The value of the gross estate must be determined to know if an estate tax must be paid and how much the tax will be. Subtitle B, Title 11, Subchapter A, Part III of the Internal Revenue Code (IRC) lists what is includable in the gross estate and what is excluded.
The decedent's gross estate includes all the decedent's probate and nonprobate property; hence, the gross estate is more inclusive than the probate estate defined by state law. However, property for which the decedent had an interest that terminated on or before his death, but where he has no control over the subsequent conveyance of the property, is generally excluded, such as a life estate for the decedent that was created by someone else. A life estate can even allow the decedent to invade principal or grant the decedent a special power of appointment. However, if the decedent had a general power of appointment then the life estate is included in the estate for tax purposes. IRC 2041
Of course, any life estate created by the decedent is includable in the estate. If the decedent transferred property to someone else, but retained actual possession or the right to possess property, then whether it is includable in his estate, is determined by whether he was paid full consideration for it, thus marking it as a bona fide transfer. If it was not a bona fide transfer, then the property is fully includable. Whether the transaction was a bona fide transfer is determined not only by the value given but also by the intent of the parties. IRC 2036
The value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death. IRC 2033
All taxable gifts given within 3 years of death, which is known as the estate tax inclusion period (ETIP), or gift taxes paid on those gifts are includable in the decedent's gross estate. IRC 2035
Concurrently owned property — joint tenancy, tenancy in common, tenancy by the entirety, and community property — is includable in the decedent's estate. However if a joint tenancy or tenancy by the entirety is with the spouse, then even though the value of the decedent's share is includable in his estate, it is eligible for the marital deduction, so no estate taxes are assessed on its value. If the decedent had a joint tenancy with a non-spouse, then there may be liability for gift tax, if the other cotenants did not provide valuable consideration for their share. However if a joint tenancy is in a bank account or government bond then no liability for gift tax occurs until the noncontributing party withdraws some or all the money. This is because the joint tenant can withdraw all the funds or none of it, so the gift tax liability cannot be determined until the joint tenant withdrawals money. However, if the contributing cotenants paid the gift tax, then it will be credited against the estate tax to ensure that there would be no double taxation.
To calculate the decedent's value of a joint tenancy, the value of the property is determined at the time the decedent's death, of the entire property, minus the joint tenants' contribution percentage, which is determined by dividing the value of the property by the number of joint tenants with right of survivorship. IRC 2040
Also included is any right that the decedent had to receive any benefit from employment-related benefits program with a pay-on-death (POD) component. IRC 2039
Any survival benefits that are paid under annuity contracts, retirement plans, or where the decedent had a right to receive current or future distributions while still living are includable in his estate. However any survivorship benefits that are payable by statute or by law to the decedent's spouse or children are not included, including Social Security benefits.
The proceeds of a life insurance policy, either term or whole life, is includable in the estate if the decedent had any incidence of ownership over the policy at the time of death or if the proceeds were paid to either the decedent's executor or his probate estate, even if he did not pay the policy premiums. The incidences of ownership include the right to cancel or transfer the policy, to borrow against it, and the right to change the beneficiary. IRC 2042
Included in the estate is any property in which the decedent had a beneficial interest or had control, even if the legal title is transferred to someone else. IRC 2036
Any property for which the decedent had the right to possess, enjoy, control, or have the right to income from the property is includable in the estate. IRC 2036(a)(1)
Qualified Conservation Easement Exclusion from Gross Estate
A conservation easement is a voluntary and legally binding agreement between the landowner and a land trust or government agency to preserve some property for a public, environmental, or historical benefit. Because easements transfer with the property, they reduce the value of the property, so the federal government allows a deduction for conservation easements. The easement is enforced by the land trust or government agency.
IRC §2031(c) provides an estate tax exclusion for qualified conservation easements, equal to the lesser of:
- the applicable percentage of the value land value used for the qualified conservation easement minus any estate tax charitable deduction taken for the easement under IRC §2055(F), Transfers for Public, Charitable, and Religious Uses; or
- the exclusion limitation.
The maximum applicable percentage is 40% if the value of the conservation easement is at least 30% of the value of the land, without accounting for the easement and reduced by any development right. The applicable percentage is reduced by 2% for every percentage or fraction thereof that the conservation easement value is less than 30%. The exclusion limitation is limited to $500,000. The land of the conservation easement must be located within the US or its possessions and must have been owned by the decedent or his family during the 3-year period before the decedent's death.
If the settlor creates a trust and retains control to appoint anyone as the trustee or to remove the current trustee even if he is not currently the trustee, then he retained sufficient control over the property to be includable in the estate.
If the decedent was a trustee of an irrevocable discretionary trust, then it is includable in his estate, since he retains control as the discretionary trustee.
If the decedent retained the power to revoke, appoint, or modify the right to enjoy property or when the party has the right to enjoy it, then it is includable in the decedent's estate if the power was relinquished within 3 years prior to the decedent's death. However, if those powers were given to a third-party, whether friendly or adverse, then the property is not includable in the estate unless the decedent also retained control over the party. IRC 2038
A finite estate is also includable where the decedent retained a reversionary interest and transfers an alternative future interest to a third-party beneficiary where possession or enjoyment requires that the beneficiary survive the decedent, and the value of the reversionary interests exceeds 5% of value the property at the time of the decedent's death. The reversionary interest is the value of the property multiplied by the probability that the property would actually revert to the decedent based on mortality tables and actuarial principles. IRC 2037
Generally any powers relinquished or transferred within 3 years of the death of the decedent are includable in his estate. IRC 2035
Generally, any property where the decedent had a general power of appointment is usually includable in his gross estate. Not included are special powers of appointment even if the power is exercised. IRC 2041
Generally, a power to invade principal by a beneficiary or trustee for his benefit constitutes a general power of appointment even if co-trustees must consent to the exercise of the power unless the power is limited by an ascertainable standard relating to health, education, support, or maintenance.
If the power of appointment is limited to the greater of $5000 or 5% annually, then only that value is includable in the gross estate unless the power is fully exercised in the year of death.