Preparing for Your Loved Ones - What is an Estate?
As simple as this question appears, and as intuitive as your answer may be, take heed - because "estate" means different things to different controlling entities. Take for example, Probate Estate, Trust Estate, and Estate for Federal Estate Tax purposes, to name just a few.
Most of you know that in a probate situation, your assets are:
(a) those that do not pass to another individual by contract (i.e., life insurance, IRA, pension, annuities, POD - Payable on Death accounts for bank accounts and securities);
(b) those that do not pass to another individual by operation of law (i.e., real property titled as joint tenancy, or community property with right of survivorship).
All other assets would technically be in the "probate estate." Further, as for real property, the full fair market value is included regardless of how encumbered the property is (i.e., a $500,000 home with a $400,000 mortgage is counted at $500,000, not $100,000, for "probate" purposes). Your probate fees and costs are based on the total value of your assets. The total of these assets constitutes your probate estate.
Revocable living trusts are in vogue in California, primarily because they're a cost-effective vehicle to eliminate the time, cost and publicity of a probate. However, the Trust must have assets in it to be effective. I have seen many beautifully crafted trusts with zero assets. The placing of the assets in the Trust is called funding. For instance, have you refinanced lately? Most lending companies require that you take your real property out of the trust. Then, through inadvertence, it may not get placed back in the trust. The consequence is that the property will go through probate, or at best a special hearing will be required. In either case, it defeats the purpose of having a trust.
Assets should be titled in the name of the trustee of the trust with the bank or county recorders office, as well as listed in a schedule attached to the trust. This double-entry provides corroborating evidence that the asset is indeed in the trust, and minimizes challenges. The total identified assets constitute your trust estate.
"Estate tax" is an excise tax for your right to pass your own money on to someone else. I call it the Robin Hood tax. It is as high as 50% of what is over the federal exclusion amount (currently $1,000,000). This "Estate" has nothing to do with the other two, above.
Now, there is good news and bad news. The good news is if you have real property heavily encumbered, only the equity is included in this estate -- not your fair market value as it was for probates. The bad news: All those assets that passed by contract or operation of law, not counted in your probate, are part of this estate! Many families with substantial life insurance may be over the million dollar mark and subject to Estate Tax and not realize it!
So, an estate means different things to different people. What are your estates worth? See The Law Offices of Dominic E. Rainone to help you protect what you've earned.
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