Your relative’s probate estate includes his assets that can’t transfer to his heirs or his beneficiaries without court intervention. For example, if he wants you to inherit his home, you don't actually own it until the deed is transferred into your name. You can’t sell the property or take a mortgage against it, because simply having it bequeathed to you in a will does not make it legally yours. Your relative’s will only memorializes his intentions; a legal process is required to move ownership from him to you. Therefore, the home would have to pass through probate so a court can authorize the transfer.
Some assets included in your relative’s overall estate do not require probate. These represent his non-probate estate. They have named beneficiaries designated to receive them upon his death. Examples include life insurance policies, where the death benefit goes to a beneficiary selected by your relative, and retirement benefits. Some states allow bank accounts and motor vehicles to be titled this way as well; they include “payable on death” clauses. Other assets that bypass probate might include any assets your relative transferred to a living trust during his lifetime. The trust assumes ownership of these assets, and they do not require probate. They can transfer directly to the beneficiaries your relative named in his trust documents.
The IRS doesn’t care whether your relative’s assets must pass through probate or if they transfer directly to beneficiaries. For federal estate tax purposes, your relative’s estate includes both probate and non-probate assets: everything he owned at the time he died. In tax terms, this is his “gross” estate. The IRS taxes these assets based on their value at the time of his death, not necessarily what he paid for them.
Community Property Law
Community property laws further complicate the definition of an estate. At the time of publication, nine states observed community property laws: California, Arizona, Nevada, New Mexico, Washington, Idaho, Wisconsin, Texas and Louisiana. In these jurisdictions, married couples own property equally. Therefore, if your relative lived in any of these states and if he was married, his estate only included half of the assets he owned with his spouse. If he wanted to leave you his home, by law he could leave you only 50 percent of it, his community property share. He has no legal right to bequeath his spouse’s half. Your relative’s portion of community property would then be broken down into categories of his probate estate, non-probate estate and gross estate.