In financial matters, an estate refers to the collection of assets that a person owned until the time of their death. Estates can vary greatly in size and complexity: Some people may own nothing more than a house and a few bank accounts, while others may hold title to numerous real estate properties, stocks, and own a few small businesses.
You can plan for what happens to your estate when you die, including who should receive your assets and belongings, by creating an estate plan. Many people start off by writing a last will and testament, also known as just a will, which is a legal document that lets you state who should get an inheritance. Even if you don't have many assets to give away, having an estate plan is key since it can prevent a court from having to step in and decide what should happen to your assets for you if you don’t leave proper instructions.
What is considered part of my estate?
While you’re alive any assets that you own are considered part of your estate and that can include:
Land and real estate
Money, including cash and bank accounts
Investments
Retirement plans
Tangible assets, like cars, boats, artworks and antiques
The value of a life insurance policy
However, depending on the context and circumstances and who’s asking the questions about your estate, certain assets may not be counted. For example, when someone files for bankruptcy and after someone dies, certain assets listed by the state can be exempted from the estate.
Estates and probate
Probate is the process of administering a deceased person's estate and handling their affairs — which includes settling debts, paying taxes, and filing papers with the court as necessary.
After a person dies, the term ‘estate’ usually refers to the probate estate, or the collection of their assets that must undergo the probate process. Not everything will be considered a probate asset, sometimes called an estate asset.
Common things that aren't counted as part of a decedent’s probate estate include assets in a living trust or a payable-on-death account (like a bank account or life insurance policy with a designated beneficiary, when its beneficiary is still alive and able to receive the transfer). Additionally, your state may list other assets that can be excluded, like a primary residence or vehicle up to a certain dollar value. You can learn more in this guide to what types of assets are subject to probate.
Some non-estate assets like those mentioned above can typically be received by beneficiaries without the hassle of probate court. It's important to understand the makeup of a decedent's estate because it can determine what type of probate filing the executor or administrator should use to handle your affairs after you’ve passed away. Every state has different procedures, and the more straightforward ones are typically reserved for small estates.
Creating an estate plan
You can plan for what happens to your estate by writing a will. This legal document can be relatively straightforward and inexpensive to create, so it is essential that you get one even if your estate consists of only sentimental items and personal belongings.
Beyond making a will, there are other estate planning documents you can get to prepare for your future.
If you need to make sure someone can make legal decisions on your behalf if you become incapacitated, you can get a durable power of attorney.
If you want to make sure you receive certain kinds of medical treatment and not others, you can write a living will to detail your choices.
If you want more control over how your future beneficiaries use your assets, you could establish a trust. A trust lets you dictate the terms of an inheritance you leave someone and they can typically receive it outside of court — trust assets are not technically considered part of your estate for probate purposes.
Trusts can be tailored to your needs so you can even use one to provide for a dependent beneficiary, protect your estate from creditors, minimize your taxes, or reduce a spouse’s future tax burden. If you encounter these concerns, then you should consult with an estate planning attorney who can give you legal advice and make sure your trust is properly structured.
A life insurance policy, which provides financial protection for your family, can also complement your estate plan.
