What's the Difference Between My Estate and My Probate Estate?

Q: Is there a difference between my estate and my 'probate estate'? -- AF, via email

A: You bet there is! 

Your estate is everything you own when you die -- and I mean everything. That includes your tax-exempt bonds, your stamp collection, and every asset that you transferred into your revocable trust. You still control all the assets in that trust. If you control it, you own it.

Depending on its total value, your estate may be subject to a state and a federal estate tax. If you die in 2009, federal estate tax applies to any assets you owned above $3.5 million. (If you die in 2010, there's no federal estate tax unless and until Congress passes a new estate tax law; the old one expires at the end of 2009.) 

But your probate estate may be only a fraction of your total estate, because it only includes assets that are going to pass to other people through your will. Probate is the legal process in which a court accepts your will as valid.

Your probate estate doesn't include your financial accounts with named beneficiaries, such as Individual Retirement Accounts, 401(k), 403(b), 457 or Keogh plans, or your life insurance policies, annuities, and ITF bank accounts (accounts that are `in trust for' a named individual).

Those assets are all governed by the appropriate beneficiary designation forms, not by your will.

Nor does your probate estate include any assets that are owned jointly with right of survivorship -- like your house -- because those assets automatically pass to the surviving joint owner when you die.

Let's take that lucky hypothetical couple, Joe and Jane Smith as an example.

Joe and Jane jointly own a $750,000 house. In addition to his half of the house, Joe has $2 million in IRAs and 401(k) accounts, and a $1 million life insurance policy. All of them name Jane as the beneficiary. And he has a $75,000 bank account `in trust' for Jane.

The couple has a $400,000 vacation house, which is solely in Joe's name. And Joe also owns a $55,000 brokerage account solely in his name.

Joe's total estate is worth $3.905 million. (If he dies in 2009, only $405,000 of his estate is subject to federal estate tax, since the federal estate tax exemption is worth $3.5 million in 2009. If they live in New York state, everything above $1 million is subject to state estate tax.)

But Joe's probate estate is worth only $455,000, because it doesn't include the $3 million in retirement accounts and life insurance, or his $375,000 share of their primary residence, or the $75,000 `ITF' bank account.

Many people have virtually no probate estate. If almost everything you own is jointly-held or in accounts with designated beneficiaries, and you live in a state where the probate process is relatively quick and inexpensive there's no reason to spend money on an estate plan that helps you avoid probate.

Please send your questions to Lynn@LynnBrennersFamilyFinance.com.  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved