Do You Know the Difference Between Your Probate Estate and Your Taxable Estate?

Do you know the difference between your probate estate and your taxable estate? Knowing how they are different and how to use those differences to your advantage is a critical component to your estate planning

In this article we will explore those differences and why it matters to you and your family. First, two examples of the consequences of the differences.

1. Did you know that you could have a probate estate that did not generate any estate taxes? It's true.

2. Did you know that you could have a taxable estate worth millions but your probate estate was worth $0? That's possible too.

Both of these examples are possible because of the differences between the probate estate and taxable estate.

Second, what is an estate. In general terms, your estate is what you pass on when you die. But that is a huge over-simplification that ignores the differences we are discussing here.

Third, what is probate? Probate is the legal system in each state of transferring title from a deceased person's name into the names of the appropriate beneficiaries. Keep the idea in mind of the name on the title of something as you read on.

What is your probate estate?

Your probate estate is determined by how you OWN what you own. In other words, the probate estate is all about ownership which is all about titling.

Titling is how you own what you own. There are several ways you can own something and which way determines your probate estate. Here they are:

1. Title is in your name alone, with no named beneficiary.

Think of a bank account that is just in your name, that is an example of this first category.

2. The title is in your name along with another person as tenants in common.

Think of two sisters who own a house as tenants in common. (Note, this is not joint tenancy which is discussed below).

3. The title is in your name alone, but you have named someone as the beneficiary.

For this third category, think of a life insurance policy where you have named a beneficiary.

4. The title is in your name along with another person as joint tenants with rights of survivorship.

Here think of spouses who own their residence together as joint tenants. This form of ownership has the unfortunate illusion of seeming like a good idea. It's not, but that is the subject of a different article.

5. The title is owned by another entity like a trust that you established.

For this fifth category, think of someone who has placed real estate into a trust which they created.

The benefits and faults of each of these five forms of ownership is not discussed here, I will write about that another time. So go back and read again each of these five forms of ownership.

Categories 1 and 2 are in your probate estate. Categories 3-5 are not in your probate estate. Categories 3-5 are also known as probate free transfer devices. Again, we are not discussing which of these is better, just how it affects your probate vs. taxable estate.

What is your taxable estate? Your taxable estate is about what you own, direct and control even if you don't own the title to the asset.

Think of the five categories all added together. Then add all things that you get benefits from, direct or control. Even some gifts that you made in the past are included. The total of all of that is your taxable estate.

When you examine these differences it is possible to see how you can have a non-taxable estate that is entirely subject to probate; or a huge taxable estate that is entirely probate exempt.

In estate planning, you will need to be aware of these differences, now they affect your property and family and plan accordingly. Your estate plan, when thought through, will probably end up being some combination of all the forms of title we examined above.

How can you know the best way to proceed. Schedule a visit with your expert estate planning attorney before making any moves.

Bernie Greenberg

Note that federal tax law requires that we notify you that you cannot use this article or any portion thereof in any manner to attempt to evade federal taxes or penalties.