Gross Taxable Estate Versus Probate Estate

A. Taxable Estate

 

1. The gross estate includes the value of all property owned at death, plus certain other assets over which the decedent had control. The gross estate can include other assets based on rules which bring previously owned assets back into the estate.

1. For example, certain transfers within three years of death are brought back into the estate for estate tax purposes.
    
2. Life insurance is included in the gross estate, even if the proceeds go directly to someone other than the decedent's estate, so long as the decedent had incidents of ownership over the policy.

B. Probate Estate

1. All of the property of the decedent for whom a fiduciary is appointed as originally constituted, and as from time to time exists during administration.
    

1. Specifically, the probate estate is comprised of all assets that pass either by intestacy or the decedent's Last Will and Testament, and do not pass by any other means. For example, if a husband and wife own their personal residence as tenants by the entirety, and although unlikely, this is the only asset which either owns, upon the first spouse's death, the deceased spouse will have no probate estate. This is because the house will pass outside of the probate estate and by operation of law to the surviving spouse based on the joint ownership.

 

C. Why Is It Important To Understand The Difference Between Estate Assets and Probate Assets?

1. Many living trusts are marketed as saving individuals estate taxes. While a living trust may avoid probate (although not necessarily), a living trust has no effect on an individual's estate taxes. This is because a living trust is generally revocable until the grantor's (also beneficiary's) death. As such, all assets contained in the living trust will be includable in the grantor's gross estate for estate tax purposes.
    
2. Assets such as life insurance, retirement assets or assets held jointly or in trust for another individual will not generally pass through the probate estate. They will be unaffected by the Last Will and Testament.
    

1. Mary has three children: Kevin, Susan and Marcia. Marcia lives with Mary and takes care of Mary. For Mary's convenience, Marcia has been placed on all of Mary's bank accounts such that all of Mary's bank accounts are now joint bank accounts. Mary has approximately $50,000 in her bank accounts. Mary also has a personal residence which she owns individually. Mary's Last Will and Testament provides that her estate is to be divided equally among all three children and Mary's intent is that all three children receive the same amount from her estate. Upon Mary's death, the $50,000 in the joint bank accounts will pass to Marcia outside of the probate estate such that this transfer to Marcia will be unaffected by Mary's Last Will and Testament which expresses her desire that all three children receive the same amount. The children will, however, divide the proceeds from the sale of the personal residence. While Kevin and Susan will receive some portion of their Mother's estate, they will not receive the portion that Mary intended each to receive.

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