Will My Retirement Accounts Go Through Probate?

Aug 10, 2022

They can – unless you designate your beneficiaries properly…

Probate is a legal process that provides for a court to review and validate someone’s will. During the probate process, a deceased individual’s assets are first inventoried, and their heirs are determined – all before any purchases distribute to beneficiaries. Although probate isn’t always necessary, it does become a requirement if someone dies owning assets that are either not in a trust or do not have proper beneficiary schedules attached to retirement accounts.

Probate can be a lengthy and costly process. It requires the filing with the court of your will and various other papers (petition, inventory, bond, military affidavit, etc.), usually with the assistance of a lawyer.

Some assets must be processed through the probate process, while others may not. How you handled your retirement assets when you were alive will depend on whether or not they go through probate.

Remember:

Probate is a legal court process that assesses the validity and authenticity of a deceased person’s will. Assets will not distribute after your lawyer or spouse’s death. And probate rarely happens rapidly; it often occurs at a frustrating crawl.
Once the court verifies the will, your Personal Representative (previously Executor) can access your assets. The court-appointed Personal Representative is provided a “Letter of Authority” by the court, and only with that letter does the Personal Representative have the ability to access the deceased’s person’s assets. Getting a “Letter of Authority” from the court can take many months.

How to Protect Retirement Accounts From Probate

When a person dies, most of the deceased person’s assets are frozen until the court validates the will, the person’s debts are paid, and the beneficiaries are verified.

You can protect your retirement accounts from the probate process by designating your beneficiaries properly.

If someone dies and the person included on the Beneficiary Schedule of an asset is not alive, that retirement account will go through probate. Consequently, you must complete a Beneficiary Schedule that goes further than just your spouse or just one other individual (in case that person should predecease you).

What About Interstate Accounts?

In some states (usually “community property” states), your retirement accounts may have to go through probate. This is if you don’t name your spouse or your estate as the beneficiary. Although Massachusetts is not a community property state, spouses here are entitled to a specific portion of the deceased spouse’s estate. A lengthy suit by a spouse could long delay the distribution of your assets to your intended beneficiaries. And in all states, a married person must name their spouse as a beneficiary unless that spouse signs a special waiver.

The financial institutions where retirement accounts exist (often called the “custodian”) are obligated to turn over assets to the named beneficiary–not to a Personal Representative or anyone else upon the owner’s death.

The contract between the owner/account holder and the custodian effectively takes the place of the will for those assets. And creditors cannot get their hands on funds from these accounts as long as they do not flow through the probate process.

What if you name your “estate” as the beneficiary instead of a person or persons? Probate will need to be “opened” at the court for that retirement account. Creditors will then have access to make their claims. So there is no clear-cut benefit to doing this.

Suppose you name your children as beneficiaries, and any one of them is a minor. In this case, a probate court will need to appoint a “conservator” to manage that retirement account’s assets. This action is on behalf of the child until the child reaches legal adulthood. You can designate someone to collect the money from a retirement account on behalf of a minor, but the process of having a “conservator” named and authorized is lengthy and costly.

Keep Your Beneficiary Schedules Up To Date!

If your beneficiary dies, retirement assets will have to pass through probate before your death, even if that beneficiary is considered underage or incapacitated before your end.

Therefore, beneficiary schedules need regular review! Don’t be lulled into believing that because you signed a beneficiary schedule ten years ago, when you set up your retirement account, all will be well!

Although retirement accounts can smoothly and painlessly pass to beneficiaries in the usual events, that “usual course” is not guaranteed. Review each schedule at least once every year or at least when significant life changes occur.