A Word About Words by Lloyd McAlister

Mrs. Jones: “But I thought my husband’s life insurance was not part of his ‘estate’ at his death!”

Mrs. Jones’ attorney: “The life insurance policy which your husband owned, insuring his life, is not part of his ‘probate estate’ but it is very much a part of his ‘gross estate’ for estate tax purposes.”

It is surprising how much confusion can arise from multiple meanings of the same word.  Consider the word “estate.”  As an estate planner, I talk with clients regularly about planning their “estate.”  This innocent use of the English language is intended to refer generally to the property interests and legal rights that a person possesses.  As simple as that might sound, it is a very broad concept encompassing something as simple as one’s ownership of their home to something as speculative and potentially valuable as the right of their “estate” to sue another person for damages for the pain and suffering caused to them by that other person who has mortally injured them.

When such a person dies, we often speak of their “estate,” again, probably referring to all the property and legal rights the deceased person owned at the time of their death.  However, sometimes we mean something narrower in meaning, with a more specific application.  For example, we might be talking about what “estate tax” will be due as a result of the person’s death, in which case we might refer to their “taxable estate.”  However, technically, to arrive at one’s “taxable estate” we must start with their “gross estate” and deduct allowable deductions.  Now, what at first might have seemed somewhat simple becomes more confusing.  One’s “gross estate” includes the property one owned at death but might also include other values such as certain property the deceased person transferred within three years of their death, certain annuities payable to the deceased persons estate or their heirs, and life insurance payable to the deceased person’s estate even if the deceased person did not own the life insurance policy.

Likewise, when referring to one’s estate, we might be talking about their “probate estate.”  Again, what might seem simple can become quite confusing because we referred to “taxable estate” and “gross estate” above, yet what comprises one’s “probate estate” might be quite different than those other terms used to refer to tax matters.  If a person dies owning property titled in their name (not owned in a trust and not owned in their name yet with valid transfer on death successor owner designations), the disposition of that property after the owner’s death is technically subject to the administration of such property by the “probate court.”  The probate court determines:  what property fits in that category (and, consequently, is subject to the jurisdiction of the probate court), whether there was a valid last will and testament of the deceased person which disposes of the deceased person’s property and, if no valid will exists which completely disposes of the property, what state law (called the laws of “descent and distribution”) provides.

Although all the property in a deceased person’s probate estate might also be in their gross estate, it will not necessarily all be in their taxable estate due to the “allowable deductions” which are subtracted from the gross estate to arrive at the taxable estate, deductions such as the marital deduction for property passing to a surviving spouse or the charitable deduction for property passing to a charity.  Similarly, it is entirely possible some or even all the deceased person’s property is in that person’s “gross estate” (again, using the term in its technical sense to refer to the gross estate for state and/or federal estate tax purposes) yet little or none of it in their “probate estate” because the ownership of the property was such that there was no need for a probate court to determine the lawful, successor owners.  The very common use of revocable trusts (also referred to alternatively as living trusts, inter vivos trusts, loving trusts, etc.) is an excellent example; a person might establish the ownership of some or even all their property in the name of a trustee (perhaps them) of their revocable trust to accomplish various planning objectives, one of which might be avoiding the court-supervised administration of their estate, called “probate.” By virtue of the legal fact that the client, now deceased, did not hold the title in their individual name but rather held title in their name (or someone else’s name) as a trustee of their trust, there is nothing to probate (nothing for the probate court to administer); the successor trustee named in the deceased person’s trust merely needs to accept or confirm their appointment as trustee.  Since the property in one’s revocable trust is subject to the “estate tax” it is included in their “gross estate” and, possibly, their “taxable estate” even though such property is not in their “probate estate.”  In fact, the deceased person may have planned their “estate” so that there will not be a “probate estate” and, consequently, no need for a court-supervised probate proceeding.

I frequently hear people say their life insurance is not “in their estate.”  This can means lots of different things.  If they own the life insurance policy (meaning they have the right to designate and change the beneficiaries who are entitled to receive the proceeds upon the insured person’s death), the proceeds will 1) likely not be subject to income tax, payable by their “estate” or their beneficiaries, 2) likely be included in their “gross estate,” and possibly their “taxable estate,” for estate tax purposes because they controlled the beneficiary designation, and 3) likely not be included in their “probate estate,” if they need to have a probate proceeding at all (for other assets), because the proceeds are payable as a matter of contract to their designated beneficiaries (assuming they have valid beneficiary designations on file with the insurance company and there are designated beneficiaries who survive to accept payment of the proceeds by the insurance company).

So, if you speak of your “estate,” be careful to be clear about the type of “estate” to which you are referring.  Otherwise, I may believe I understand what I think you said; but what I may fail to realize is that what I heard is not what you meant!