What Does the IRS Include in Your Estate?

The estate tax is the tax imposed on the amount of your gross estate at your death that exceeds the federal exemption amount (currently $11.4 million), minus deductions. Here is what the IRS includes in its calculation of your “gross estate”.

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

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 payable to your estate or if you possessed any “incidents of ownership” over the policy (e.g., the ability to change beneficiaries, borrow from the cash value, assign, surrender or cancel the policy).

Exclusion of assets from your gross estate

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 (ILIT) 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. The transfer of a partial interest in a piece of real estate that you own to a carefully structured and managed Family Limited Partnership (FLP) or Limited Liability Company (LLC), or directly to an adult child, may reduce the property’s fair market value for estate tax purposes.
  4. An Intentionally Defective Grantor Trust (IDGT) is another way of transferring wealth to family members during your lifetime and reducing or avoiding estate taxes in the process. With an IDGT, you remain the owner of an irrevocable trust which is disregarded for income tax purposes but which still legally removes the assets from your estate for estate tax purposes.

Reducing the size of your estate through lifetime gifts

Outright gifts of up to $15,000 per person ($30,000 per married couple) made during your lifetime are not only tax-free, but also reduce the size of your estate. In addition, you can make gifts of any amount for another person’s medical and educational needs so long as payment is made directly to the facility or provider.

Gifts of any amount may be made to qualified charitable organizations.

Allowable deductions at your death

Estate tax 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)
  • Losses, if any, incurred during the 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.