where there is no beneficiary to receive the assets-these assets then are payable to the probate estate and are governed by the rules of the decedent’s will or the laws of intestacy.