How Do Annuities Avoid Probate?

By Lee Roberts

Annuities are investment vehicles offered by insurance companies. With annuities, you can provide income for yourself during your retirement as well as for a beneficiary after your death. The typical annuity account will not go to probate because it has a named beneficiary. Assets with a named beneficiary, such as annuities and life insurance policies, typically bypass probate. The beneficiary receives the asset directly.

Beneficiary

When you set up an annuity, you typically designate a person to serve as the beneficiary of the account. In the event of your death, the beneficiary will receive the remaining value of the account. The type and amount of funds will vary according to the type of annuity. To avoid probate, the beneficiary must be alive at the time of your death. If your beneficiary dies before you, you must name another beneficiary in order for the annuity to avoid probate.

Death During Accumulation Period

Annuities typically have an accumulation period during which you add funds to the annuity. For example, during your working years you might direct a certain amount each month to your annuity. If you die during the accumulation period, the annuity guarantees to pay a certain sum directly to the designated beneficiary, bypassing probate.

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Death During Payout Period

Annuities have a period where the investor receives a lump sum or scheduled payments from the insurance company -- often you might choose payments to begin once you retire. If you die during the payout period, the insurance company will pay the your designated beneficiary. Depending on the terms of your annuity, the beneficiary may receive a limited number of payments or payments for his lifetime, but either way, this asset bypasses probate.

Method to Designate the Beneficiary

The specific method of naming a beneficiary depends on the forms provided by the company selling the annuity. It's typically as simple as writing the name of your beneficiary on the forms in a designated place. If there is any problem with the paperwork, and you have managed not to name a beneficiary -- a very unlikely occurrence -- the annuity will go to probate.

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Items That Are Not Part of a Probate Estate in Pennsylvania
 

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Can I Put Jointly Held Property in a Living Trust?

Generally, you place assets into a living trust for your management, use and benefit during your lifetime, with those assets passing to beneficiaries after your death, without going through the probate process. These assets are titled in the name of the trust, typically with you as the trustee. While you might put jointly-held property into a living trust for a variety of reasons, the overriding purpose should not be to avoid probate, since jointly held property normally passes directly to the joint owner at death without going through probate.

What Is the Difference Between a Living Trust and an Estate Account?

Living trusts and estate accounts are entirely different entities. The former is an estate-planning tool that allows a person to control assets placed in the trust during his lifetime and simplifies distribution to beneficiaries after death. The latter is an account opened by the executor of an estate after probate has been commenced to pay the estate's taxes, debts and any other necessary distributions out of estate assets.

Can an Estate Be a Named Beneficiary?

You can opt to have your estate receive an account that requires a beneficiary designation. A beneficiary designation simply means that you provide written instructions to the account administrator as to who will get the money from that asset when you die. The kinds of accounts that usually require beneficiary designations are life insurance policies, IRAs, pensions and other retirement accounts. A variety of beneficiaries exist that you can name: an individual, charity, trust or your estate. If the estate is the named beneficiary, the asset must go through the probate process. If the beneficiary is an individual, charity or trust, the funds are typically released directly to the named beneficiary and do not pass through probate.

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