The word “estate” can have multiple meanings. In the legal and financial sense, a person’s estate is their entire net worth, which is particularly relevant in the case of bankruptcy of death. The word can also refer to a large property, especially in the countryside.
In this article, we will be focusing on what an estate is in terms of law and finance, and explain some key related concepts.
Key highlights:
An estate is an individual’s entire net worth, including tangible and intangible assets.
If the individual declares bankruptcy, their estate is assessed to determine which debts they are able to pay.
If the individual dies, the individual’s estate is distributed among beneficiaries according to instructions in the individual’s will.
If the individual does not have a legal will, their estate is distributed according to the jurisdiction’s inheritance laws.
What is an estate?
In finance and law, the term “estate” refers to the entire net worth of an individual, including but not limited to cash, real estate, financial securities (such as stocks), insurance, vehicles, art and antique items, and so forth.
An individual’s estate is especially relevant in two scenarios – bankruptcy and death. If the individual declares bankruptcy, their estate is relevant to estimate how much of their debt they will be able to pay. In the event of an individual’s death, the individual’s estate is transferred to beneficiaries included in the individual’s will.
Estate planning
Estate planning refers to the process of preparing a plan of how an individual’s estate will be managed in the event of theird death. This involves tasks such as creating an inventory of one’s assets and liabilities, accounting for the impact of estate taxes and writing a will.
There are attorneys that specialize in estate planning, and using their services might be worthwhile if your estate is large or complex.
Estate planning is commonly viewed as something only for the wealthy, but that’s a misconception. It can be a valuable tool for anyone to manage their assets and liabilities, both during their lifetime and after their death.
Estate tax vs. inheritance tax
An estate tax is a tax that must must be paid when the estate of a person is transferred to beneficiaries. Estate taxes vary from jurisdiction to jurisdiction, although they typically only apply when the value of the estate exceeds a certain threshold.
In the United States of America, the threshold for federal estate taxes is set at estates valued at $13.61 million or above. However, different states have different estate tax legislation.
An inheritance tax, on the other hand, is levied on assets after they have been inherited and is paid by the person inheriting the assets. There is no federal inheritance tax, although certain U.S. states do levy it. Make sure to research estate and inheritance taxes in your jurisdiction.
Probate estate vs. trust estate
There are two important categories that fall under the estate umbrella – probate estate and trust estate.
Probate estate refers to the estate of an individual who died without a legal will. This can also be referred to as “intestate”. In such a scenario, the individual’s assets are distributed based on the inheritance laws of the jurisdiction under the supervision of a probate court, which appoints an estate administrator.
Meanwhile, trust estate refers to assets that have been left in trust. When someone passes away and leaves assets in a trust, it can indeed result in two separate estates. The assets that the deceased still owned at the time of their death form the deceased’s estate, while the assets transferred into the trust create a separate trust estate. Each estate is managed and handled according to different legal and financial rules.
What is probate court?
Probate court is a part of the judicial system responsible for overseeing the execution of wills and the administration of estates, conservatorships, and guardianships.
The court ensures that a will is carried out in accordance with the deceased’s wishes, verifying that all debts are settled and assets are distributed correctly. It also monitors and typically must approve the actions of the executor appointed to manage these affairs.
Additionally, if a will is contested, the probate court rules on its authenticity and assesses whether the individual who signed it was mentally competent at the time.
Alternative meaning of “estate”
Outside the financial and legal realm, the word “estate” is used to refer to a large area of land (typically in the countryside) owned by an individual or family. In British English, the word can also be used to refer to a housing estate or an industrial estate.
The bottom line
Hopefully, this article has helped clarify the meaning of the term “estate” as well as important related concepts such as estate planning, estate tax and probate court.
If you’re interested in more topics related to long-term finances and investing, we invite you to take a look at our article explaining active vs. passive ETF investing.