Estate planning when you have a small or moderately sized estate is complex enough. But it can become even more complicated with a larger estate. With more assets, the more likely you are to face taxes on a state or federal level. To figure out your potential estate tax liability, you need to understand which assets contribute to your gross estate. Here’s a breakdown of some of the types of property that factor into your estate. A financial advisor can provide valuable guidance on estate planning.
What Is a Gross Estate?
A gross estate is the overall amount of property you own at the time of your death. That includes both personal and real property. The value of these assets then serves as the basis for the amount of estate tax you owe to the government.
Your gross estate factors in multiple forms of assets. Taking stock of the various things you own or hold interest in is vital then. They impact the overall value of your estate and your estate tax liability as a result. Here are some assets you may need to consider while calculating yours.
Financial accounts such as checking, savings, money market and certificates of deposit accounts are all a part of your gross estate. The exact value of the account, however, can differ depending on your ownership.
If the account is solely in your name, the entire value gets included. This also applies to payable-on-death accounts and revocable living trusts. But if you share the account with your spouse, either through joint ownership or rights of survivorship, only half of the value is included. This can get more complicated with other joint owners, though. In that case, 100% of the account’s value is included unless you can prove the other owner, or owners, made contributions.
The same rules apply to investment accounts, like brokerage accounts holding stocks, mutual funds, etc.
Your gross estate includes all of the proceeds from your life insurance policy. In contrast, if you own the policy for someone else’s life, only the cash value gets included.
There is also a time limit if you transfer a life insurance policy to an irrevocable life insurance trust (ILIT). Your gross estate must include it if the policy transferred within three years of the decedent’s death date.
There are a variety of retirement plans out there. When it comes to calculating your gross estate, it includes both Roth and IRA accounts at 100% of their value.
Additionally, you factor in employer-sponsored retirement plans like simple and SEP IRAs, 401(k)s and 403(b)s as well as annuities. You also include them at 100% of their value.
You probably fill your home with both high-value and sentimental items. For example, you might have a collection of artworks, antiques, jewelry, books, electronics or wine. You may even store some of these possessions outside of your home. Either way, all of them need to be calculated into your gross estate. Some may have inconsequential value, though.
The estate’s executor will likely need to organize appraisals for higher-value items to determine their exact value.
Vehicles such as automobiles, airplanes and boats face the same rules that financial accounts do. As long as they are solely under your name, the entire value goes toward your gross estate. The same applies if the vehicle is in the name of your revocable living trust.
In comparison, if you and your spouse jointly own it, only 50% is included. If the joint owner is not your spouse, 100% of the value goes toward the gross estate unless the other owners can prove their financial contribution to the purchase.
Interest in a closely held business applies in a few different situations. For example, if you hold any sole proprietorships, a qualifying partnership or stock in a corporation, it may apply to you. Although, both of the latter situations require additional conditions.
For example, if you hold stock in a company, it must be a minimum of 20% in value of the voting stock, or there must be a limit of 45 shareholders. This is what it means to have stock in a closely- corporation – a small group or an individual must hold the shares.
Ownership of real estate follows the same rules that apply to vehicles and financial accounts. However, if there are claims, liens or debts against the property, they may deduct from the value.
Specific Trust Assets
Some trusts you are the beneficiary of apply, but only certain ones. For example, trusts that you have general power of appointment over count toward your gross estate at the entire value of the trust’s property. This includes the value of a marital or “A” trust created to provide benefits for you as a surviving spouse.
One form of trust that does not qualify, however, is the irrevocable living trust.
Taxable Lifetime Gifts
The IRS allows single filers and joint filers annual and lifetime tax exemptions up to a certain limit. The IRS adjusts these limits periodically to keep up with the rate of inflation. According to the IRS, it adds the value of lifetime taxable gifts to the net estate value. This is after the gross estate value subtracts deductions. The sum then influences the estate tax total, although available unified credit may reduce it. The unified tax credit determines the lifetime tax exemption allowed, which is $12.92 million for 2023. However, the $12.92 million limit applies to your combined gross assets and taxable gifts.
Money Owed to You
Finally, money owed to you can also contribute to your gross estate. This may include unpaid compensation through your work, such as wages or royalties, loans you’ve made to others or mortgages held by you that someone else is paying. This form of asset gets evaluated at a dollar-for-dollar level.
Gross Estate Calculation
There are tax consequences to your gross estate. So, it’s crucial for every taxpayer to understand how to calculate their cumulative property.
Gross estate includes all personal or real, intangible or intangible, property you own. You can evaluate the value of this total amount in one of two ways. First, you can value it as of the decedent’s death date.
If the executor chooses against this, they can elect for the alternate valuation, according to Sec. 2032. In this case, property sold, distributed, exchanged or otherwise disposed of within six months of the owner’s death gets valued at the date of transfer or exchange. Any remaining property gets valued at the six-month mark following the decedent’s death. This is done based on aggregate value, so it’s possible even if some items appreciate in value.
However, the executor can only choose the second method if the estate and GST taxes on the estate are lower using this method. Otherwise, they must continue with the date-of-death valuation.
Once you have the appropriate evaluation amount, you factor in applicable deductions. Deductions include:
- Funeral expenses
- Mortgages and liens
- Expenses incurred while addressing claims
- Losses during settlement of the estate
Gross Estate, Example and Taxes
Let’s say estate owner John passed away in 2023. Combining his personal possessions, insurance policies, financial accounts and real property, John owned an estate worth $8 million – his gross estate. However, at the time of his death, he owed some outstanding debts. In addition, the executor of the estate faced some administrative costs while settling it. As a result, the total value of the estate comes down to $7 million – his adjusted gross estate.
John’s adjusted gross estate in 2021 is $7 million. But he doesn’t owe any estate tax. Why is that?
When estate owners pass, they may face a federal tax on their transferred property. It takes into account everything they own or have an interest in at the date of their death. The tax uses the fair market value of the items to calculate the gross estate value. From this, it subtracts certain deductions, resulting in your taxable estate.
Many estates do not have to actually pay this tax, though. A filing is only required for estates with combined taxable gifts and gross assets that exceed the gift tax limit. The limit for 2023 is $12.92 million. As a result, John’s estate does not owe any tax because his taxable estate only amounts to $7 million.
The examples above are just some of the assets that can be included in your gross estate. The list that applies to you may be unique, though. To best understand your personal situation, consider talking to an estate planning professional. They can help you determine your potential estate tax liability. In addition, they can help you find ways to minimize the burden of those taxes.
Tips on Estate Planning
- Many people incorporate generational wealth transfer into their estate plan. A financial advisor who specializes in estate planning can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Your financial investments may also contribute to your gross estate. So, it’s important you know what your portfolio will look like by the time you pass it down. SmartAsset’s investment calculator can help you project your potential growth, making planning easier.
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