ESTATE AND TAXABLE ESTATE:
An Explanation of Each
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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
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.
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).
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
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.
a tax perspective, here are the various possible
- 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.
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.
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
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
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.
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.