The Internal Revenue Service considers virtually everything you own in your name at the time of your death to be an asset of your estate. Some assets have to pass through probate, but others don’t. They’re still part of your estate for tax purposes; they just don’t require the probate process to transfer ownership.
Taxable Estate Assets
If the value of all your assets totals $5 million or more as of the time of publication, the Internal Revenue Service says these assets are all part of your estate and your estate must pay taxes on the value. It doesn’t matter if the items of property have to pass through probate or not; they're still assets as far as the IRS is concerned. If you own only a partial interest in something, such as a piece of real estate, only that portion counts, not the entire property.
Although they might be taxable by the federal government, some of your estate’s assets will not pass through probate when you die. From a probate standpoint, only property that requires a special legal process to transfer ownership to your beneficiaries constitutes your estate. For example, if you and your spouse own your home as joint tenants with rights of survivorship, the home will pass directly to her when you die. It doesn’t require probate, so it’s not a probate asset. This also applies to retirement accounts and payable-on-death bank accounts with named beneficiaries. If they go to the beneficiary by contract with the bank or financial institution, they’re not your estate’s assets for probate purposes.
Life insurance policies have rules all their own regarding both probate and tax issues. If the policy has a named beneficiary, it’s not an asset of your estate for probate purposes. However, if the named beneficiary is your estate, it is. If you own the policy, the IRS says it’s an estate asset and your estate has to pay taxes on its value, no matter who the beneficiary is. However, if someone else takes out an insurance policy on your life, such as your spouse, it’s not part of your estate because your spouse actually owns it.
Another gray area concerns assets you place in a trust. Technically, after you transfer your assets into a trust, you don’t own them anymore; the trust does. Therefore, when you die, they don’t have to go through probate because their owner -- the trust -- did not die as well. Probate law does not consider trust assets part of your estate. However, depending on whether the trust is revocable or irrevocable, the IRS might. With a revocable trust, you still have control over your assets so the IRS says they are part of your estate and they’re taxable. With an irrevocable trust, you give up control of the assets you place in it. You no longer have any ownership interest in them, so they’re not taxable.
- FreeAdvice: What Property is Included in Probate?
- Law Office of Scott C. Soady; What Assets Do Not Go Through Probate?; Scott C. Soady; June 2009
- IRS.gov; Frequently Asked Questions on Estate Taxes; March 2011
- Nolo: Transfer Your Life Insurance and Decrease Your Estate Tax
- Estate Street Partners, LLC: Revocable Trusts vs. Irrevocable Trusts
- Commonwealth of Massachusetts. "Find Out When It’s Necessary to Probate an Estate." Accessed Sept. 17, 2020.
- Cornell Law School Legal Information Institute. "Right of Survivorship." Accessed Sept. 17, 2020.
- Social Security Administration. "SI ATL01110.510 Shared Ownership." Accessed Sept. 17, 2020.
- IRS. "Frequently Asked Questions on Gift Taxes." Accessed Sept. 17, 2020.
- American Bar Association. "Estate, Gift, and GST Taxes." Accessed Sept. 17, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.