What’s Your Estate and How Much Is It Worth?

The term “estate” can have different meanings for different purposes. The “probate estate,” which is comprised of assets requiring court approval to pass title to the beneficiary, includes only those assets you own in your name and that do not pass automatically upon your death by operation of law. For example, if you own your car in your name, it becomes a probate asset when you die. If you own it jointly with your spouse with rights of survivorship, the car passes automatically to your spouse upon your death, so the car is not a probate asset.

For tax purposes, your “estate” includes all property in which you have an interest-both probate and nonprobate property. Examples:

• Life insurance owned by you on your own life (or on anyone else’s life).
• Assets held in a living trust in which you are the beneficiary.
• Assets jointly owned with a spouse (or anyone else). The portion of jointly owned assets included in the estate depends on certain circumstances.
• Household goods.
• Collectibles.
• Retirement plan benefits, including assets within a traditional or Roth IRA.
• Investment portfolios, including stocks, bonds, and mutual fund shares.
• Debts owed to you, such as loans you’ve made to other people.
• Business interests, such as a sole proprietorship or your share in a limited liability company, partnership, or corporation.

What’s your estate worth?

For tax purposes, your estate is usually valued on the date of death. Value is usually determined by fair market value-what a willing buyer would pay and what a willing seller would accept in a reasonable situation. What you paid for an asset has no impact on estate tax value.

If your estate is large enough to require that an estate tax return be filed (more than $5 million in 2011 and 2012), then your personal representative can opt to value all the assets in the estate as of six months from the date of death, or if sold or distributed by this date, then the value on the sale/distribution date. This is called the alternate valuation date. It’s one or the other-date of death value or value on the alternate valuation date-you can’t pick and use the more favorable value.

For certain assets, such as publicly traded securities, valuation is easy to determine-just look in the newspaper or online for the date of death to find the appropriate value (there are some wrinkles to this rule when death occurs on a holiday or weekend since there is no trading on that date).

For other assets, such as a home, a closely held business, or art works, value depends on someone’s opinion. Depending on the projected value of an asset, an expert appraisal is required for estate tax return purposes.

Note: The value used for estate tax purposes is very important to heirs. It becomes their basis in the assets they inherit and will affect their gain or loss when they ultimately dispose of the inherited property.