Your Probated Estate versus Federal Estate – What’s the Difference?
by Shane Flait ©2011 

One of the concerns that estate planning addresses is the problem of probate. This is your state’s legal process of settling a decedent's affairs supervised by your local probate court in your county. It’s a public, time-consuming, and often costly process.

You can avoid it if you wish, but it’s important to understand that the estate that’s probated is different from the estate you pay estate taxes on when you die. That’s what this article is about.

Your Estate for federal tax purposes

Your estate for federal tax purposes - that’ll be taxed at your death - is different from your probate estate. The federal estate is the total value of all you own, have a right to, or control when you die. This includes your home, life insurance you either own or control, your retirement plans such as your IRA, your car and all your investment holdings. It doesn’t matter whether any asset is subject to federal income tax or not. And it doesn’t matter whether or not the asset will automatically go to a designated beneficiary at your death – like an IRA.

This also includes all assets you co-own with other people. The value of a co-owned asset that adds to your estate depends on who the co-owner is, what kind of co-ownership it is, and certain other factors about how you contributed to it.

Lastly, any value some one owes you ­such as wages, debt, or bond interest, at the time of your death are also included in your estate.   

This estate can be quite sizeable and is subject to federal estate taxes and your state’s estate tax too. Of course each has its own tax exclusion or threshold level and tax rates.

Your Probate Estate

Your probate estate consists of only assets held in your own name alone and that won’t pass automatically to a named beneficiary when you die. You can see, the issue of the probate court is determining who should get your assets that only you own and have not automatic way of passing to another person.

So assets that typically bypass the probate estate (i.e. don’t get probated) include:

• IRAs and qualified retirement plan benefits with a named beneficiary
• Life insurance that pass to a named beneficiary, but not insurance left to the owner’s estate
• Annuities with a named beneficiary
• Property owned by joint tenants or tenants by the entirety with rights of survivorship, and
• Living trusts that hold title to assets and that pass to named beneficiaries

You can see that this estate for probate can be quite a bit smaller than your estate for federal estate tax purposes.

And you can see that if you have some assets in your name only and don’t automatically go to some beneficiary other than you, you can easily arrange to eliminate them as probate assets by transferring them to a living trust. That simply means entitling your assets in the name you give to the living trust. The living trust is a revocable trust so you can dissolve if you want to at any later time.

Because you still control the assets in your living trust, they remain part of your federal estate but no longer your probate estate. So if you don’t like the probate process, you can easily exclude it from a possibility

 

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Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com