When planning your estate, it’s important to understand that avoiding probate does not eliminate or reduce estate taxes. Although avoiding probate may reduce or eliminate estate income taxes, avoiding probate doesn’t have any effect on estate taxes. In fact, avoiding probate and avoiding estate taxes are two unrelated concepts. The following is an overview of the two concepts:

Avoiding Probate

Avoiding probate is a strategy used to pass the decedent’s property directly to the beneficiaries without going through the probate court. Most common estates (smaller estates that are less than the exclusion amount that triggers the estate tax) use probate avoidance methods for the following reasons:

• By avoiding probate court, property of the decedent gets to the beneficiaries much quicker than if they had to wait for the probate process to end, which is usually a year depending on state law.

• By using probate avoidance methods on assets that earn income after death, the income earned on those assets belong to the beneficiary. As a result, the beneficiary is responsible for the taxes on the income. This will reduce or eliminate the estate income tax liability for the estate.
  

For related information on avoiding probate, refer to the following articles:

• Tips to Avoid Probate in your Estate Plan.
• Commit Enough Assets to Cover Expenses in Your Estate Plan.
• Tips to Minimize the Estate Income Tax.

Avoiding Estate Taxes

The IRS regulates estate taxes as part of a complex tax structure. So, the IRS doesn’t care about the probate court or probate avoidance methods on assets. For the purpose of assessing an estate tax, the IRS looks at the gross value of the estate. The gross value is calculated by totaling the value of all property belonging to a decedent, including property in a revocable trust, regardless of how the property is titled. Fortunately, common estates don’t have to worry about estate taxes because the gross value of the estate is less than the exclusion amount that triggers the estate tax. So, estate taxes concern only the large estates.

In terms of avoiding estate taxes, wealthy people who are planning their estate will need a more elaborate estate plan. The estate plan will require the help of professionals and will most likely include gift giving and irrevocable trusts.

For more on estate taxes and other taxes related to an estate, refer to the following articles:

• The Estate Tax and Gift Tax: The Impact on your Estate.
• Tax Returns and the Date of Death.

Conclusion

To clear up any confusion, avoiding probate may reduce or eliminate estate income taxes, not estate taxes. Therefore, avoiding probate is a better strategy for smaller estates with assets that earn income after death. Conversely, avoiding estate taxes is only a concern for large estates and will require a more elaborate estate plan.

Recommended Reading

The Executor’s Guide– The Executor’s Guide goes into more detail about the benefits of avoiding probate and what’s needed to avoid estate taxes.

Plan Your Estate – Plan Your Estate gives more details on probate avoidance methods and trust information to avoid estate taxes.

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