Question: Someone told me that assets with named beneficiaries are not subject to estate tax, is that correct?
Answer: No, that is not correct. Your “gross taxable estate,” meaning the assets that are subject to estate tax, consists of all of the assets which you have an interest in at death, even if those “non-probate” assets that do not pass to your beneficiaries through the probate of your Will. However, if your gross taxable estate is less than the state and federal exemption amounts, there will be no estate taxes due at your death. In 2021, those who die as residents of New York State with less than $5.93 million will not owe state estate taxes, and those with less than $11.7 million will not owe federal estate taxes.
Your gross taxable estate may also include certain property transferred during your life in which you retained an interest. For example, if you transferred property to your children but retained a life estate, that property would still be part of your gross taxable estate. Or, if you have property or financial interests that would become payable upon your death, such as life insurance, that may also be included in your gross estate. Note that there are specific rules that may include gifts given during your lifetime into your gross taxable estate, but this only applies to those above the State and/or Federal exemption amounts.
Typically, the property that is includible a person’s gross taxable estate is property held in the deceased person’s name ether jointly or solely. However, it may also include ownership interests in trusts and business partnerships. For example, your gross taxable estate may include: real estate, personal property, brokerage accounts, life insurance, retirement funds, and all claims against others, such as claims involving a personal injury.
A different term that is also used in this area is “probate estate.” This term refers to assets which pass to your beneficiaries though a Will. This includes assets that were in the sole name of the decedent, or made payable to the decedent’s estate. The probate estate does not include assets owned jointly with rights of survivorship, payable-on-death accounts, or other assets with named beneficiaries. Assets held in a revocable or irrevocable trust do not typically pass through the probate estate. The probate estate is just one portion of your gross taxable estate.
“Probate” is also the name of the Surrogate’s Court process by which the Will is determined to be a final statement of how your assets are to be distributed at death and confirms the appointment the executor of your estate. The term “probate” also refers to the process of administering the estate. The probate process involves asset gathering, paying the debts, taxes and expenses of administration and distributing the assets to the beneficiaries. Assets held in a trust, jointly held or with a named beneficiary will not be subject to the probate process and will pass immediately to your named beneficiaries.