In large part, the size of an estate dictates the estate planning documents and strategies to be employed. Accordingly, initial estate planning discussions soon turn to the client’s assets. The starting point is to determine the client’s “Gross Estate”. Basically, the gross estate is the total value of the client’s assets.

Certain deductions are then allowed in determining the “adjusted gross estate.” Permissible deductions reduce the adjusted gross estate to arrive at the taxable estate. The diagram which follows illustrates the circuitous journey from the gross estate to the estate tax due. It also provides an overview of a number of the topics discussed later in the book.

The term “gross estate” includes all property in which the decedent has a beneficial interest at the time of death. The most obvious examples are cash, stocks, bonds, real estate, business interests, artwork and other personal tangible property. The following is a more complete list of assets included in the gross estate listed by category:

TANGIBLE

• Cash
• Cars and other vehicles (including boats and recreation vehicles)
• Precious metals, jewelry and furs
• Antiques, collectibles and works of art
• Household goods, clothing and other miscellaneous personal property

INTANGIBLE

• Savings and Checking accounts
• Money Market and Certificates of Deposit
• Stocks and bonds
• Mutual Funds
• Vested interest in profit sharing plan, stock options, 401(k) and IRA Plans, etc.
• Life Insurance
• Trademarks and royalties/partnerships/sole proprietorships & corporations
• Miscellaneous receivables (mortgages, promissory notes, rents due)

REAL ESTATE

• Homes, condominiums, time shares, business and investment properties, as well as undeveloped and agricultural land.

The gross estate includes other complex ownership interests over which the decedent retains the requisite control. The balance of this Q2 discusses concepts exclusive to the calculation of the gross estate, many of which are not found in financial accounting, and some which appear to have no basis in logic.

LIFE INSURANCE

The full face value of life insurance is included in the decedent’s estate, if the decedent maintained any “incidents of ownership” over the policy. Incidents of ownership are ownership-type rights, such as the right to change the beneficiary or borrow from the policy.

The increased life expectancy of Americans has resulted in lower life insurance premium costs and substantially larger face values. Large life insurance proceeds can inflate the value of an estate, causing unexpected estate tax consequences. To avoid estate tax, it may be advisable to own life insurance in an Irrevocable trust (See Q15). A properly drafted Irrevocable Trust separates the incidents of ownership from the decedent, thereby excluding the proceeds from the decedent’s estate.

RETIREMENT PLAN ASSETS

The full value of IRA, 401(k) and other retirement plan account balances is included in the decedent’s estate. Distributions from these plans are also subject to income tax. The possibility of double taxation on retirement type assets requires special planning (See Q17).

JOINTLY HELD ASSETS

One-half (1/2) of the value of assets owned jointly with a spouse are included in the gross estate of a decedent. One-hundred (100%) percent of assets held jointly with a non-spouse are included in the decedent’s estate where the decedent supplied all of the original consideration.

For example, the entire value of a joint savings account would be included in mom’s estate where mom simply added the name of her son to her account as a joint owner for sake of convenience.

Clients often mistakenly believe that they are making gifts by adding their children’s names to their assets. In reality, where the deceased joint tenant originally owned the asset the entire asset comes back and is fully included in the decedent’s estate. Assets held jointly with a spouse receive a stepped up basis as to one-half of the date of death value of the asset.

As a consolation prize, assets held jointly with a non-spouse, that are fully included in the decedent’s estate, receive a full stepped-up basis for income tax purposes.

Gifts of the following types of property must be brought back into the decedent’s gross estate:

1. gifts of property in which the decedent retained a life estate;
2. certain gifts of property that only vest if the donee survives decedent;
3. gifts subject to revocation by the decedent; and
4. gifts of life insurance policies insuring the decedent’s life, if made within three years of death.

TRANSFERS WITH A RETAINED LIFE ESTATE

The gross estate includes the value of any property which the decedent transfers if he or she retains the right to possession or enjoyment of the property, or the right to income from that property.

For example, if the decedent transfers his home to his child, but retains the right to live in the home during his life, the entire date of death value of the home will be included in the gross estate.

REVOCABLE TRANSFERS

If a decedent made a transfer of property during his lifetime, but retained the power to alter, amend, revoke or terminate the enjoyment of the property at any time up to and including the date of death, the value of the property is included in the decedent’s gross estate.15 Consequently, the entire value of a Revocable Living Trust is included in the Grantor’s estate.

POWERS OF APPOINTMENT

The gross estate includes the value of property over which the decedent has a general power of appointment. A general power of appointment is a power given to the decedent by a third party to consume, invade or appropriate the property in favor of the decedent, his estate or his creditors.
If the power is a lifetime power and is limited by an “ascertainable standard relating to the health, education, support, or maintenance of the decedent, then the power is deemed not to be a “general power of appointment” for estate tax purposes. The most common power of appointment is found in marital trusts (See Q10).

A marital trust power of appointment allows the surviving spouse to appoint the balance of the marital trust remaining at her death to a beneficiary of the surviving spouse’s choosing. As a result, the entire value of the marital trust (valued as of the date of the surviving spouse’s death) is included in the surviving spouse’s estate.

VALUATION

The value of any asset included in the gross estate is the asset’s fair market value as of the date of the decedent’s death. Special valuation rules are available for certain special use assets such as business property and farm land. The “alternate valuation date” (the date six months following the date of death of the decedent) may be elected by the decedent’s Personal Representative where the value of the decedent’s estate declined in value immediately after the decedent’s death. (See Q11).

The fair market value of cash and traded securities can be determined from the newspaper. The value of real estate and business interests must be determined by an independent appraiser. Obtaining the proper appraised value of property is necessary to avoid later conflict with the IRS, and for purposes of establishing the stepped-up basis of the asset.