Some clients ask whether avoiding probate also avoids the federal estate tax. Both probate and the federal estate tax deal with your estate, but avoiding one doesn’t avoid the other. To answer the question, if you avoid probate, you don’t necessarily avoid the federal estate tax.
What is Probate? What’s the Federal Estate Tax?
Probate is the process of validating a will, if there is one, and settling an estate. Probate assets are all those assets that the decedent owned in his or her individual name, but didn’t have a beneficiary designation.
Examples would be a bank account in an individual’s name or a house in an individual’s name.
Examples of NON-probate assets include assets owned as joint tenants with right of survivorship (with a spouse or another individual), life insurance, retirement accounts, and annuities.
The federal estate tax is a tax on everything an individual owns at death, regardless of whether the asset goes through probate, or not.
Examples of assets that are subject to the federal estate tax include all assets you own such as bank accounts, investment accounts, retirement accounts, a house, and annuities, no matter how you own them. If you have a right to them or control them in some way, those assets are subject to the federal estate tax.
Although avoiding one, doesn’t necessarily mean that you avoid the other, both probate and the federal estate tax can be avoided, when you work with a qualified estate planning attorney.