14.1 The Gross Estate (GE)

14.1 The Gross Estate (GE)

General Definition:

• The GE includes the Fair Market Value (FMV) of all property (real, personal, tangible, intangible, wherever situated) in which the decedent had a beneficial interest at death.

• Valuation: Generally at FMV ("stepped-up" or "stepped-down" basis). The executor can elect the Alternate Valuation Date (6 months after death) only if it decreases both the GE value and the total tax liability.

Specific Inclusions in the GE:

• Dower/Curtesy: Value of a surviving spouse's common-law interest in property.

• Joint Tenancy with Right of Survivorship (JTWROS):
  • Full value is included unless it can be proven the other tenant provided the original consideration.

  • For spouses, 50% is included automatically, regardless of who paid.

• Powers of Appointment (POA): Property over which the decedent had a general power of appointment is included.

• Gifts within 3 Years of Death:
  • Generally not included, except for:
    • Life insurance policies.

    • Property with a retained life estate.

    • Gift taxes paid on any gift made within 3 years of death are included.

• Life Insurance Proceeds: Included if:
  • Payable to the estate or executor.

  • Decedent had any "incidents of ownership" (e.g., right to change beneficiaries) at death.

  • Policy was gifted within 3 years of death.

• Annuities & Survivor Benefits: Included if the decedent had the right to receive payments for their life or a period not ascertainable without reference to their death.

• Inter Vivos Transfers (Lifetime Gifts): Included if the decedent retained at death:
  • A life estate or income interest.

  • The right to designate who enjoys the property.

  • A reversionary interest of 5% or more.

  • The power to alter, amend, revoke, or terminate the transfer.

14.2 Deductions and Credits

Deductions from the Gross Estate (to calculate the Taxable Estate):

• Expenses: Funeral expenses, administrative expenses (attorney, executor, accountant fees), and selling expenses (if necessary).

• Claims & Debts: Debts of the decedent, unpaid mortgages, state inheritance taxes.

• Casualty/Theft Losses: Incurred during estate settlement (if not claimed on income tax return).

• Charitable Deduction: Donations to qualified charitable organizations.

• Marital Deduction: Unlimited deduction for property passing to a surviving spouse who is a U.S. citizen.
  • Includes outright transfers and Qualified Terminable Interest Property (QTIP).

Credits (to offset Federal Estate Tax Liability):

• Applicable Credit Amount (ACA):
  • Also known as the unified credit.

  • Offsets tax on a specific amount ($13.61 million per spouse in 2024).

  • Portability: Unused ACA of a deceased spouse can be transferred to the surviving spouse.

• Income in Respect of a Decedent (IRD): Beneficiaries can deduct the estate tax paid on income earned before death but received after death..

 

14.3 Estate Tax Payment and Return

Filing Requirement (Form 706):

• Required if the Gross Estate exceeds $13.61 million (2024).

• Due Date: 9 months after date of death (with a possible 6-month extension).

Payment:

• Generally due with the return.

• Extensions for payment are possible (up to 1 year automatically, up to 10 years with reasonable cause).

• Special Rule for Closely Held Businesses: Payment can be delayed if the business interest exceeds 35% of the GE.

Basis Reporting (Form 8971):

• Estates filing Form 706 must report the estate tax value of property to the IRS and beneficiaries.

• This reported value becomes the beneficiary's income tax basis in the property.

• Prevents using a low value for estate tax and a high value for income tax.

14.4 Generation-Skipping Transfers (GST)

General Concept:

• The Generation-Skipping Transfer Tax (GSTT) is a separate tax imposed in addition to gift or estate tax on transfers to a skip person (a beneficiary at least two generations below the transferor, e.g., a grandchild).

Three Types of GSTs:

1. Direct Skip: Transfer directly to a skip person (e.g., grandparent gives a gift directly to a grandchild).

• Taxpayer: The transferor (donor) is liable.

Taxable Distribution: A distribution from a trust to a skip person.

• Taxpayer: The transferee (beneficiary) is liable.

Taxable Termination: The termination of an interest in a trust (e.g., by death), after which only skip persons have an interest.

• Taxpayer: The trustee is liable.

Key GSTT Rules:

• Exemption: Each individual has a $13.61 million (2024) GST exemption that can be allocated to transfers.

• Applicable Rate: Maximum federal rate (40%) × Inclusion Ratio.
  • Inclusion Ratio = 1 - [Allocated Exemption / (Value of Transfer - Estate Tax & Charitable Deduction)]

• Basis Adjustment: For Taxable Distributions and Direct Skips, the beneficiary's basis in the property is increased by the GSTT paid.

• The GSTT does not apply if the transfer is not subject to federal estate or gift tax.