What is an Estate?

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Definition:

An estate includes all of the things that a person owned when they died, including cash, investments, property, and other goods.

🤔 Understanding estate

An estate includes everything a person owns when they die. When someone passes away, everything they owned enters their estate. Based on their will and local regulations, some things may pass directly from the estate to beneficiaries. The remainder of the estate goes through the probate process. During probate, the executor of the estate (usually named in the will) pays off any outstanding debts, and gives the remaining assets to any inheritors. If someone passes away without a will, the probate process uses local law to decide how the estate gives out any assets. If the estate is worth more than a set amount, depending on where the decedent lived, the estate may have to pay estate taxes from the decedent’s assets (taxes charged to estates after a person dies).

Example

Let’s say a retired person passes away. Before they died, they owned their own home, and lived off a mix of investment income and Social Security. After they die, their investment portfolio, bank accounts, home, and the things in the home enter their estate. Their will named their son as the executor, so he manages the estate — He pays any debts that his parent had and transfers the assets of the estate to family members and other inheritors named in the will, or as specified by local law.

Takeaway

An estate is like moving between homes…

When you move from one home to another, you put everything you own in a moving van. When you get to the new home, you unpack the van. An estate is similar. When someone passes away, everything they own gets placed in their estate. The executor then unpacks it, distributing assets to the people the decedent named in their will or based on local law.

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What is an estate?

An estate is all of the assets and things of value that a person leaves behind when they die. It can include things like cash, bank accounts, investment portfolios, real estate, furniture, jewelry, books, and anything else they owned.

Estates are important for a number of reasons. One is that estates of a certain size may have to pay an estate tax. The federal estate tax applies to estates exceeding $11,580,000 in value. Each state can also assess an estate tax based on different minimum values. For example, Massachusetts charges estate taxes to those valued over $1M.

When someone dies, their estate goes through the probate process. During probate, a court names an executor (someone assigned to carry out what’s in the decedent’s will). The executor then has to manage the estate, which involves first using the estate’s assets to settle any debts, then distributing the remaining assets according to the deceased’s will. Certain assets may avoid going through probate if the decedent took certain steps. For example, money in retirement accounts may pass directly to a named beneficiary, avoiding a lengthy probate process. People can name their own estate as the beneficiary on an account if they don’t have a specific person they want to inherit an account. In this case, the money will go into their estate and go through the probate process to be split among inheritors.

If someone passes away without a will (also called intestate), a court names an executor for the estate based on local law. The executor is then responsible for distributing the estate’s assets based on the law for estates with no will. Someone can decline to serve as an executor if they do not want the responsibility. If this happens, the court will appoint a different executor.

What are estate assets?

Many of the deceased’s assets become part of their estate, but some don’t, instead passing directly to an inheritor. Anything that passes to inheritors based on the terms laid out in a decedent’s will is an estate asset (aka probate asset). Things that pass directly to a person outside of a will are non-estate assets (aka non-probate assets). For example, if someone wills their home to their child, the home would be considered an estate asset. Other things like vehicles, collectibles, antiques, and furniture can also be estate assets.

Examples of non-estate assets (things that may pass directly to an inheritor outside of the probate process) include joint bank accounts, a home that’s owned and occupied with a joint tenant, life insurance (or other insurance policies with a named beneficiary), and investment accounts with a named beneficiary.

How are estates managed?

When a person dies and their belongings enter their estate, someone needs to manage those assets. Typically, their will names an executor. If the person who passed didn’t leave behind a will, the court names an executor or trustee.

The executor is supposed to handle the estate’s assets, which includes responsibilities like keeping any real estate in good repair, selling assets that need to be sold, paying any relevant taxes, and paying the decedent’s remaining debts. The executor also files insurance claims on the decedent’s behalf and gets any unusual property (such as collectibles or antiques) appraised.

Once the executor pays all relevant taxes and debts, they may give out the estate’s funds based on the terms laid out in the will. If there’s no will, local law determines who inherits and in what amounts. For example, in Massachusetts, if someone dies and leaves behind children and a surviving spouse, the spouse inherits all assets unless one or more of the children is not also the spouse’s children.

What is a will?

A will is an estate planning document that lays out a person’s wishes for what should happen with their belongings after they die. If the decedent has children, the estate’s will can also lay out who they wish will take care of those children.

A typical will contains multiple sections.

  1. One section names an executor for the will. The executor manages the decedent's estate — Valuing assets, paying taxes and debts, and carrying out the deceased’s wishes as specified in their will.
  2. A second section outlines the beneficiaries of the will. These people will receive money or other assets from the estate.
  3. A third section lists how the deceased wishes each beneficiary to receive an inheritance from the estate. For example, the deceased might have created a trust to benefit a child, willed a car to a sibling, and left the family home to their spouse.
  4. If someone dies, leaving a minor child, the will might also name someone as the child’s guardian (assuming the named person is willing to accept the responsibility).

How is an estate settled?

Typically, an estate is settled through the probate process. If the decedent leaves behind a will, it usually names an executor. Otherwise, a probate court names an executor for the estate.

The executor settles the estate based on the wishes outlined in the will. They usually begin by assessing the estate’s property, getting appraisals when necessary, and paying any bills, taxes, or debts using the estate’s assets.

After the executor settles any bills, appraisals, and any other requirements set by the court, they may settle the estate by liquidating and distributing the remaining assets to the inheritors named in the will.

What happens if there is no will?

If someone dies without a will (aka an intestate), the process is a bit different. Instead of naming an executor based on the decedent's wishes, the court names an executor based on local law. Typically, the executor is a spouse, child, or another blood relative.

Once the executor of the estate pays outstanding taxes and debts, they can settle the estate by paying out its remaining assets to the inheritors based on local law. For example, in Iowa, the estate of someone who dies without a will must pay $50,000 plus half of the remaining property to a spouse, if the decedent had children with another person. The children divide the remainder equally.

What is a beneficiary?

A beneficiary is anyone named in a will to receive assets from the deceased. If there’s no will, a beneficiary is anyone who will receive assets from the estate according to local laws. For example, a child who inherits a portion of the decedent's estate is a beneficiary of that estate. The term beneficiary is also used when discussing trusts to designate the person who benefits from the trust by receiving cash payments or other things.

What is an executor of the estate?

When someone writes a will, they usually name someone to be the executor of their estate. The executor is responsible for managing the estate’s assets after the person passes away. The executor must handle the probate process, take inventory of the estate’s assets, get assets assessed and appraised, communicate with the beneficiaries, and sell assets (for example, at an estate auction) as needed. They also pay any remaining taxes, bills (think mortgage payments, car payments, insurance, etc), and debts. Once the executor fulfills these obligations, they distribute the estate’s assets to any beneficiaries.

If someone passes away without a will, the court names an executor based on local laws. Typically, the court will name a family member, such as a spouse or child, as the executor of the estate. The court provides the executor with letters testamentary, a legal document that gives them the right to manage the estate’s assets.

Someone named as executor can decline the responsibility. When that happens, the court appoints another person. Court-appointed executors may receive payment for the work.

What is an executor’s role?

The executor of an estate typically carries out terms stated in the decedent's will, and fulfills obligations like settling debts and distributing assets to any inheritors. An executor’s responsibilities generally include:

  • Finding and taking inventory of assets.
  • Determining who inherits any assets, usually based on a will. If there’s no will, the executor follows local law.
  • Filing the decedent’s will, if there is one, with the local probate court.
  • Handling daily affairs for the estate, like paying bills and keeping insurance up to date.
  • Notifying relevant organizations (such as the Social Security Administration and the decedent’s bank) about the death.
  • Using the assets to pay any remaining debts and taxes.
  • Distributing the deceased’s property or other assets to inheritors.
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