The Gross Estate Explained
The Federal Estate Tax is imposed on the transfer of an individual's property at his death and on certain other transfers considered to be the equivalent of transfers at death. The tax is imposed on a decedent’s "Taxable Estate", that is, the value of the total property transferred or considered transferred at death (the "Gross Estate"), reduced by various deductions, including the Unlimited Marital Deduction available for property passing to a spouse. The tax is then computed under a unified rate schedule applicable to both gift and estate taxes. Under the unified rate structure, lifetime gifts and transfers at death are taxed on a cumulative basis at a rate of 50%. Before any tax is imposed, however, each individual is entitled to the equivalent a $1,500,000 Unified Credit against the Federal Estate Tax and Federal Gift Tax.
The Gross Estate of a decedent for Federal Estate Tax purposes consists of property falling within the following categories:
The main category of property included in a decedent's gross estate is that in which the decedent had full or partial ownership when he died. The property is included only to the extent of the interest he owned when he died. This includes all kinds of property both real and personal and tangible and intangible, including savings, investments, automobiles, artwork, jewelry, retirement benefits, loans to family members, homes, second homes, and business interests.
The value of property given away by a donor during his life is generally not included in his gross estate on his death. But some gifts, if made within three years of death, may be included in the donor's gross estate, at least for certain limited purposes. And any gift tax paid on any gift made within three years before death is added to the donor's gross estate under a special 'gross-up' rule.
Certain types of gifts, if made within three years before the donor's death, are includible in his gross estate. The gifts to which this three-year rule applies are interests in property otherwise included in the gross estate under Code Secs. 2036 (transfers with retained life estate), Code Secs. 2037 (transfers taking effect at death), Code Secs. 2038 (revocable transfers), and Code Secs. 2042 (life insurance proceeds). The three-year rule also applies to interests in property which would have been included in the gross estate under the above Code sections if the interest had been retained by the decedent. Inclusion of such gifts is required whether or not a gift tax return was required to be filed with respect to the transfer.
If the decedent made a transfer, either outright or in trust, under which he retained the possession or enjoyment of the property or of the income derived from it for his life, or any period that cannot be ascertained without reference to his death or does not in fact end before his death, the property is included in his estate.
In making lifetime gifts, donors frequently attach conditions and qualifications that have the effect of postponing the time when the recipient can get full possession or enjoyment of the property. If the postponement was for the donor-decedent's life or longer and he retained a significant reversionary interest, the property is includible in his gross estate.
A property interest transferred by the decedent at any time during his life (except for full and adequate consideration) is includible in his gross estate if at the time of his death the enjoyment of the interest was subject to change through retained powers that permitted him to revoke the transfer or change its terms.
If property was acquired by the decedent and the other co-owner or owners by gift, will or inheritance, only the decedent's fractional share of the property is included in his gross estate at death. If the joint ownership was created by one or more of the co-owners, the entire value of the property is included, except the part attributable to the consideration furnished by the other co-owners ("consideration furnished" test), subject to an important exception. This exception which applies only to joint interests created and owned by spouses is known as "the spouses' joint property rule" and it provides that half the value of the property is included in the estate of the first spouse to die regardless of which spouse furnished the consideration for the property.
Qualified terminable interest property (QTIP) for which a marital deduction was previously allowed is included in the estate of a surviving (or donee) spouse if the qualifying income interest for life is retained by the spouse until his or her death.
The donor of a power of appointment authorizes the donee to dispose of property on the donor's behalf. When the donee of the power of appointment dies, the question arises whether the property subject to the power is includible in the donee's estate for estate tax purposes. This depends primarily upon the scope of the power. Ordinarily, only a general power of appointment will cause inclusion in the donee's estate.
Property over which the decedent held a power of appointment is not includible in the decedent's estate unless the power was "general." A power of appointment is considered "general" if it is exercisable in favor of the decedent personally, his estate, his creditors, or the creditors of his estate.
The proceeds of insurance on the decedent's life are includible in his gross estate under a special provision of the Code. This includes proceeds receivable by the executor of the decedent's estate. It also includes proceeds receivable by other beneficiaries but only if the decedent possessed one or more incidents of ownership in the policy at his death. Thus it is possible to keep insurance proceeds out of the decedent's estate by naming a beneficiary other than the insured's estate and giving up all incidents of ownership in the policy.
Annuity or survivorship payments receivable by any beneficiary under certain con tracts, agreements or plans are includible in the decedent's estate to the extent the value of the annuity or payment is attributable to amounts paid by the decedent or his employer.