What Makes Up Your Taxable Estate?
by Shane Flait ©2011 

If you have many millions in your estate, estate taxes can rob a chunk of it from your beneficiaries. But this tax is imposed on your net estate value. That’s the value of your estate after you’ve taken allowable deductions from your gross estate. What makes up your gross estate is the value of all property in which you have any interest at your death plus some gift items you made within 3 years of death. This article overviews the deductions you can take.

 

What property interests are included in your gross estate?

Included is the value of all your property interests such as:

• All property that you own individually and outright.
• Half or all Jointly-owned property:
  • If held with rights of survivorship between husband and wife, then one-half of the value of such joint property is included in the gross estate of the first joint tenant to die and the other one-half is excluded from the gross estate.
  • If held with right of survivorship between persons who are not husband and wife (ex: parent-child or brother-sister), then the entire value of any joint property is included in the estate of the first joint tenant to die, unless the estate can affirmatively prove that the surviving joint tenant supplied some, or all of the money used to purchase the joint property.
• Life Insurance proceeds on your life if:
  • the policy proceeds are payable directly or indirectly to your estate; or
  • you held any incident of ownership in the policy, such as the right to change the beneficiary, surrender or cancel the policy or borrow against the policy.
• The value of gifts made within 3 years of death since they are considered as given in contemplation of imminent death.

 

What can you deduct from your gross estate?

You can deduct funeral expenses and expense incurred in administering the estate property for estate tax purposes, net losses during the administration, debts of the decedent, mortgages and liens, and charitable, public, and similar gifts, and lastly, but most significantly - the marital deduction.

 

The marital deduction includes any bequest to the surviving spouse. It’s an unlimited deduction so you can leave everything to her and not be taxed on your estate. But it’s allowed only where

·         the marital bequest goes to a legally recognized spouse,

·         the surviving spouse is a citizen of the United States, and 

• the marital bequest is included in the value of the gross estate.

Full use of the marital deduction to eliminate your estate taxes may produce a highly taxed estate at your spouse’s death which can then cut into your children’s legacy. Use a by-pass trust to help eliminate this consequence.

Estate taxes for 2011 and 2012 allow a $5 million exemption. So only your net estate value in excess of this is taxed after your above deductions. That rate is 35%.

But for 2011 and 2012, you’re also allowed to deduct the new ’portability tax exemption’ from your estate. This means that if your spouse died earlier and didn’t use all his estate tax exemption, you can use the unused portion of it to add to your exemption.

As an example, if your husband died and used only $2 million of his $5 million exemption, you can add his remaining $3 million exemption to your $5 million exemption when your die for an $8 million exemption.

The estate tax return must be filed within nine months after the decedent's death, although you can file for a six month extension. Valuation of the estate can be made either at the date of death or exactly six months later.

 

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Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com