We frequently hear about the importance of estate planning, but a shockingly large number of people do not understand the basic process and the components of an estate. Knowing these terms and understanding why everyone should have an estate plan – no matter the value of your assets – is the first step in recognizing the importance of these plans.
What Is An Estate?
When we hear the term estate, many individuals picture a large home on a vast piece of land. But in the world of estate planning, the term estate means something very different.
An estate is made up of everything an individual owns. And these assets don’t have to be things like real estate, financial accounts, or investments. Even physical property can be included in an estate. Estates include:
- All real estate properties and land
- Personal possessions
- Vehicles
- Furniture
- Art collections and collectibles
- Family heirlooms
- Bank accounts
- Savings bonds
- Investments
- Financial securities
- Cash
- Stocks
- Companies or interest in companies
- Antiques
Essentially, estates encompass nearly everything an individual owns, including insurance policies, IRAs, and pension funds.
So, anyone who owns anything has an estate – even if it’s not a mansion on a sprawling stretch of land. Individuals with a modest estate might only have personal effects, furniture, and perhaps a car. But even if the total assessed value of these items is relatively low, it is still considered their estate.
Estate & Net Worth
The term estate may also be used to describe an individual’s net worth. Fundamentally, an estate is the total of a person’s assets, less any liabilities or debts. The value of a personal estate may become relevant if an individual declares bankruptcy. In these instances, the estate is assessed to determine which debts can be paid. Legal processes and assessments come into play under these circumstances.
Aside from bankruptcy, the value of an estate is often determined upon the individual’s death, which is why estate planning is crucial. Upon death, the assets encompassed within an estate must be distributed to beneficiaries or heirs. Without an estate plan in place, the estate may go to probate, which can be a drawn-out and expensive process.
If an estate has more liabilities than assets, it is considered insolvent. The first order of business that an executor of an estate must initiate is paying all taxes and debts. If the estate assets are sold off and there is still debt owed, then the beneficiaries may only receive items that hold no monetary value.
Why Everyone Needs An Estate Plan
Everyone has an estate – no matter how large or small it may be. Without an estate plan, a probate court will handle the transfer of assets, which can be difficult, expensive, and emotionally exhausting for the decedent’s loved ones. The state of California allows some estates to go through a simplified probate process for estates valued at less than $150,000 (adjusted every year for inflation). However, even the simplified process can become complicated quickly.
Even without an estate plan, some assets (such as life insurance and IRAs) can be excluded from the probate process if they have named beneficiaries.
The probate process generally consists of these steps:
- A Petition to Probate must be filed by the executor of the estate or a probate attorney.
- A notice must be provided to beneficiaries and heirs. A public notice must also be published to inform creditors and other interested parties.
- A hearing will be held to determine the validity of a will if one exists.
- A financial assessment is made of all of the decedent’s assets. At this time, debts and taxes must be paid.
- The executor must file a final report with the probate court on all income received and payments made by the estate.
- The remaining assets are divided among beneficiaries named in the will if one exists. If there is no will or estate plan in place, the probate court will determine who will inherit assets based upon intestate succession laws. This process can result in the assets being distributed in a way that is contrary to how the decedent would have wanted them to be distributed.
The bottom line is that you will want to avoid probate court if at all possible. The process is complex and can take years, especially if family members and beneficiaries cannot agree on distributing the assets. In addition, if the decedent has children, the court may also appoint a guardian without knowing the parent’s chosen custodian. For these reasons, an estate plan is essential – even if its financial value is minimal.
The Benefits Of An Estate Plan
An estate plan offers several benefits for the decedent and their survivors. Even if you are healthy and have a small estate, you cannot predict the future. In the event of a tragedy, it’s better to have clear direction for your surviving loved ones.
Having an estate plan in place:
- Prevents your estate from going to probate and putting your loved ones through the process.
- Ensures that you clearly identify who makes decisions (the executor) and determines who will receive which assets. Even if your estate has no monetary value, you may want to identify the intended recipients of sentimental items.
- Protects your children or minor beneficiaries and ensures that the individual you named as guardian will have legal rights to assume custody.
- Minimizes taxes and protects assets so that more of your property can be passed on to your loved ones.
And while it may be tempting to consider drafting your own estate plan, it’s often a far better investment to discuss it with a professional estate planning attorney. These individuals can ensure that all elements of your estate plan are legally binding and enforceable. Contact the Law Office of Janet L Brewer to learn more about protecting your estate.
