Bob Brinker's Marketimer

  Thursday June 25, 2009

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What Is Included in a Person's Estate for Federal Tax Purposes?

In a word, everything. The size of the probate estate has nothing to do with the size of the gross estate, which is the starting point for determining whether an estate is subject to federal estate tax. The gross estate is reduced by allowable deductions to calculate the taxable estate. Avoiding probate by keeping property out of your probate estate (with a living trust, or by other means) does NOT necessarily keep that property out of your taxable estate.

  • Taxable estate is composed of ALL property interests that the deceased person owned.
  • Life insurance proceeds, certain retirement plans, profit sharing plans, jointly held property, and property held in certain trusts is included in the taxable estate.

Changes made by the 2001 law

The 2001 tax law affected many states’ gift and estate taxes. This influence will continue with the $11.2 million estate tax exemption for 2018. Historically, state death taxes have been much less significant than federal taxes because many states accepted the federal deduction for state estate tax as their tax amount. The 2001 Tax Relief Act changed this in a way that began costing the states significant revenue starting in 2002. Some states have responded by increasing their own inheritance and estate taxes to avoid loss of revenue resulting from these changes in the federal law.

What is in the gross taxable estate?

A decedent’s gross taxable estate is composed of ALL property interests he or she owns. This includes:

  • The decedent’s share of his or her jointly owned property and accounts. If the other co-owner is a spouse, the law presumes that 50 percent of the property belongs to the decedent, and it is included in his or her gross taxable estate. But if the other co-owner is anyone other than the decedent’s spouse, the law presumes that 100 percent of the property is owned by the decedent, unless the other co-owner can prove his or her actual contribution to that account or property. The IRS assumes in this situation that the decedent was merely shifting assets by setting up a joint account to avoid taxes, so the other joint owner is ignored.
  • Qualified retirement plan accounts such as 401(k)s and profit sharing plans. Individual retirement accounts (IRAs) of all varieties are also included.
  • Life insurance proceeds. If the decedent owns the policy at the time of death, the death benefit is part of the decedent’s gross taxable estate, even though the beneficiary does not have to pay income tax on the proceeds. An estate that is seemingly below the taxable minimum of $11.2 million in 2018, can easily leap well past that point in size when insurance policy proceeds are counted. To avoid having life insurance death benefits included in the gross taxable estate is to transfer ownership of the policy to another person or trust.
  • Property held in a trust the decedent controlled outright or in which he had significant "strings attached" is fully included in the decedent’s gross taxable estate. A simple living trust, for example, will not save tax of any kind. A trust must be irrevocable and not under the full control of the grantor if it is to save estate taxes in the grantor’s estate.

Everything you own at death is "on the table" when it comes to figuring your estate tax liability. That’s why it’s so important to make full use of all available tax-saving strategies and tools appropriate to your situation.

The legal process of proving the validity of a will and fulfilling its provisions. It involves obtaining official recognition of the testator (or appointment of the administrator by a court), filing paperwork, declaring validity of the will, and settling the estate.
The total value of a deceased person’s assets, calculated before debts and taxes are subtracted. The gross estate is figured primarily for federal estate taxes.
1. A right, title, or interest in a piece of real or personal property. 2. In business law, the estate is the total of all assets owned by an individual at the time of death.
A tax imposed on assets willed to heirs. The federal government and many states impose estate taxes. The estate tax differs from the inheritance tax in that it is imposed on the estate rather than on the heirs. Federal estate taxes must be paid by the executor of a will out of the assets of the estate. Transfers of property between spouses are not normally subject to this tax.
Amounts subtracted or withheld from one’s gross income.
The amount of an estate that can be taxed. It is figured by subtracting all allowable deductions from the gross estate.
1. In financial terms, a trust is a type of fiduciary agreement in which one person holds property for the benefit of another person. 2. A group of businesses illegally organized to reduce competition and control prices. 3. The willingness to rely on others. Every aspect of business requires trust so that systems may function smoothly.
A payment to federal, state, and/or local governments based on the sales price of a product, on worker income, or on other property and activities.
A voluntary transfer of property without expectation of return.
Freedom from a tax or other obligation. For example, interest obtained on certain investments is tax-exempt. Exemption from taxes is a major incentive for certain types of investing.
1. Total dollars a business receives for the goods and services it sells. 2. Total dollars a government unit takes in through taxation and other means.
Property passed down from someone who has died, or passed down as a gift. Inheritances are subject to taxes in some cases.
A deposit to a health savings, retirement, or other account. Contributions must be made in cash.
The agency of the federal government that is responsible for collecting federal income and other taxes and enforcing the tax laws of the US government.
Anything of value that a person or organization owns. Examples include cash, securities, accounts receivable, inventory, and property such as land, office equipment, or a house or car. (Compare with liability. The same item can be both an asset and a liability, depending on one’s point of view. For example, a loan is a liability to the borrower because it represents money owed that has to be repaid. But to the lender, a loan is an asset because it represents money the lender will receive in the future as the borrower repays the debt.)
An account owned by two or more people who share equally in its obligations and rights.
A retirement plan created by the US government to encourage people to save for their own retirement. Benefits include tax-deferred growth and, depending on the type of IRA, tax deductibility or tax-free withdrawal. There are several qualifications and limitations as to who may contribute and when withdrawals may be made.
The amount to be paid by a life insurance company upon the death of the insured or annuitant, to be collected by that person’s survivors or beneficiaries.
A person designated as a recipient of funds under a health savings account, will, life insurance policy, annuity, education savings account, retirement account, or trust.
A tax on the money one makes from labor and/or investments. Income taxes collected by the state and federal governments pay for public programs, defense, and entitlement programs.
A contract in which one party, called the insurer, agrees to protect another party, called the insured, against loss, damage, or medical costs in return for a premium. Another way to look at insurance is to see it as the assumption of risk by another party. In return for a periodic fee (the premium) and a set of requirements by which to abide, an insurance company will assume risks taken by those covered. Insurance companies are regulated by the insurance commissioners of their respective states or territories.
A form of insurance that pays a specific amount of money to a designated beneficiary after the insured person dies. The most popular types of life insurance are endowment, term, whole life, universal life, variable life, and variable universal life.
One who transfers the title of a property to another; a grantor is also called a donor or a trustor.
The amount of money that one is required by law to pay to a taxing authority, such as the IRS.
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