Gross estate

Key takeaway

For a U.S. citizen or resident decedent, the gross estate is the value of property interests included under federal estate tax law, generally valued at death, including certain lifetime transfers and assets passing outside probate.

Property interests included at death

Property held at death is included to the extent of the decedent’s interest. That rule does not automatically include an entire asset owned with someone else.

For a U.S. citizen or resident decedent, covered property includes real and personal property, tangible and intangible, wherever situated.

Start your review with an ownership list for your business interests, real estate and investments. Record each owner and the documents that describe each interest.

How included property is valued

Each included item generally is valued at fair market value at death unless the executor elects alternate valuation.

A forced sale price does not determine fair market value. A local property tax assessment may be used only if it represents fair market value on the applicable valuation date.

An executor may elect alternate valuation only if it decreases both the gross estate and the combined estate and generation skipping transfer tax. The election is irrevocable.

Under that election, property distributed, sold, exchanged or otherwise disposed of within six months after death is valued on the disposition date. Other property is valued six months after death.

Joint property held by spouses

When the surviving spouse is a U.S. citizen, one half of a qualified spousal joint interest is included in the gross estate.

A qualified interest is property held by the decedent and spouse as tenants by the entirety, or as joint tenants with right of survivorship when those spouses are the only joint tenants.

Keep the title documents with your ownership list so your review starts with the actual form of ownership.

Mortgages and the gross estate

If a mortgage debt is enforceable against other estate property, or the decedent was personally liable, include the property’s full value and report the mortgage or lien as a deduction.

If the estate is not liable, include only the equity of redemption, meaning the property’s value less the debt. Do not separately deduct that debt.

Gather the loan agreement along with the property valuation. Looking only at the outstanding loan balance leaves out the liability question.

Gross estate, taxable estate and tax due

For a U.S. citizen or resident decedent, permitted deductions reduce the gross estate in determining the taxable estate. Federal estate tax is imposed on the transfer of the taxable estate.

The gross estate total alone therefore does not establish tax due or eligibility for a particular deduction.

Fair market value: The price a willing buyer and willing seller would agree on when neither is compelled to act and both are reasonably informed.

Domicile: For federal estate tax, domicile means living in a place, even briefly, with no definite present intention of leaving. Residence without that intention is insufficient, and an intention to change domicile requires an actual move.

Resources for your next review

Federal estate, gift and GST tax. Open this guide next to put your gross estate review in the context of federal transfer taxes.
Federal transfer tax records and questions checklist. Use this checklist to prepare the records and questions you want to bring to a discussion about included property and valuation.
Asset and authority map template. Organize your ownership review here before working through jointly held assets and interests in private businesses.
Questions for an insurance and estate liquidity review. Take this checklist into your insurance discussion when you reach the policy ownership questions below.

An early start for business owners

This speaker’s experience with business exits offers a reason to begin gathering ownership and planning questions before a transaction approaches.

"So it is never too early to begin thinking about exit. Oftentimes, I would say most of our clients come to us in the year of transaction when they say, you know what I'm really thinking about selling this year? What can we do? And our playbook is it changes and can be limited at that point."
From an Investor Advantage talk hosted by Richard C. Wilson

Common questions

Can life insurance paid to someone other than the estate be included?

Yes, proceeds from insurance on the decedent’s life payable to other beneficiaries are included when the decedent held incidents of ownership at death, exercisable alone or with another person. Proceeds from that insurance payable to the executor are also included.

Incidents of ownership include powers to change beneficiaries, surrender or cancel the policy, assign it, revoke an assignment, pledge it or borrow against its surrender value.

A reversionary interest counts only if its value immediately before death exceeded 5% of the policy’s value. Proceeds outside this insurance inclusion rule may still be included under another gross estate provision.

Does gift tax paid near death increase the gross estate?

Yes, the gross estate increases by gift tax paid by the decedent or the estate on gifts made by the decedent or spouse during the three years ending at death.

This addition concerns gift tax paid rather than automatically adding the value of every gift.

When does the gross estate trigger a federal estate tax return?

For a U.S. citizen or resident decedent, the executor must file when the gross estate exceeds the basic exclusion amount for the year of death, reduced by adjusted taxable gifts.

Filing to elect portability is a separate matter.

Sources