PROBATE ESTATE AND TAXABLE ESTATE:
An Explanation of Each

  1. Probate Estate

    1. Probate refers to those assets of a decedent which do not pass directly to a beneficiary by operation of law. Operation of law typically includes assets originally held in a revocable trust, assets owned jointly with one or more other persons with the right of survivorship, or assets held by a wife and husband as tenants in the entirety.

    2. Assets passed along by operation of law do not need to be presented to court and no court approval is necessary for ownership to be transferred - hence, it is very private. Such jointly held assets instantly become the property of the survivor who has immediate full control over them. Trust held assets can be transferred as soon as the Trustee is able to do so, which usually is quite quick - and is also private because no court disclosure is needed.

    3. Probate assets are generally those held in the decedent's name only, along with joint assets held as tenants-in-common (as opposed to right-of-survivorship explained above). If a person dies without leaving a will, probate assets will be distributed according to the laws of the state (or other jurisdiction). This is known as intestacy, and such a person is said to have passed away intestate. Here, the Probate Court would appoint the administrator of the estate.

    4. If a person leaves a will, then the terms and directions centered in that will govern the distribution of assets unless some term is in conflict with a law. The executor presents the will to the Probate Court, receives authorization to act (unless the Court can show the executor is ineligible), and then carries out the provisions of the will. Periodic and final reporting to the Court is required, and all distributions must be Court approved.

    5. A will, when drawn up, should be a formal document that is appropriately witnessed according to the laws of the state in which it was created. We recommend using a qualified attorney so that the necessary standard wording is there, and ambiguities are eliminated as much as possible. Normally, the Courts will strictly respect such a will unless it can be shown to have not been the decedent's free choice. Beneficiaries, even potential beneficiaries, can try to have the Court modify the terms of a will if they can convince the Court it was improperly created or unduly influenced by those who gained.

    6. Handwritten wills (known as holograph wills) are legal - even if not witnessed. However, by their very nature, they can be readily challenged and questioned - and are, for such reasons, not recommended.

    7. Once a will is signed, it can be modified by use of an appropriate and proper codicil. A codicil can be thought of as an amendment to one or more sections of a will - and its creation should follow all the basic formalities of preparing a will.

    8. If changes to a will are extensive, then a new will would usually be more appropriate. Remember, the most recent valid will is what the Courts would consider the last will - and generally a current will contains language revoking all prior wills.

    9. Sometimes people inquire as to whether they should have two (or even more) wills if they have extensive assets in two or more countries. For reasons explained in eight above, this is not wise - unless specific and qualified legal counsel can show why two wills could be acceptable under some particular foreign statute.

    10. Probate laws vary somewhat from state to state (and especially between countries). Thus, it is recommended that wills be modified (or even rewritten) to conform to the rules of the jurisdiction of current residency in the event of a move. In the event of assets in multiple jurisdictions, your attorney should be alerted so she/he can check for the universality and appropriateness of the language in the will.


  2. Taxable Estate

    1. In the U.S., this would generally include all worldwide assets of a decedent, less liabilities. No distinction is made between probate and non-probate assets, and there are very specific and complex rules as to what is included, how it is valued, and how it is reported. As a safe starting point, assume everything is part of a taxable estate unless it can be specifically excluded.

    2. Aside from the more obvious assets such as real estate, personal property, cash and investments (whether jointly held or not), a taxable estate can potentially include life insurance proceeds, pension funds, other pensions that continue to beneficiaries (but usually not government social security type pensions), and certain future rights to income or contracts.

    3. If some assets are outside of the U.S., the local estate laws need to be reviewed as other countries would have very different ways of computing estate tax. Some countries have no estate tax, or like Canada, only tax the previously untaxed capital gain - but under the income tax laws. Treaties do exist between many countries to reduce or eliminate the effects of double taxation on the same estate.

    4. At the U.S. federal level, currently the first $2,000,000 of a taxable estate is fully exempt from estate tax. Under current legislation, this exemption might increase to $3,500,000 in 2009. Furthermore, generally unlimited exclusions are available for bequests to U.S. citizen spouses. In the case of a non U.S. citizen spouse, the use of special U.S. trusts can preserve the impact of the unlimited spousal exemption.

    5. Non U.S. residents (who are also non U.S. citizens) are only accorded a $60,000 exemption unless modified by a treaty with another country. Specific advice must be sought in such situations.

    6. Wills, known sometimes as tax-sensitive wills, can be drawn up for sufficiently large estates (over $1,000,000ish) in order to take full advantage of the tax planning strategies that may be available. Typically, these will involve the use of trusts as the situation calls for.

    7. Although it is too complex to cover here, the U.S. also imposes a generation skipping transfer tax (GST) on direct bequests to a second-level generation (in excess of a total of $1,000,000 per decedent). Professional advice is needed if this situation is contemplated.

    8. At the state level, many states assess that portion of the federal estate tax which is allowed as a state credit - with the result that the overall combined federal and state estate tax does not exceed the initial federal computation. Vermont is such a state. However, some states do not follow the federal thresholds nor rules. If assets are located in other states, professional advice should be sought.

  3. Filing Responsibilities

    1. The first step is for the executor to locate the will. An original of the will should be presented to the local Probate Court office (a fee will be charged). After appropriate judicial steps are taken, the executor will be given authorization to proceed, along with instructions. (If no will can be found, complications may arise and it is recommended that professional help be sought).

    2. In the meantime, the executor should undertake a careful and exhaustive inventory of ALL assets, as well as a determination of the liabilities. At the same time, clearly identify how the assets are held as this will be crucial for probate purposes. Remember not to overlook non-obvious assets.

    3. From a Probate perspective, they will guide the executor as to when they will expect an inventory, how to present requests for distribution, and how and when to present summaries of receipts and disbursements (known as accountings), including the final accounting.

    4. From a tax perspective, here are the various possible filings:

      1. The decedent's final personal income tax return to report income and deductions for the year of death, but only up to the date of death. This is due in the normal time period, that is, April 15 of the year following, plus extensions if necessary.

      2. To report income from assets in the probate estate, a fiduciary income tax return (Form 1041) is used for each year the estate is open and has taxable income. Normally, a fiscal year is chosen for the estate, ending on the last day of the month preceding the month in which the person passed away. Such returns are due 3 1/2 months after the end of the fiscal year, plus extensions if necessary.

      3. To report income from assets NOT in the probate estate (that is, assets that passed to a beneficiary by operation of law), is the responsibility of each beneficiary, as it is they who receive the income - not the estate.

      4. If the gross taxable estate exceeds the lifetime exemption (currently $2,000,000), an Estate Tax return (Form 706) is required. This is due nine months to the day after the date of death. A filing extension can be obtained, but the expected estate tax must be paid, under normal conditions, by the unextended filing deadline. This is an extremely voluminous and quite complex return, and professional help should be sought.

      5. Even if the estate does not exceed the lifetime exemption, it may be necessary or desirable to file an estate tax return - especially if prior year taxable gifts had been made.

      6. Near the end of the estate administration, a tax clearance must be obtained which is normally required by the Probate Court before they will grant the final distribution order. This is typically provided by the state tax department - although a federal tax clearance may also be needed, especially in the case of non-residents.
The above is a general explanation of the major concepts involved in probate and taxable estates. It is not meant to be exhaustive and all-encompassing, but only to serve as a guide. Specific legal advice should be sought if you are involved in an estate planning or estate settlement situation. Data accurate as of 2002-02-05.