Estate law is a subcategory of property law which governs the manner in which the estate of an individual is handled. This includes overseeing how the individual’s property is managed during their lifetime and if they become incapacitated or pass away.
The term estate refers to the total sum of an individual’s:
- Personal belongings;
- Real property; and
- Intangible assets, such as patents or copyrights.
Any debt and taxes which are owed on the property that is owned by the testator may also be included as part of their estate.
What are Components of a Person’s Gross Estate?
When an individual passes away, their property will have to be accounted for and distributed as provided by their will or the laws of their state. If the individual had a will in place at the time of their passing, it should name the individual who they wish to be the executor of their estate.
The court will appoint the executor who is named in the will to handle the deceased’s estate. If the individual passed away and did not have a will, the court will appoint an administrator to handle these tasks.
The administrator or executor will calculate the individual’s gross estate, which reflects the value of the individual’s property and their other assets at the time they passed away. This will include items such as:
- Cash;
- Real estate;
- Stocks;
- Investments; and
- Personal belongings.
This may be a complicated process if the individual had numerous assets or investments. If an individual is planning their estate, it is important for them to understand what will factor into their gross estate, how deductions will affect their gross estate, and the resulting tax implications.
In addition, administrators and executors need to have an understanding of the components of a gross estate in order to ensure smooth estate distribution following an individual’s death.
What are Some General Items Included in the Gross Estate?
Anything which the deceased, or individual who passed away, had a beneficial interest in when they pass away would qualify as property which should be accounted for in a gross estate. In general, state law will outline what qualifies as a beneficial interest.
Standard items which are included in a gross estate may include:
- Cash, both physical cash and that which is stored in bank accounts;
- Savings bonds;
- Stocks and other investments;
- Real estate, such as houses or businesses that the deceased owned;
- Automobiles; and
- Personal belongings, like jewelry.
It is important to note that the individual did not have to have title or possession of the property in order for it to qualify as part of their gross estates. For example, suppose an individual was a stakeholder in a business before they passed away. Whatever the value of their interest in the business was at the time of their death would be included in their gross estate, even though they were not the business owner.
A second common example includes interest in real estate. An individual is not required to be the titleholder or sole owner of real estate in order to have it included in their gross estate.
For example, if an individual jointly owned a house with their spouse who was still alive, half of the value of that property would factor into their gross estate. This calculation is different, however, if that joint property is owned with an individual who is not their spouse.
In general, the deceased individual can have the entire amount of the property factored into their gross estate if the other individual did not contribute any funds to obtain the property.
What are Some Other Things That Could be Factored Into the Gross Estate?
There are various other things which can also be factor into an individual’s gross estate, so long as a beneficial interest exists. Examples of this may include:
- Annuities;
- Reversionary interests;
- Life insurance;
- Revocable transfers; and
- Gifts after death.
An annuity is when an individual is under contract with an insurance company to receive interval cash disbursements out of money that they paid, either through several payments or a lump sum. These disbursements may be set for immediate payment or for future payment, and may be viewed as income. A gross estate will include annuity payments which are receivable by a beneficiary who survived the deceased and will only reflect the value of the contribution of the deceased.
A reversionary interest may arise if the individual had given away property with the possibility that it may revert back to them. In some cases, it may be included in the gross estate but will depend on the laws of the state.
If life insurance proceeds payable on an individual’s life are paid to their estate, they will be included in the gross estate calculation. If, however, they are paid to a beneficiary who is not the executor of the estate, the proceeds will only be included in the gross estate if the individual had incident of ownership at the time of their death. Having the right to cancel the policy or alter the beneficiaries will qualify as incident of ownership.
In some instances, an individual can transfer property to another individual and retain an interest which will cause it to be included in their gross estate. This includes the ability to do any of the following to the transfer:
- Alter;
- Change;
- Revoke; or
- Terminate.
In general, any gifts made within three years of an individual’s death will be included in the gross estate, even though that gift will be transferred to a beneficiary because the original recipient passed away. The requirement is that the transferred property would have been accounted for in the individual’s gross estate had the transfer not occurred, such as a gift of money.
These are not the only examples of property which should be factored into a gross estate. If the deceased had an interest in any other property, it will also likely qualify. The individual’s state laws and federal tax laws will help to guide the determination of what qualifies.
What Deductions Can Affect the Gross Estate?
If an individual is planning their estate, taxes will need to be accounted for in that plan. Knowing what will be factored into the individual’s gross estate is the first step in the process.
Federal estate taxes, however, will only be imposed on the net estate. The net estate is the gross estate minus any applicable deductions.
The applicable deductions will be based upon any liabilities that the individual owed at the time of their death. For example, if an individual owned a house and twenty percent of that house still had to be paid off at the time of their death, that amount would be deducted from the gross estate.
Other examples of deductions may include:
- Funeral costs;
- Outstanding loans;
- Administrative fees; and
- Other debts.
Once these items are all calculated, the net estate will be distributed to beneficiaries or heirs.
Do I Need to Contact an Attorney About My Estate?
It is essential to have the assistance of an estate planning attorney for any issues, questions, or concerns you may have regarding planning your estate. Your attorney can help you make an estate plan in order to ensure your property is handled according to your will.
Your attorney will follow all of the applicable state laws and federal tax laws to create a viable estate plan for you. They can review your estate and determine what will be included in your gross estate.
In addition, your attorney will be able to advise you regarding what may remain as your net estate after the applicable deductions are made based on your debts and liabilities.
