Remember the classic Abbott and Costello comedy routine, “Who’s on First?” The speakers use identical terms to mean different things, but neither recognizes the problem. The longer they banter, the more they grow frustrated by each other’s seeming lack of understanding of the baseball game they are discussing, and hilarity ensues. Similarly, the language of estate planning can give rise to problems for the uninitiated, but the problems that come up may not be funny at all. The vocabulary of estate planning is very precise, and a seemingly innocuous slip of the tongue can make a world of difference.
A good example is the term “estate.” Does it mean land, as in “real estate,” or what passes by way of your Will, as in “probate estate,” or does it mean what is in your revocable living trust, as in “trust estate,” or does it mean what is subjected to “estate” tax after you are gone? It can mean any of those things, depending on the context.
An “estate” can be land or an interest in land. An example of an interest in land is a life estate. A life estate gives the owner—called the life tenant—the right to use the land for his or her lifetime. The life estate terminates upon the life tenant’s death and the land goes to the remaindermen. Interestingly, the term “life tenant” does not refer to somebody who pays rent, as we normally think of a “tenant,” but rather somebody who can use certain property for life without having to pay rent.
Your probate estate is whatever you own at your death that will pass by way of your Last Will and Testament. It can include anything you own, such as land, bank accounts, and jewelry.
If you put your land, bank accounts, and jewelry into your revocable living trust, those assets become what is called your “trust estate,” and they will not longer be part of your probate estate when you die. Your trust estate bypasses probate.
But wait! Doesn’t the estate tax hit not only a person’s probate estate, but also things that have nothing to do with the person’s probate estate—like life insurance policies, retirement accounts, jointly-owned assets, and trust assets? Yes, because your estate for estate tax purposes includes just about everything you own or control at the moment of your death.
Knowing the language of estate planning can be helpful in formulating your own estate plan, as well as understanding someone else’s plan that names you as a beneficiary. Having a well-informed estate planning vocabulary takes you a long way toward knowing “who’s on first” in the complicated subject of estate planning.