What is an estate?

An estate consists of all of the land, or property an individual owns or controls. The estate property may be in his or her sole name, held in a partnership, in a joint ownership arrangement, or through a trust. Real estate property also includes all other monies that would be generated upon the person’s death, such as through life insurance. An estate can be divided up into three categories: gross estate, residue estate and estate debt.

What is included in a gross estate?

The first category of items in your estate property is your gross estate. This is basically the larger items that determine your net worth.

Real property is typically the largest bulk of wealth in your gross estate and includes houses, buildings, barns, and any other property that you own. Your gross estate also includes any businesses, investments or bank accounts you held, retirement accounts including pensions, and life insurance.

What is included in a residue estate?

The second category is residue estate, which consists of your personal estate property. Personal property includes things such as your car, furniture, clothes, jewelry, tools, and equipment, and anything else found in your home. This category also includes any withstanding payments or investments that were not mentioned specifically in your will or allocated in your trust. For example, if you sent out an invoice an hour before you died, the money from that invoice is part of your residue estate.

What is included in estate debt?

The final category, and the one many people don’t like to think about, is your estate debt. Estate debt includes all debts and obligations owed to others. The most common forms of estate debt are medical bills, student loans, credit cards, mortgages, and business invoices. Taxes owed or damages from lawsuits such as pain and suffering from an auto accident also qualify as estate debt.

What is excluded from an estate?

An estate does not include assets a person has transferred to an irrevocable trust during his or her lifetime. If a trust is irrevocable, it means the assets can’t be taken back. Once the transfer is made, the person no longer owns or controls those assets, even if the trust continues to benefit that person. When a person dies, other property a person owned is no longer included in that person’s estate. Property that the deceased has placed in a revocable trust, such as a living trust, irrevocably belongs to the trust when the person who set up the trust (trustor) dies, and all the assets of the trust are no longer part of the estate of the decedent (though they may be considered for tax purposes).

Other property is also excluded from the real estate when the property passes directly to another on the former owner’s death. For example, insurance policies, pension funds, and U.S. savings bonds with named beneficiary, property owned with a right of survivorship, and bank accounts that pass directly to a named party (also called pay-on-death accounts or Totten trusts) are not considered part of an estate of the decedent.

For questions about freehold estates, leasehold estates, or what property, assets, or debt is included in an estate, contact an experienced estate planning attorney. Get questions answered regarding land ownership and what’s involved in the estate planning process.

Case Studies: Utilizing Different Types of Insurance in Estate Planning

Case Study 1: Life Insurance for Estate Liquidity

Mrs. Anderson, a successful businesswoman, wants to ensure a smooth transition of her estate to her children upon her passing. However, a significant portion of her estate consists of illiquid assets, such as her business and real estate properties.

To provide liquidity for her estate, Mrs. Anderson purchases a life insurance policy with a death benefit that would cover the estate taxes and other expenses upon her death. By doing so, she ensures her children will have sufficient funds to settle any debts and taxes without needing to sell off valuable assets quickly.

Case Study 2: Long-Term Care Insurance for Asset Preservation

Mr. and Mrs. Johnson have spent a lifetime accumulating wealth, including various investment accounts and a valuable art collection. They are concerned about the potential financial burden of long-term care expenses as they age and want to preserve their assets for their children.

As part of their estate planning, they obtain long-term care insurance policies. This insurance will cover the costs of nursing homes or in-home care, allowing the Johnsons to protect their assets and pass them on to their children while still receiving the care they may require in the future.

Case Study 3: Umbrella Liability Insurance for Asset Protection

Dr. Martinez, a renowned surgeon, owns multiple properties and significant investments. He is aware of the potential risks associated with lawsuits, such as malpractice claims or personal injury lawsuits. To protect his assets and minimize his exposure to liability, Dr. Martinez secures umbrella liability insurance.

This type of insurance provides additional coverage beyond the limits of his primary insurance policies. In the event of a significant claim or lawsuit, the umbrella policy would protect his estate from substantial financial losses and preserve his wealth for future generations.