What is Included in my “Taxable Estate” for Purposes of Calculating if my Estate will Owe Estate Taxes?

According to the IRS, the Federal Estate Tax is a tax on your right to transfer property to others at your death. It consists of an accounting of everything you own or have certain interests in at the date of your death.

When determining that amount, the IRS looks at what the fair market value is of these assets, not what you paid for them or what their values were when you acquired them. The total of all of your assets is what the IRS calls your "Gross Estate." Examples of assets included in your Gross Estate include cash and securities, personal property, real estate, the life insurance death benefit of any policies you own, assets owned by your revocable trust (and sometimes in trusts set up for your benefit), annuity contracts, business interests and other assets.

After you have computed the total fair market value of the assets in your Gross Estate, the IRS allows for certain deductions before you arrive at your “Taxable Estate”. Some of the deductions allowed are mortgages, debts, estate administration expenses, property passing to a surviving spouse in a Survivor’s Trust, QTIP Trust or outright, and property left to a charity. There are also presently deductions for valuation discounts on some business interests and farms (2021). Note however that this last category of deduction is under attack as two Bills have been introduced into Congress to eliminate valuation discounting for most business interests or to seriously curtail those discounts available in the current tax code.

After all deductions have been calculated, the value of any lifetime taxable gifts is added to the total. If that number is above the present Federal Estate Tax Exemption of $11.7MM (2021), an Estate Tax is computed on the amount over the Exemption, presently a 40% tax. As I mentioned in my article in my August Newsletter, two of the more likely probable changes to the estate tax code in the next year or two is the reduction in the available Estate Tax Exemption amount and the increase of the Estate Tax rate. The possibility of a return to a $3.5MM exemption is on the horizon with a 45-65% estate tax rate.

To schedule a meeting to discuss advanced estate planning to take advantage of the current estate and gift tax laws, call our office at (760) 448-2220 and ask for our Intake Coordinator, Katie Nance.