Many people are curious about the exact definition of an estate and think that it just refers to rich people, while that isn’t exactly wrong there are specific definitions of an estate and broader reaching uses. In laymen’s terms, an estate is a person’s total assets and liabilities, both real and personal, left by the decedent.
What Is an Estate (full definition)?
An estate is everything comprising the net worth of an individual, including all land and real estate, possessions, financial securities, cash, and other assets that the individual owns or has a controlling interest in.
Structure of an estate
However, in the financial and legal sense of the term, an estate refers to everything of value that an individual owns—real estate, art collections, antique items, investments, insurance, and any other assets and entitlements—and is also used as an overarching way to refer to a person’s net worth. Legally, a person’s estate refers to an individual’s total assets, minus any liabilities.
The value of a personal estate is of particular relevance in two cases: if the individual declares bankruptcy, and if the individual dies. When an individual debtor declares bankruptcy, their estate is assessed to determine which of their debts they can be reasonably expected to pay. Bankruptcy proceedings involve the same rigorous legal assessment of an estate that also occurs upon an individual’s death.
Estates are most relevant upon the death of an individual. Estate planning is the act of managing the division and inheritance of your personal estate, and arguably represents the most important financial planning of an individual’s life. Generally, an individual draws up a will that explains the testator’s intentions for the distribution of their estate upon their death. A person who receives assets through inheritance is called a beneficiary.
The history of estates
The word estate is traditionally used to refer to all of the land and improvements on a vast property, often some farm or homestead, or the historic home of a prominent family. The origin of estates dates back to the church and its clergy which is known as the first estate. The clergy was very wealthy and had vast lands which is why today the word estate is commonly associated with great wealth and high status. At this time in the 13th century, nobles were considered to be below the clergy and thus the nobles, even with their great wealth were commonly referred to as the second estate followed by commoners known as the third estate. Later, class systems were developed and instead of using the second and third estate, terms like Bourgeoisie were used for the upper-middle class and peasants took the place of commoners. These were people that did not have an estate at all at birth.
How is an estate maintained
When someone passes away, their land and assets must go somewhere. Usually, estates are passed down to the deceased person’s family or whoever the deceased person chooses to allocate their estate to in their will. Since estates have money and resources, lawyers have developed ways to maintain the passage of wealth in the estate from generation to generation without diminishing the size of the estate through paying great amounts of taxes. In fact, inheritance accounts for a massive proportion of total wealth in the United States and around the world which is one of the reasons why the rich stay rich for centuries.
Inheritance tax or estate tax on an estate is something that can make a great impact on the size of an estate as it’s transferred to the next generation. This tax can be very large depending on the size of the estate and many times a beneficiary (heir or heiress) will have to sell some of the inherited assets to pay the tax bill.
In the U.S. if the majority of an estate is left to a spouse or a charity, the estate tax is generally lifted. Another way to maintain the size of an estate is through avoiding probate by doing estate planning ahead of time and naming beneficiaries on all of the accounts.
Assets Included in the Estate
One of the major responsibilities of an estate’s executor or administrator is to list all assets owned by the decedent with their value in an inventory. The inventory has to be accurate and should include everything so the executor should be open to discussions with the decedent’s relatives and friends.
Safe deposit boxes and the decedent’s home should also be checked for all hidden assets or their documents. Additionally, the decedent’s bank and other financial institutions they had dealings with should be consulted as there could be assets even the decedent does not know that they own. An estate property inventory should include:
- All real estate owned by the decedent either solely or jointly with their addresses and description. The value of the properties should be listed and the executor should possess their deeds. Outstanding mortgages should also be included with the amount owed stated.
- All bank accounts owned solely and jointly by the decedent with the account number and amount of money in them at the time of death should be listed as well. The decedent’s death certificate and an affidavit declaring you as the executor can be sent to the bank so they can release this information.
- Automobiles, boats, aircraft, and other transportation mediums owned by the decedent with their description, model number, and identification number should be listed in the inventory.
- All stocks and bonds with their description, amount, type, name of the shares and exchange platform used for trading should also be listed in the inventory. Bond names, interest rates, and date of maturity should also be indicated in the inventory.
- All retirement plans owned by the decedent with the account number, amount of money in them, and the company handling the account should be indicated. Also, life insurance policies with the policy number, company providing it, name of beneficiaries, and type of coverage should be recorded.
- All unpaid salaries and employment benefits owed to the decedent by their employees should be noted.
- If they owned a business, the type of ownership, name of the business, and their investments should be outlined in the inventory.
- Intellectual assets like patents, book copyrights, or contracts owned by the decedent should also be indicated.
- Debts, taxes, and liabilities owed by the decedent should be found out and recorded in the estate property inventory.
- All personal belongings like art, collections, jewelry, and other personal effects should be listed in the inventory also.
Famous Estates
- VILLA VIZCAYA – MIAMI FLORIDA
- HENRY FLAGLER MUSEUM – PALM BEACH
- THE VANDERBILT ESTATE (BILTMORE) – ASHVILLE NORTH CAROLINA
- THE GAINSEWOOD ESTATE – ALABAMA
What all of these estates have in common is that they date back to the early 1900s or before and have been maintained over time through proper estate planning and maintenance.
Trust Vs Esate
An estate is the makeup of personal assets at the time of death which is different than a trust which is a legal entity that holds and distributes assets according to certain conditions. There are different types of trusts which all have different and specific legal purposes. Here are some common trust entities:
- Revocable Trusts.
- Irrevocable Trust.
- Asset Protection Trust.
- Charitable Trust.
- Constructive Trust.
- Special Needs Trust.
- Spendthrift Trust.
- Tax By-Pass Trust.
Lifespan of an estate
An estate is intended to be temporary which is also different from a trust which is intended to be a semi-permanent entity. A trust exists to distribute assets over time according to a series of rules and conditions, overseen by a trustee whereas an estate just refers to the assets someone dies with at the time that they died.
Estate Vs Probate
An estate is a term for someone’s assets when they pass away. If the estate assets are not set up to pass directly to beneficiaries then it is the states responsibility to probate the estate and administer it to make sure it is handled properly, creditors are paid, taxes are paid and beneficiaries receive the right amount according to the directions of that states probate laws.
Uses of an estate
An example of someone using the word estate out of context is “The Biltmore Estate in Ashville North Carolina 123,000 acres and it’s amazing.” They are really saying, the assets that George Vanderbilt died with are extraordinary. When in reality, those assets have been distributed amongst many different family members and are governed by a trust.
Loans On Estates For Beneficiaries
Many times beneficiaries of an estate in probate will try to receive an estate loan. This is a common occurrence because of how much time it takes for probate to be completed. As a result, beneficiaries need money while it is locked up in the probate courts so they will receive what is termed an estate cash advance. This financial tool allows heirs to receive their money before probate is finished and use it however they want.
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