What Is an Estate?
Anestate is everything comprising the net worth of an individual, including all land and real estate, possessions, financial securities, cash, and other assets that the individual owns or has a controlling interest in.
Key Takeaways
- An estate is the economic valuation of all the investments, assets, and interests of an individual.
- The estate includes a person's belongings, physical and intangible assets, land and real estate, investments, collectibles, and furnishings.
- Estate planning refers to the management of how assets will be transferred to beneficiaries when an individual passes away.
- Estate taxes may be levied on the value of one's estate at death.
Understanding Estates
The word estateis colloquially used to refer to all of the land and improvements on a vast property, often some farm or homestead or the historic home of a prominent family. However, in the financial and legal sense of the term, an estate refers to everything of value that an individual owns—real estate, art collections, antique items, investments, insurance, and any other assets and entitlements—and is also used as an overarching way to refer to a person's net worth. Legally, a person's estaterefers to an individual's total assets minus any liabilities.
The value of a personal estate is of particular relevance in two cases: if the individual declares bankruptcy and if the individual dies. When an individual debtor declares bankruptcy, their estate is assessed to determine which of their debts they can be reasonably expected to pay. Bankruptcy proceedings involve the same rigorous legal assessment of an estate that also occurs upon an individual's death.
Estates are most relevant upon the death of an individual.Estate planning is the act of managing the division and inheritance of your personal estate and arguably represents the most important financial planning of an individual's life. It's important to keep in mind that every country has specific rules about passing on wealth, the allowed amounts, and the approved estate planning trusts.
Generally, an individual draws up a will that explains the testator's intentions for the distribution of their estate upon their death. A person who receives assets through inheritance is called a beneficiary.
How Estates Are Managed
In almost all cases, estates are divided among members of the deceased's family. This passage of wealth from one generation of a family to the next has a tendency to entrench income in certain social classes or families.Inheritance accounts for a massive proportion of total wealth in the United States and around the worldand is in part responsible for persistent income inequality (though there are, of course, many other factors).
Partially as a response to the stagnationof wealth movement as a result of inheritance, most governments require those in line for an inheritance to pay an inheritance tax (estate tax) on the estate. This tax can be very large, sometimes requiring the beneficiaryto sell some of the inherited assets to pay the tax bill.
In the U.S., if the majority of an estate is left to a spouse or a charity, the estate tax is generally lifted.
Itis generally advisable for both the individual drafting the will and the beneficiaries of an estate to employ the services of estate attorneys. Inheritance taxes are notorious for their complexity and exorbitance, and the use of an attorney helps ensure that your inheritance taxes are paid correctly. On the drafting end, several measures can be taken to minimize the amount of taxone's beneficiaries will have to pay—for example, setting up trusts.
Writing a Will
Awillis a legal document created to provide instructions on how an individual’s property and custody of minor children, if any, should be handled after death. The individual expresses their wishes through the document and names a trustee orexecutorthat they trust to fulfill the stated intentions. The will also indicates whether a trust should be created after death.
Depending on the estate owner’s intentions, a trust can go into effect during their lifetime (living trust) or after the death of the individual (testamentary trust).
The authenticity of a will is determined through a legal process known asprobate. Probate is the first step taken in administering the estate of a deceased person and distributing assets to the beneficiaries. When an individual dies, the custodian of the will must take the will to the probate court or to the executor named in the will within 30 days (in most states) of the death of the testator. However, it may vary by state, for example, Florida requires a will be filed within 10 days of being notified of the death.
The probate process is a court-supervised procedure in which the authenticity of the will left behind is proven to be valid and accepted as the true last testament of the deceased. The court officially appoints the executor named in the will, which, in turn, gives the executor the legal power to act on behalf of the deceased.
FAQs
What Is Estate Planning in NJ and Why Do You Need it? An estate plan is a set of legal documents that name certain people who name people who will oversee administering your estate when you pass away and also name the beneficiaries of that estate.
What is the difference between an estate plan and a will? ›
A will covers what will happen to your family and property after you die. An estate plan has a will but also includes other documents protecting your family and property while you are alive but incapacitated. An estate plan guides your loved ones in handling your financial affairs and medical care.
What are the disadvantages of estate planning? ›
Disadvantages of Estate Planning:
Time: Estate planning can be time-consuming, as it requires gathering financial and legal documents, making important decisions, and reviewing and updating your plan regularly.
What is the purpose of making an estate plan? ›
Estate planning involves determining how an individual's assets will be preserved, managed, and distributed after death. It also takes into account the management of an individual's properties and financial obligations in the event that they become incapacitated.
Why are wills an important piece to an estate plan? ›
A will may not be all you need for end-of-life planning, but it is an essential component because it lays out what should become of your property after your death, including who will inherit which assets.
What is an estate plan when should you get one? ›
Many financial consultants advise that an estate plan is required as soon as you reach legal adulthood and to update it every 3 to 5 years afterward. This is because you are now legally responsible for your money, healthcare (in some areas), and power of attorney at 18.
What are the four basic types of wills? ›
What are the four basic types of wills? Instead of asking "What is a will," an estate planner should instead ask themselves, "What type of will is best suited for the situation?" The four main types of wills are simple wills, testamentary trusts, joint wills, and living wills.
Why do people not do estate planning? ›
Thinking about dying, even indirectly through estate planning, makes many people uncomfortable. There are various complicated psychological explanations for why this happens. But for many people, it comes down to a belief (perhaps subconscious) that talking about death will somehow hasten it.
Why do people not have an estate plan? ›
32% of Americans don't have an estate plan because they've been procrastinating, and 25% don't have a plan because they don't know where to start.
What is the downside to a will? ›
Time-consuming probate – Your estate will likely have to go through probate after you die. That means your loved ones can face a lengthy process to get the court to validate the will so they can receive the assets you left them.
Get a head-start on planning and follow these 7 easy steps:
- Take Inventory of Your Estate. First, narrow down what belongs to you. ...
- Set a Will in Place. ...
- Form a Trust. ...
- Consider Your Healthcare Options. ...
- Opt for Life Insurance. ...
- Store All Important Documents in One Place. ...
- Hire an Attorney from Angermeier & Rogers.
To be recognized as valid by the probate court, a will:
- Must be in writing. Neither oral nor handwritten wills are recognized as valid in Minnesota or Florida.
- Must be written by a competent person. ...
- Must be signed by the testator. ...
- Must be signed by two witnesses. ...
- Can be revoked or modified.
Traditionally, the process of planning for the transfer of assets to your loved ones after your death is known as estate planning. As you approach this process, you might also hear another term: Legacy planning.
Is a trust more powerful than a will? ›
But for more complex estates, a trust can be a valuable tool. “A will manages what happens to your assets after death, but a trust goes into effect as soon as you sign the paperwork,” says Cyndy Ranzau, wealth strategist with RBC Wealth Management-U.S. “A trust can dictate what happens while you're alive.
What is the most important decision in estate planning? ›
The first and well-known component of an estate plan is a will. A will determines two things. First, it sets forth who is to step into your shoes as your “personal representative” in order to pay your bills and distribute your assets. Second, it instructs the personal representative how to go about it.
Is a will or beneficiary more important? ›
Wills aren't necessary for beneficiary designations to kick into action. On the other hand, say you don't have any financial products with beneficiary designations. In this case, passing away without a will means your relatives and the court will distribute assets without any guidance from you.
What is the difference between a will and a trust and estate planning? ›
A will takes effect upon death but trusts can be used both during the lives and after the deaths of the grantor, or creator. Wills and trusts can provide effective estate planning when used separately or together.
Is an estate the same as a beneficiary? ›
An estate beneficiary is who you elect to receive all, or just a portion, of your property and assets. You can have one or many beneficiaries. However, to fully understand what an estate beneficiary is, you must also define estate. In this case, your estate refers to the monetary value of the entirety of your assets.
Should I make my estate a beneficiary? ›
Additionally, it's best to leave your estate out as a beneficiary because naming it requires probate to determine who gets what, which could take time, and there could be large tax consequences if you name your estate.
What defines an estate? ›
: the assets and liabilities left by a person at death.
