Posted by The TaxAdvocate Group, LLC

Gross Estate

Gross Estate

The gross estate's value must be determined to know if an estate tax is paid and how much it will cost. Subtitle B, Title 11, Subchapter A, Part III of the Internal Revenue Code (IRC) lists what can be included in the gross estate and what is excluded.

The deceased's gross estate includes all testamentary and non-testamentary property of the deceased; therefore, gross estate is more comprehensive than defined by state law. However, a property in which the deceased had an interest that terminated at the time of death or before death, but has no control over the subsequent conveyance of the property, are generally excluded, such as life estate for the decedent that was created by someone else. A life estate can even allow the deceased to invade the principal or give the decedent special power of appointment. However, if the deceased has a general power of appointment, the life inheritance is included in the inheritance for tax purposes. 

Of course, any life estate created by the deceased can be included in the estate. Suppose the deceased transferred the estate to another person but retained actual possession or the right to own the property. In that case, if it can be included in his estate, it is established whether he was paid the full value for it by marking it a legit transfer. If this was not a bona fide transfer, then the property is fully includable. Whether the transaction was a bona fide transfer is determined by the amount provided and the parties' intention. 

The estate's gross value will include the value of all property to the extent of the deceased's interest in them at the time of death. 

Any taxable gift offered within three years of death, known as an estate tax period inclusion period (ETIP), or gift taxes paid on those gifts can be included in the deceased's gross estate. 

Concurrent-owned property (tenancy in common, joint tenancy, community property, and tenancy by entirety) can be included in the deceased's estate. However, suppose the joint tenancy or tenancy by the entirety is with the spouse. In that case, even though the value of the deceased's share may be included in his estate, it is qualified for marital deduction. Therefore no estate taxes are calculated on its value. If the deceased had joint tenancy with someone other than their spouse, there might be a tax liability for gift tax if the other co-owners do not provide valid consideration for their shares. However, suppose the joint tenancy is in a bank account or on a government bond. In that case, no liability for gift tax occurs until the non-contributing party withdraws part or all the money. This is because the joint tenant can withdraw all or none of the funds, so that the gift tax liability cannot be established until the joint tenant has withdrawn the money. However, if the contributing co tenants paid the gift tax, it will be credited against the estate tax to avoid double taxation.

To calculate the value of the decedent's value of a joint tenancy, the value of the property is determined at the time of the deceased's death, of the entire property minus contribution percentage of the joint tenants, which is determined by dividing the value of the property by the number of a joint tenant with right of survivorship.

Also included is any right of the deceased to receive benefits from the employment-related benefits program with a POD (pay on death). 

Any survivor benefit paid based on annuity contracts, pension plans, or when the deceased was entitled to receive current or future distributions during his lifetime may be included in the estate. However, survivor benefits payable by law or by statute to the deceased's spouse or children, including social security benefits, are not included.

Income from a life insurance policy, whether whole life or term, may be included in the deceased's estate, if the decedent had a property rights impact on the policy at the time of death or if the income has been paid to the deceased's executor or his probate estate. Even if you haven't paid the policy premiums, ownership incidents include the right to cancel or transfer the policy, take out loans, and the right to change beneficiaries. 

Any property in which the deceased has a beneficial interest or control is included in the estate, even if legal title is transferred to another person. 

Any property over which the deceased was entitled to own, enjoy, control, or have the right to property income may be included in the estate.


Exclusion of qualifying conservative easement from a gross estate

A conservation easement is a willful, legally binding agreement between the owner and a trust fund or government agency to preserve certain properties for public, environmental or historical interest. When easements are transferred with the property, they reduce the property's value, so the federal government allows a deduction for conservation easements. The easement is enforced by a government agency or the land trust.

IRC §2031(c) provides for an exclusion from property tax for qualifying conservation easements, equal to the lesser of the following amounts:

  • the applicable percentage of the value of the land used to qualify as a conservation easement less any tax deduction on charitable property taken as an easement per IRC §2055(F); or

  • the exclusion limitation.

The maximum applicable percentage is 40% if the conservation easement value is at least 30% of the land's value, without counting the easement and less any construction right. The applicable percentage is reduced by 2% for each percentage or fraction where the value of the conservation easement is less than 30%. The exclusion limit is limited to $500,000. The land of the conservation must be located in the United States or its possessions and must have been owned by the deceased or their family during the three years period before the deceased's death.


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