When someone passes away, their property will need to be accounted for and distributed accordingly. If the deceased had a will in place, it should name who they wish to be the executor of their estate. A court will then appoint this executor to handle the deceased’s estate. If the person died without a will, then the court will appoint an administrator to handle this task.
The executor or administrator will calculate the gross estate, which will reflect the value of the person’s property and other assets when they died. This will include things like cash, real estate, stocks, investments, and personal belongings. This can be a complicated feat if the person died with a lot of assets or investments.
If you are planning your estate, it is important to understand what will factor into your gross estate, how deductions affect the gross estate, and resulting tax implications. Executors and administrators also need to have a firm grasp on the components of a gross estate to ensure smooth estate distribution after a person’s death.
What are Some General Items Included in the Gross Estate?
Anything that the deceased had a beneficial interest in when they die would qualify as property that should be accounted for in the gross estate. State law will generally lay out what qualifies as a beneficial interest. Some standard items include the following:
- Cash, both physical and stored in bank accounts;
- Savings bonds;
- Stocks and other investments;
- Real estate, like houses or businesses that the deceased owned;
- Automobiles; and
- Personal belongings, like jewelry.
Something important to know is that the person did not need to have title or possession of the property for it to qualify as part of the gross estate. So, say for example that you were a stakeholder in a business before you died. Whatever the value of your interest in the business was at the time of your death would be included in your gross estate, even though you were not the business owner.
Another common example is with interest in real estate. You do not have to be the titleholder or sole owner of a piece of real estate to have it included in your gross estate. For example, if you jointly owned a house with your spouse who is still alive then half the value of that property will factor into your gross estate.
However, this calculation is different if the joint property was owned with someone who is not your spouse. Generally, the deceased can have the entire amount of the property factored into their gross estate if the other person did not contribute any money to get the property.
What are Some Other Things That Could be Factored Into the Gross Estate?
Various other things can be factored into a person’s gross estate, as long as a beneficial interest exists. Some examples are:
- Annuities: These are when you are under a contract with an insurance company to receive interval cash disbursements out of money you paid (either through a lump sum or several payments). These disbursements can be set for immediate or future payment, and are viewed as income. The gross estate will include any annuity payments receivable by a beneficiary who survived the deceased, and will only reflect the value of the deceased’s contribution.
- Reversionary Interests: If the deceased had given away property with the possibility of it reverting back to them, then that may be included in the gross estate. However, this can be a tricky situation and will be dependent on your state’s laws.
- Life Insurance: If insurance proceeds payable on a person’s life are paid to the estate, then they will be included in the gross estate calculation. However, if they are paid to a beneficiary (who is not the estate’s executor), these proceeds will only be included in the gross estate if the person had incident of ownership at death. For example, having the right to cancel the policy or alter beneficiaries qualify as incident of ownership.
- Revocable Transfers: Sometimes, you can transfer property to another person and still retain an interest to alter, change, revoke, or terminate the transfer. This property will be counted in the gross estate.
- Gifts After Death: Any gifts made within three years of a person’s death will generally be included in the gross estate, even though the gift will be transferred to a beneficiary since the original recipient died. The requirement is that the transferred property would have been accounted for in the gross estate if the transfer had not occurred, like a gift of money.
These are not the only instances of property that should be factored into the gross estate. Any other property the deceased had interest in will likely qualify. Federal tax law and your state’s laws will help guide this determination.
What Deductions Can Affect the Gross Estate?
If you are planning your estate, taxes will need to be accounted for in the plan. Knowing what will be factored into your gross estate is the first step. However, federal estate taxes will only be imposed on the net estate. This is the gross estate minus any applicable deductions.
The deductions will be based on any liabilities that the person owed at the time of their death. For example, say you own a house and twenty percent of it still needed to be paid off at the time of your death. This figure would be deducted from the gross estate.
Other examples of deductions include funeral costs, outstanding loans, administrative fees, and other debts. Once these things are all computed the net estate will remain and be distributed to any beneficiaries or heirs.
Do I Need to Contact an Attorney About My Estate?
If you want to put together an estate plan to ensure your property is handled according to your will, then you should contact a local estate planning attorney. An attorney will follow relevant state laws and federal tax law to create a viable estate plan.
An attorney can also help carry out your wishes about property distribution and determine what would be included in your gross estate. Additionally, an attorney will advise you on what will remain as your net estate after deductions are made based on your liabilities and debt.