FAQs

Your taxable estate is all of the property that would be reported on your estate tax return. This includes all assets in which you have what the tax law refers to as “incidents of ownership.” In general, it is everything that you can control at your death. That is, if you are the person that is able to determine who will inherit something upon your death, generally that item is counted as part of your taxable estate.
The amount of assets exempt from estate taxes is currently very high – more than $12,000,000 for each individual. In addition, the exemption amount is adjusted each year for inflation, and a surviving spouse can claim the unused exemption amount of the deceased spouse. This means that most people do not have estate tax concerns. However, even if you do not have an estate large enough to owe an estate tax, understanding what is included in your taxable estate is a good starting point for estate planning.
Your probate estate is a subset of your taxable estate. The probate estate consists only of assets that are subject to probate laws and procedures, and that pass according to your will (or, if you don’t have a will, by the intestate laws). Your probate estate is essentially all property that you own individually, and that does not have a beneficiary designation.

It’s easier to understand how to identify your probate estate if you understand what the probate court does. So…

A: To answer this question for yourself, think about the job of the probate court – appointing someone to stand in the shoes of the deceased to manage assets. If the deceased, while living, already appointed someone to handle or own an asset (by contract, for example), the probate court would not need to appoint someone to stand in the decedent’s shoes for that particular asset. The deceased had taken care of that asset’s succession during life. It is not part of the probate estate.¹

Some Examples:

 

1. Life insurance policies. If the deceased named a beneficiary on her life insurance policy, the life insurance company has already, by contract, agreed to pay the beneficiary the life insurance proceeds at the decedent’s death. The probate court does not need to be involved in this transfer. This asset is not part of the probate estate.
2. Other accounts with beneficiary designations. Many types of accounts have beneficiary designations, including IRAs, 40l(k)s and other work-related retirement accounts, investment accounts, even bank accounts (usually called pay-on-death by banks). If the account owner already named someone to be the beneficiary, the financial institution will turn over the account to the beneficiary after the death of the owner. No probate court involvement is necessary, so this asset is not part of the probate estate.
3. Joint accounts. If the deceased had an account that was owned jointly with another person(s), often, the surviving joint owner(s) will have full control of the asset after the death. The account would not be part of the probate estate.²
4. Trust assets. If the deceased had titled assets in the name of a trust, the trustee of the trust is already entitled to control those assets. The deceased may have been the trustee during life, but the trust document (a contract) will have named a successor trustee, who is now entitled to control the trust assets. The probate court doesn’t need to appoint anyone to manage the assets. It has already been done. The trust assets are not part of the probate estate.

¹Although none of the above examples are included in the probate estate, they are all (at least partially) included in the taxable estate. Remember, the taxable estate comprises everything in which you have an “incident of ownership.”
²There are different types of “joint” ownership. If you own an asset with others as tenants in common, at your death, your share of the property passes to your heirs, not to the other owners. Your interest as a tenant in common is ownership of your fraction in your sole name. Therefore, your fractional share is part of your probate estate.

A: As the examples above illustrate, it is essential that your assets be properly titled to work in conjunction with your estate planning goals. Otherwise, your plans can be frustrated. The examples below further illustrate:

Frustration Example #1:
Josephine, a single person without children, wanted her estate plan to be handled outside of the probate court process. Her attorney prepared a Revocable Living Trust (RLT) that contained her asset distribution wishes. The attorney also prepared a deed to transfer Josephine’s house into her RLT, and also wrote Josephine a letter telling her that she should transfer other assets into the RLT. Josephine did not have a clear idea how to do this, and forgot about it within a week of signing her trust documents. Needless to say, at Josephine’s death, the trust owned nothing but her house. Josephine’s “pour over” will directed the personal representative to pour Josephine’s other assets into the trust, but in order to do that, the personal representative must first be appointed by the probate court. Josephine’s goal of avoiding the probate process has been frustrated.
In addition, Josephine had jointly-owned assets, and assets with beneficiary designation that named an individual person as beneficiary. These assets can’t not flow into her trust, because they can’t be controlled by the personal representative. They are already controlled by the joint owner or the beneficiary. This isn’t what Josephine wanted. She wanted everything handled as set out in her trust document. By ignoring how her assets were titled. Josephine’s estate plan did not work as she intended.

Frustration example #2
Joseph was a widower who had an attorney prepare a will about 10 years before his death. He wanted his estate divided equally between his two adult children, a daughter and a son. Joseph thought his will would cover everything, and he frequently told his children that when he died, they would inherit his estate “50/50.” Not understanding what his will did not cover, Joseph did not pay attention to title and beneficiary designations. Joseph never got around to changing the beneficiary designation to the life insurance policy that he took out when he was first married, 59 years ago. His now-deceased wife was named as the primary beneficiary, and his daughter, who was then 3-years-old and his only child, was named as the sole contingent beneficiary. In addition, about 2 years before his death, Joseph’s younger sister, who lived nearby and helped him with his affairs, was added as a joint owner to his bank accounts, for convenience. At Joseph’s death, the life insurance proceeds went to his daughter. And the bank accounts were then owned by his sister. Joseph’s probate estate, i.e., the only thing governed by his will, consisted of his personal effects and a small investment account. One-half of that small probate estate is all that his son received. Joseph’s estate plan did not work at all as he had intended, because he did not pay attention to title, and did not keep his plan maintained.

A: There is no simple answer to this question, because each individual has different desires regarding the succession of his or her assets. Some considerations:

Will

 

• Administration of a will is overseen by the probate court. It is a more open, public, procedure. All legal heirs, whether they inherit under the will or not, will be sent a copy of the will, and will be kept informed of the probate process. Administration of a trust, on the other hand, is handled by the trustee. Only the beneficiaries of the trust will be informed of its administration.
• A will applies only to after-death situations. A trust applies during life, during disability, and after death. The trust-maker may die, but the trust lives on. The trust document that applied during life still applies. The successor trustee merely takes over for the initial trustee.
• A will makes all distributions outright. After the personal representative has appropriately performed all his or her duties, the probate court discharges the Personal Representative. There is no further supervision. The trustee of a trust, on the other hand, is discharged only under circumstances stated by the trust-maker in the trust document. The trustee can manage the trust assets, as dictated by the trust document, for years after the trust-maker’s death. Therefore, if the trust-maker wishes to leave assets to minors, to persons with a disability, or to a person that for any reason in not able to manage assets wisely, a trust is the proper estate planning tool. A trust can also be used to protect the assets from the beneficiary’s creditors. A trust-maker may also wish to use a trust simply to protect a financially-inexperienced beneficiary, or a financially-unwise beneficiary, from inheriting “too much, too soon.”

 

Trust

• A Trust is an essential estate planning tool if your beneficiaries are minor children
• A Trust is an essential estate planning tool if your beneficiary has special needs that will prevent her or him rom ever being able to manage financial assets without assistance.
• A Trust is an essential estate planning tool if you wish to protect the assets that a beneficiary will inherit from that beneficiary’s creditors, divorcing spouses, or from the beneficiary’s own bad financial tendencies.
• A trust is a proper estate planning tool if the estate is large enough to be subject to an estate tax.
• A trust is often the proper estate planning tool in non-married, domestic partnership families.
• A trust is often the proper estate planning tool in second marriage and blended family situations.

The decision about whether a will-based or trust-based estate plan is best for you should only be made after discussing your individual situation thoroughly with an estate planning attorney.