Have you ever asked if you have an estate that you need to spend time and money planning for? If you have, the answer is easy. It is yes! Most people have at least two "estates"? One estate is normally a subset of the other.
To plan your estate effectively you must start by identifying the type of "estate" that you are dealing with. So what is your estate?
TAXABLE VS. PROBATE
An "estate" can be defined as your "taxable estate" or your "probate estate". Your taxable estate is all of the property that is required to be reported on your death tax return. Your death tax return must report all the assets in which you have an "incident of ownership."
Your probate estate consists only of assets that will pass according to your last will and testament, and are therefore subject to probate laws and procedures. If you don’t have a last will, then state law provides a default set of directions for distribution of your probate estate.
You will be taxed on what you fully control legally at your death. You can control assets that do not go through probate. If you get to determine who will receive something upon your death, it is generally included in your taxable estate.
Understanding legal title
Confusion between taxable and probate estates may come from the legal concept of title and how various title options affect the procedure for transferring assets upon your death.
You may hold legal title to (1) assets in your sole name, (2) own assets in joint tenancy with rights of survivorship, (3) own assets that pass to designated beneficiaries by contract, like life insurance or annuities, and (4) own assets in a trust under which you have retained certain rights. The different types of title impact the process of transferring those assets upon your death.
Two kinds of assets pass according to your will: assets that are owned in your sole name, and beneficiary or trust assets that have your "estate" (meaning probate estate) listed as the beneficiary upon your death. These assets will make up your probate estate.
Joint tenancy assets pass to the surviving owner or owners according to property law. Beneficiary assets like annuities, IRAs and pay-on-death investments pass to the named beneficiary according to contract law. Assets in trust pass to the remainder beneficiaries according to the trust agreement, based on contract law. These are part of your taxable estate, but generally will not require probate administration.
The most puzzling asset can often be life insurance. When you have individuals named as the beneficiaries and the beneficiary is not your estate. The death benefit won’t be part of your probate estate. But because you have the right to name the beneficiary, you have incidents of ownership...control over who will get the money. As a result, the death benefit will be part of your taxable estate, even though it will not be part of your probate estate.
When considering real property and other various titled assets, remember there is a significant difference between joint tenancy and tenants in common. Joint tenancy automatically passes to the surviving joint owners. It does not follow your last will, so it is not a part of your probate estate. Your tenant in common ownership interest will pass according to your will. The percentage you hold as a tenant in common is ownership in your sole name, and as a result it will be included in your probate estate. These assets, regardless of tenancy, will be included in your taxable estate.
Assets you own in trust, like a living trust or land trust, are within your control. They will be counted as part of your taxable estate, but they usually will not be included in your probate estate. Trust assets will pass according to the trust contract to the trust beneficiaries.
Coordination is critical
Failure to properly title your assets is a leading cause why many estate plans fail to accomplish their objectives. Generally speaking, if you use a will or a living trust for your estate plan, you need to title or name the beneficiary on assets strategically to assure that your planning objectives are accomplished.
If the titling of your assets is not properly implemented, your estate tax planning, asset protections for your spouse or other heirs, and your plans for how your farm or ranch will be divided among your children will be unlikely to produce the results you expect. The titling will override the instructions in your last will or your living trust, so they must be coordinated in order for your plan to work effectively
A critical part of making your estate plan work is the careful review of ALL asset titles, and the retitling of your entire taxable estate to make everything follow your plan.
A special thanks to Curt Ferguson for his contribution to this article. Dolan, an attorney, helps farm and ranch families achieve comprehensive estate, succession, and legacy planning objectives. Dolan is the principal of Dolan & Associates, P.C. in Brighton and Westminster, Colo. Learn more on his website: www.EstatePlansThatWork.com.