What Does the IRS Include In Your Estate?

One of the first things your estate planning attorney does during your initial estate planning consultation is assess the value of your estate for estate tax purposes. The IRS includes nearly everything in this calculation, and most people are surprised at how high the government will be valuing their estate.

Your gross estate

The IRS includes in your gross estate everything you own or in which you have an interest, whether or not it is held in your name or in a revocable living trust, including:

  • Cash
  • Personal property
  • Securities
  • Real estate
  • Business interests 
  • Annuities
  • Retirement accounts
  • Life insurance proceeds on policies insuring your life if the proceeds are (1) payable to your estate or (2) for your beneficiaries if you possessed any “incidents of ownership” over the policy

Exclusions

For the most part the only assets that are excluded from your gross estate are assets that are not in your name and are outside your control. Through careful estate planning, a portion of your assets can be removed from your gross estate. For example:

  1. The proceeds of a life insurance policy taken on your life that was (1) never owned by you or (2) was transferred more than three years before your death to another adult or to an irrevocable life insurance trust of which you are not a trustee, will not be considered part of your estate for estate tax purposes.
  2. Assets transferred to an irrevocable trust such as a Grantor Retained Annuity Trust (GRAT) or Unitrust (GRUT), Qualified Personal Residence Trust (QPRT), Charitable Remainder Trust (CRT) or Charitable Lead Trust (CLT) are not considered part of your estate.
  3. Careful structuring and operation of a Family Limited Partnership (FLP) or Limited Liability Company (LLC) can enable you to transfer assets to your children over time. For example, the transfer of a partial interest in a piece of real estate that you own to an FLP or LLC (or directly to an adult child) may reduce the property’s fair market value for estate tax purposes.

Outright gifts of up to $13,000 per person ($26,000 per married couple) made during your lifetime are not only tax-free, but also reduce the size of your estate. Note that you also have the option of making gifts of any amount for another person’s medical and educational purposes so long as payment is made directly to the facility or provider. Gifts of any amount may also be made to qualified charitable organizations.

Deductions

Estate tax is the tax imposed on your assets (excepting the first $5,450,000) at the time of your death – the tax is imposed on your gross estate, minus deductions. Deductions are allowed for:

  • Mortgages on your real estate
  • Other debts remaining at the time of your death
  • Expenses of administering your estate (including funeral expenses)
  • Any losses incurred during estate administration
  • Gifts to qualifying charities in your will or trust, and
  • Property that passes outright to your spouse as a result of your death (the “Marital Deduction”).

Knowledgeable estate planning and tax attorneys in San Francisco

The estate planning and tax attorneys at Moskowitz, LLP understand the tax implications of your estate plan and can help you arrange the best way to minimize estate taxes upon your death. Contact our San Francisco office for a consultation.