What is an estate?
An estate consists of all of the property a person owns or controls. The estate property may be in his or her sole name, held in a partnership, in a joint ownership arrangement, or through a trust. Estate property also includes all other monies that would be generated upon the person's death, such as through life insurance. An estate can be divided up into three categories: gross estate, residue estate and estate debt.
What Is Included in a Gross Estate?
The first category of items in your estate property is your gross estate. This is basically the larger items that determine your net worth. Real property is typically the largest bulk of wealth in your gross estate and includes houses, buildings, barns, and any other property that you own. Your gross estate also includes any businesses, investments or bank accounts you held, retirement accounts including pensions, and life insurance.
What Is Included in a Residue Estate?
The second category is residue estate, which consists of your personal estate property. Personal property includes things such as your car, furniture, clothes, jewelry, tools, and equipment, and anything else found in your home. This category also includes any withstanding payments or investments that were not mentioned specifically in your will or allocated in your trust. For example, if you sent out an invoice an hour before you died, the money from that invoice is part of your residue estate.
What Is Included in Estate Debt?
The final category, and the one many people don’t like to think about, is your estate debt. Estate debt includes all debts and obligations owed to others. The most common forms of estate debt are medical bills, student loans, credit cards, mortgages, and business invoices. Taxes owed or damages from lawsuits such as pain and suffering from an auto accident also qualify as estate debt.
What Is Excluded from an Estate?
An estate does not include assets a person has transferred to an irrevocable trust during his or her lifetime. If a trust is irrevocable, it means the assets can’t be taken back. Once the transfer is made, the person no longer owns or controls those assets, even if the trust continues to benefit that person. When a person dies, other property a person owned is no longer included in that person’s estate. Property that the deceased has placed in a revocable trust, such as a living trust, irrevocably belongs to the trust when the person who set up the trust (trustor) dies, and all the assets of the trust are no longer part of the decedent's estate (though they may be considered for tax purposes).
Other property is also excluded from the estate when the property passes directly to another on the former owner’s death. For example, insurance policies, pension funds, and U.S. savings bonds with named beneficiaries, property owned with a right of survivorship, and bank accounts that pass directly to a named party (also called pay-on-death accounts or Totten trusts) are not considered part of a decedent’s estate.
For questions about what property, assets, or debt is included in an estate, contact an experienced estate planning attorney.