What is an Estate?

Many people in California may wonder: What is an estate? While some people associate the word with high wealth or old English country homes, the truth is: almost everyone has an estate. Here’s an overview of what constitutes an estate in California.

What is an Estate?

The term “estate” is a remnant of the English feudal system, which created a complex hierarchy of interests in land. Today, an estate refers to the sum total of all your assets.

Your estate is basically your net worth, including:

• Real estate
• Cash
• Financial securities such as bank accounts, retirement accounts, life insurance, and investments
• Personal possessions such as household furnishings, vehicles, and valuables like jewelry or art
• Assets you own or have a controlling interest in, such as a business, partnership, or corporation
• Debts owed to you, such as personal loans or promissory notes

These assets are considered part of your personal estate, unless you have created a trust.

What is a Trust Estate?

When someone creates a trust and transfers assets into that trust, they create a trust estate. A trust is a legally independent entity. A trust is managed by a trustee. 

If someone dies having transferred all of their probatable assets into a trust, the trust will be administered by the trustee after they die. The trustee will inventory the trust assets and ultimately distribute assets to the named beneficiaries of the trust. 

Trust assets avoid probate, meaning they do not need to go through the California Probate Court after death. However, if some assets are left out of the trust, those remaining assets would need to pass through Probate Court.

What is a Probate Estate?

If the decedent died without creating a trust, then the assets they owned at the time of their death are considered part of their probate estate. If they created only a will or died “intestate” (without a will), then their assets will need to pass through the court-supervised probate before their heirs can receive an inheritance. 

The court will appoint an executor or personal representative who will perform the same tasks in a probate proceeding that a trustee performs in a trust administration. First, they will inventory all of the decedent’s assets. 

If the decedent created a will, then the assets will be distributed according to that document. If the decedent died without a will, then the assets will be distributed according to California laws of intestate succession. 

The probate processes are much slower and more expensive than trust administrations, which is why revocable living trusts are so popular in California.

Some assets are considered non-probatable and can bypass the Probate Court after a person dies. Besides trust assets, the following types of assets can also skip probate:

• Life insurance proceeds with a named beneficiary
• Retirement account funds including 401(k)s and IRAs with a named beneficiary
• Payable on death bank accounts
• Property that the decedent owned in joint tenancy with the right to survivorship

Estate Tax

Another common use of the word “estate” is related to taxes. While California state laws do not include an inheritance tax, high-wealth individuals may be subject to a federal inheritance tax. The Internal Revenue Service evaluates the decedent’s gross estate in order to determine if it is subject to estate tax. 

The IRS will evaluate the value of all property owned by the decedent, whether in or out of a trust. If the value exceeds $12.92 million in 2023, the assets will be taxed at rates of up to 40%.

Estate Planning

Now that we’ve explained the various meanings of the word “estate”, hopefully it’s clear why estate planning is for everyone – because almost everyone owns some sort of assets that will need to be dealt with after you pass away. Seek the counsel of an experienced attorney for assistance.

If you have any questions about this topic, feel free to contact our law firm.