When a taxpayer dies and leaves behind a large amount of money and property, the federal government may collect an estate tax on part of the estate's value. The IRS only taxes the “taxable estate.” Essentially, this equals the “gross estate” minus certain deductions. Therefore, it’s important to determine what the gross estate includes.
Estate Tax Basics
For money and property to be subject to the estate tax, the decedent must still own it at the time of death. This ordinarily includes money in bank accounts, investment accounts, cars, personal belongings and just about everything the decedent owns at death. However, the IRS includes other property in the gross estate of a decedent that may not be so obvious.
Life Insurance Policies
When the decedent owns a life insurance policy that is payable to his estate at death, then the IRS will include the value of the policy in the gross estate. Even if the life insurance policy is payable to someone else upon the decedent’s death, the IRS will still include its value in the estate if the decedent has any incidents of ownership over the policy at the time of death. An incident of ownership just means that the decedent retained the power to change the beneficiaries, cancel the life insurance policy or to borrow against its value.
Property Owned Jointly
If the decedent owns property jointly with rights of survivorship, then the IRS will include the full value of the property in the gross estate, even though the decedent never owns 100 percent of the property. This type of ownership allows the surviving owner to automatically become the full owner upon the death of the other owner. One way to keep the full value of the property out of the gross estate is to provide the IRS with proof that the surviving owner actually contributed money to its purchase. The estate tax law provides an exception when the decedent owns property jointly with a spouse. In this case, only half the value of the property is included in the decedent’s estate, and it’s not necessary to prove that the surviving spouse contributed money to the purchase.
The estate tax laws include a three-year look-back rule to include certain types of gifts the decedent makes within three years of death. This includes the transfer of property where the decedent retains a life estate. For example, if you transfer your house to your children on Jan. 1, 2007, but retain the right to live in it until you die, then the value of your home is included in the gross estate only if you die before 2010. This three-year rule also includes property transfers that take effect upon your death. Therefore, if you own a brokerage account and provide that your daughter takes ownership of the account immediately upon your death, then the value of your account is included in the gross estate.