Estate Planning | VI. Estate Tax


When a citizen or resident of the United States dies, an estate tax is imposed on the decedent's right to transfer property to his heirs. All property owned directly or indirectly by the decedent, in whole or in part, at the time of death is included in the decedent's estate at the fair market value as of the date of death (or the alternative valuation date, if elected).

Several questions arise when considering what property should be included in a decedent's estate:
1. Did the decedent have sufficient ownership interest to require inclusion
2. Can the property be transferred at the decedent's death

The federal estate tax is applied to the estate tax base, and the decedent's estate is liable for the payment of estate taxes.

The estate tax applies to both citizens and residents of the United States and to non residents of the United States. For U.S. citizens and residents, estate tax is imposed on worldwide assets. Non-U.S. citizens and non-U.S. residents only pay estate tax on assets located within the United States.

It is particularly important to understand the difference between gross estate, adjusted gross estate, and tentative tax base.

The Gross Estate

When calculating the gross estate, you have to start by calculating the value of the decedent's gross estate. The decedent's gross estate is defined as the fair market value of all interests owned by the decedent at the time of death.

The assets included in a decedent's gross estate:

  • Cash
  • Stocks & Bonds
  • Annuities
  • Retirement Accounts
  • Notes Receiveable
  • Residences
  • Other Real Estate
  • Household Goods
  • Automobiles

Property Owned by the Decedent (IRC Section 2033)

IRC Section 2033 requires the value of all property in which the decedent held an interest at his death to be included in the gross estate. This includes medical reimbursements and court awards.

Dower and Curtesy Interest (IRC Section 2034)

The curtesy right is a husband's right to receive a life estate, at his wife's death, in the land she owned in fee simple if the couple had at least one child. The dower right was tradtionally a wife's right to a life esate in one third of the land her husband owned in fee simple at his death.

Gifts Made Within Three Years of Death (IRC Section 2035)

A lookback provision that requires the value of certain lifetime transactions to be included in a decedent's gross estate.

Any gift tax paid on gifts made within three years of a decedent's date of death must be added to the gross estate.

The value of property gifted by the decedent within three years of his death, which would otherwise have been included in the decedent's gross estate under Sections 2036 (transfers with a life estate), 2037 (transfers taking effect at death), or 2038 (revocable transfers).

Transfer of a Life Insurance Policy Within Three Years of Death will result in proceeds of a life insurance policy on the life of the decedent to be included in the decedent's gross estate.

Transfers With a Retained Life Estate (IRC Section 2036)

A transferred interest is treated as having been retained if, at the time of the transfer, there was an understanding expressed or implied, that the interest or right would later be conferred.

A decedent who retains or reserves an interest in transferred property for his life must include the value of that property in his gross estate under IRC Section 2036.

A decedent who retains an interest in property for any period not ascetainable without reference to the decedent's death must include the fair market value, determined at the decedent's date of death, of the property in hsi gross estate under IRC Section 2036.

When a decedent transfers property and retains or reserves an interest for any period of time, and that interest does not in fact end before the decedent's death, the fair market value of the property at the decedent's date of death must be included in the gross estate.

Transfers Taking Effect at Death (IRC Section 2037)

A decedent's gross estate also includes the fair market value at the decedent's date of death of any interest in property transferred by the decedent, if the transfer was conditioned on all of the following: possession or enjoyment of the property can be obtained only by surviving the decedent, the decedent has retained a reversionary interest in the property, and the value of such reversionary interest immediately before the death of the decedent exceeds 5% of the value of such property.

A reversionary interest is any interest that includes a possibility that the property transferred by the decedent may return to him or his estate, or the possibility that property transferred by the decedent may become subject to a power of disposition by him.

To determine whether or not the decedent retained a reversionary interest in transferred property of a value in excess of 5%, the fair market value of the reversionary interest in the property is compared with the fair market value of the transferred property, including interest in the property that are not dependent upon survivorship of the decedent.

Revocable Transfers (IRC Section 2038)

Annuities (IRC Section 2039)

A straight single life annuity is an annuity paid to the annuitant until his death.

Joint Interests (IRC Section 2040)

A decedent's gross estate includes the fair market value at the decedent's date of death of any property jointly held by the decedent and another person with the right of survivorship, property held by the decedent and spouse as tenants by the entirety, and a deposit of money, or a bond or other instrument owned by the decedent, but held in the name of the decedent and any other person, which is payable to either the decedent or a survivor.

Powers of Appointment (IRC Sections 2041 and 2514)

A decedent's gross estate includes the value of property over which the decedent possessed, exercised, or released certain powers of appointment.

Proceeds of Life Insurance (IRC Section 2042)

Generally, the amount to be included in a decedent's gross estate under Section 2042 is the full death benefit payable from the life insurance policy.

Incidents of Ownership are not limited to the direct ownership of the life insurance policy in the technical legal sense. An incident of ownership is the right of the insured, or his estate to enjoy any of the economic benefits of the policy.

Property For Which Martial Deduction Was Previously Allowed (IRC Section 2044)

A marital deduction will be allowed for property included in the gross estate of the first spouse to die and transferred to the surviving spouse if a QTIP election is property made at the death of the first spouse.

Valuation of Assets at Death

Hard-to-Value Assets

Real estate, art, jewelry, antiques, collectibles, and closely held business interests usually require an appraisal.

Financial Securities

Life Insurance

The Alternative Valuation Date

Deductions to Determine the Adjusted Gross Estate

The adjusted gross estate is determined by deducting the following items from the gross estate:

  • Funeral Expenses
  • Last Medical Expenses
  • Administrative Expenses
  • Debts of the Decedent
  • Losses During Estate Administration

Deductions to Determine the Taxable Estate

The Charitable Deduction
The Unlimited Marital Deduction
The Taxable Estate

Determining the Tentative Tax

The abbreviated estate tax formula
Post-1976 Taxable Gifts
The Tentative Tax Base
The Tentative Tax

Credits from the Tentative Tax

Applicable Estate Tax Credit
Exemption Portability
Credit for Tax Paid of Prior Transfers
Foreign Death Tax Credit

Estate Tax Liability

Paying and Reporting Estate Taxes

Filing Requirements

The federal estate tax return, Form 706, must be filed if a decedent's gross estate, plus adjusted taxable gifts, is greater than the applicable estate tax equivalency (also called the applicable estate tax exclusion amount) for the year of death.


Adjusted Basis To Heirs and Legatees

IRD Assets

Heir Donor

Surviving Owner

Community Property

Basis Rules for Years Beginning After 2009 (EGTRRA 2001)

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