What assets are included in an estate? As an Estate Planning attorney, I am often asked if a particular is part of an Estate, from life insurance and real estate to employment contracts and Health Savings Accounts. The answer is explored in the aptly-titled article, “Will It (My Home, My Life Insurance, Etc.) Be in My Estate?” from Kiplinger.
When you die, the team Estate is defined differently for different planning purposes. You have a gross estate for federal estate taxes. That is very expansive and includes just about everything you have control over while alive.
However, there’s also the probate estate, which is controlled by a last will and testament and under the probate court’s supervision.
Let’s start with life insurance. You’ve purchased a policy for $500,000, with your son as the designated beneficiary. If you own the policy, the full $500,000 death benefit will be included in your gross estate for federal estate tax purposes. If your estate is big enough ($12.06 million in 2022), the full death benefit above the exemption is subject to a 40% federal estate tax.
However, if you want to know if the policy will be included in your probate estate, the answer is no, so long as the policy has valid beneficiaries. Life insurance policies are not subject to probate since the death benefit passes directly to the named beneficiaries.
Next, is the policy an estate asset available for heirs, creditors, taxing authorities, etc.? The answer is a little less clear. Since your son was named the designated beneficiary, your estate can’t use the proceeds to fulfill bequests made to others through your will. Even if you disowned your son since naming him on the policy and changed your will to pass your estate to other children, the life insurance policy is a contract. Therefore, the money is going to your son unless you change this while still living.
Another aspect of figuring out what’s included in your estate depends upon where you live. In community property states—Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin—assets are treated differently for estate tax purposes than in states with what’s known as “common law” for married couples. Also, in most states, real estate owned on a fee simple basis is simply transferred on death through the probate estate, while in other states, an alternative exists where a Transfer on Death (TOD) deed, or life estate deed can be used.
This legal jargon may be confusing, but it’s important to know, because if the property is in your probate estate, expenses may vary from 2% to 4%, versus assets outside of probate, which have no expenses.
Speak with an experienced estate planning attorney in your state of residence to know what assets are included in your federal estate, what is part of your probate estate, and what taxes will be levied on your estate from the state or federal governments. Also, don’t forget some states have inheritance taxes your heirs will need to pay.
For instance, in Maryland, a nephew would pay a 10% inheritance tax on an IRA or Certificate of Deposit but doesn’t need to pay tax on life insurance. If you have exempt and nonexempt beneficiaries, allocating the life insurance correctly or not, have a significant impact
Reference: Kiplinger (Dec. 13, 2021) “Will It (My Home, My Life Insurance, Etc.) Be in My Estate?”