What is included in your gross estate

Add Adjusted Taxable Gifts

Subtract Gift Tax
Subtract Deductions

Determine Tentative Tax

Subtract Credit

I. Determine the Taxable Estate

A. Your gross estate consists of assets of various classes:

1. The obvious part are those assets in your own name.

2. Assets owned in joint tenancy except to the extent the surviving joint tenant proves they contributed to the asset. Note that I did not say joint tenancy assets are included to the extent of your contribution. They start off fully included. It's up to the estate to prove it fits in the exception. By Congressional definition, assets owned in joint tenancy between spouses are 50% included

3. Certain gifts you've made of which you retain too much "control". I use quotes because "control" is shorthand for a massive amount of rules. There are many subtle ways, all spelled out in the Code and interpreted by the courts, that a gift could be pulled back into the estate. At the same time, there are measures of control which do not run afoul of the rules. Some of these gifts may have been subject to gift tax -- there is an area of overlap -- and there are some adjustments made.

4. Insurance on your life which is either payable to your estate or of which you have "incidents of ownership" (those are the actual words -- and what they mean has also been the subject of much interpretation). Many people are surprised because they thought life insurance was tax-free. It is income tax-free. By appropriate steps, it is possible to remove insurance from estate taxation. One of the most effective methods is to have the insurance owned by an irrevocable insurance trust.

5. Certain releases of powers within three years preceding death (including gifts of life insurance) and the gift tax paid on gifts within three years preceding death -- the gift itself is not necessarily includible, but the tax is.

6. Pensions and similar annuity payments. Pension and profit-sharing plans, which now constitute a large portion of the estates of many families, will be subject to estate tax as well as income tax. *70*% of the plan balance will go for taxes (cheer up, it used to be 85%).

7. Property of which you have at your death (or released during life while retaining control) a general power of appointment . A power of appointment is a power to tell the trustee of a trust created by someone else to distribute trust assets to someone. A power is general for tax purposes if that someone can include you, your estate, or the creditors of either. Even then it is not general if your power to distribute to yourself is limited to your health, education, maintenance or support. This does not restrict the power someone else may have to distribute to you. Except for the QTIP discussed below, the only way a trust created by someone else can be included in your estate is if you have or had a general power of appointment. Similarly, those are the only ways a trust you create for someone else can be included in their estate -- which means that you can, if you wish, give a beneficiary a very high degree of control without tax consequences.

8. Qualified Terminable Interest Property for which a marital deduction was allowed in your spouse's estate.

B. From the gross estate, two types of deductions    are subtracted:

1. Economic deductions -- funeral and administration expenses, debts, losses {{during administration -- even a Congressperson can apparently grasp that somebody who dies owning $3,000,000 of assets subject to $1,000,000 of debts should not be taxed the same as someone with $3,000,000 of assets and no debt.

2. Policy deductions -- allowed for qualifying bequests or other forms of gifts to charity or your surviving spouse.

No, you don't then get to subtract that $1,000,000 (in 2003) you've heard about. You think Congress would make it that simple?

II. Add your adjusted taxable gifts to your taxable estate to get your tax base (tax base is not a term used in the Code but describes this total). Adjusted taxable gifts are your taxable gifts since 1976 (when gift and estate tax were consolidated) except those gifts which are included in the estate.III Calculate the tax on the tax base, referred to as the tentative tax..

(see table. Notice that once you've gotten into the taxable area, you *start* at 37%)

IV. Subtract the tax on post-1976 gifts based on the same table. Why bring in gifts and then subtract the tax paid on gifts? The transfer tax is unified and progressive -- death is the final gift. The inclusion of gifts determines the *bracket* of the estate.

V.    NOW you get to reduce the tax by the amount of tax on $1,000,000 (depending on the year) you've heard about -- reduced by the amount you've used on lifetime gifts. This gives you your gross estate tax. The $1,000,000 is referred to as "the applicable exclusion amount" and changes during the years -- see the second table.

Why so complicated? Why couldn't we just subtract $1,000,000 from the taxable estate and calculate tax on the result? Because such a deduction reduces the amount of tax on the highest brackets and gives greater benefit to the higher bracket taxpayers. Congress, in its finite wisdom, has determined that it's better to give an equal tax benefit to all taxpayers.

VI  No -- you're not done. You also get to subtract a partial credit for state death taxes. That's worthy of a separate discussion elsewhere. See state tax. There are also adjustments for certain gift taxes, foreign taxes, and taxes in other estates -- all very rare.


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