Probate and Nonprobate Property
An understanding of the wills, trusts, and probate specialty begins with an understanding of property rights. The disposition of property after death is the primary concern of this field of the law. There are two types of property interests: real and personal. The disposition of the decedent's property interests depends on the nature of the ownership interest in the property.
Types of Property
Real property is property that is fixed, immovable, and permanent. It commonly refers to land, but also includes structures (buildings) on the land. Real-property ownership rights are not limited to the surface of the land. The owner of real property owns the area below the ground, as in the case of mineral rights. The owner of real property also owns the space above the ground, as in the case of rights of air space.
Personal property is movable property, or everything that is not real property. Personal property can be tangible or intangible.
Tangible property has a physical existence. Sometimes we determine ownership of personal property by a document of title, as in the case of a car or boat. More often, mere possession is the only evidence of ownership, as in the case of a watch, a computer, or a washing machine.Intangible personal property does not have physical existence. Sometimes the property has no value in itself but simply represents the right to receive something of value. We usually use documents to establish these kinds of property rights. Common examples of intangible personal property include bank accounts, stocks, bonds, annuities, pension plans, accounts receivable, ownership interests in partnerships, and legal claims against others.
Fact
All kinds of property — real and personal, tangible and intangible — must be distributed after the death of the owner. The fundamental concept of inheritance law is that all property owned by the decedent must be passed to a subsequent owner. If the decedent does not express intentions about the disposition of property, the law will operate to determine ownership.
Types of Ownership Interests
Knowing what kind of property the client owns — real property, tangible personal property, or intangible personal property — is only part of the will equation. The legal practitioner also needs to know the nature of the client's interest in the property.
Classification of the client's interest in the property as a probate asset or a nonprobate asset affects the disposition of the property after death.
Whether an asset is classified as probate or nonprobate depends on the nature of the decedent's ownership interest. Probate assets include property owned as separate property and property owned as community property. Examples of nonprobate property include property owned in joint tenancy, life estates, and designation interests.
ssential
A nonprobate asset is an ownership interest in property that can automatically pass to another person on the client's death. There is no requirement of a court order transferring the ownership interest. A probate asset is an ownership interest that does not automatically pass to another person on the client's death. The transfer of ownership interest requires a court order.
Ownership as Separate Property
When one person possesses the entire ownership interest, he owns the property as separate property. The owner has the right to possess, to occupy, to control, and to manage the property. Because no other person possesses any ownership interest in the property, the disposition of the property requires probate.
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An undivided share is not the same as an equal share. Tenants in common can own undivided shares in any ratio imaginable. Whatever the ratio, the shares are undivided when no other person has an interest in that share.
Community property is a form of property ownership. The community property system applies only to property acquired during a marriage. Other forms of ownership are available to unmarried property owners. In general, community property is a probate asset because the community-property system does not provide for rights of survivorship. Some states, however, allow the equivalent of joint tenancy for community property and treat community property as a nonprobate asset.
Joint Tenancy
The form of property ownership known as
Life Estates/Remainder Interests
A life estate is a commonly used estate-planning tool. It divides the ownership interest between the present interest (the life estate) and the future interest (the remainder). Although the life estate can take many forms, the form most frequently encountered is, “To A for life, then to B.” Life estates are nonprobate assets. Because the ownership interest transfers automatically after death, there is no need for a court order. The life estate can be an effective estate-planning tool if the estate is small and the real property is the only asset. To avoid disputes, there should also be a small number of heirs. There are tax advantages to using life estates in some circumstances.
Designation Assets
There are certain kinds of property where the client has no possessory interest at all, but only the right to a future benefit. If the benefit is vested (guaranteed), the client also has the right to designate a beneficiary. Common types of designation assets include life insurance policies, qualified benefit plans, IRAs, 401ks, and similar financial devices.
The designation of the beneficiary determines whether the designation asset is a probate or nonprobate asset. The client who specifies her spouse as beneficiary creates a nonprobate asset. If the spouse predeceases the client, however, probate issues arise. Often the secondary beneficiary is the client's estate. Most designation assets are probated if there is no identifiable, living beneficiary.
