An estate consists of all of the property that a person leaves behind when she passes away. When it comes time to address the tax and legal issues related to distributing the assets, both the gross estate and the probate estate totals are calculated for tax and distribution purposes.
The Gross Estate
The gross estate is the total fair market value of the assets a decedent owned at the time of death before making allowances for any adjustments or the payment of debts and taxes. This amount is important because it becomes the basis for determining estate taxes. Examples of assets included in the gross estate are:
- Cash and personal property
- Securities
- Real estate
- Trusts and retirement accounts
- Life insurance
- Business interests owned by the decedent
- Taxable death benefits from pensions and annuities
The amount of the taxable estate is calculated by subtracting deductible items like debts owed by the deceased, charitable donations and the estate's administrative costs. Federal estate taxes apply if the taxable estate exceeds $11.4 million, as of 2019. Some states levy estate taxes as well.
The Probate Estate
Probate is the legal process through which a probate court validates a will and appoints an executor to administer the estate. If a person dies without a will, the probate court relies on state laws of intestate succession to decide who inherits assets. The probate estate may include any or all of the assets of the gross estate. However, if the person who died made arrangements for assets to pass directly to a beneficiary without going through the probate process, these items are not counted as part of the probate estate.
Assets Excluded from Probate
Probate can be a long process. However, with some estate planning, an individual can speed things up by arranging for estate assets to go directly to designated beneficiaries without the need for probate. Here are examples of ways in which property of various kinds can pass directly to beneficiaries:
- Bank accounts and life insurance. Funds in the account are paid upon death to a named beneficiary.
- Securities accounts. Assets transfer to a beneficiary when the owner dies.
- Retirement accounts. Ownership transfers to the beneficiary.
- Joint accounts with right of survivorship. When someone dies, the surviving co-owner becomes sole owner of the assets of an account, business or real estate property.
- Revocable living trust. A person transfers ownership of assets ranging from securities to real estate to jewelry. The trust becomes the owner of the property placed within it. The individual keeps control of the assets and may continue to use them until his death. Ownership then passes directly to the beneficiary.