 Main Menu Table of Contents Copyright Disclaimer Questionnaires FCS Home Page Elder Law Section Contributing Attorneys Related Links NC General Assembly |
 |
The
starting point in determining whether
your estate will be subject to estate tax
is your "gross estate."
The gross estate - in general |
The gross estate of a U.S. citizen or resident decedent encompasses all property in which the decedent had an interest as of the date of his or her death. The gross estate includes property distributed by your will or living trust and may also include other property such as life insurance, retirement accounts, certain other trusts and jointly owned property.
Stocks, bonds, tangible personal property, real property, mortgages, notes and lifetime transfers which are revocable or in which you retained interest are all included in your gross estate. Also included is property over which you have a power of appointment and some lifetime transfers made within three years of death. The proceeds of life insurance are included in your gross estate if the policies were owned or controlled by you.
Your gross estate also includes the value at your death of any property given to you by your spouse, in trust or otherwise, if you had a life income interest in the property and your spouse (or his or her estate) received a marital deduction under the "qualified terminable interest property" (QTIP) rule.
A decedent has an interest in property if, under state law, the property (or interest therein) is included in the decedent's probate estate. The decedent must have had the right to transfer the property by will or through state intestacy laws for it to be included in the probate estate.
When a decedent gives away property during his or her lifetime but retains some control over the gifts, the property is generally included in the gross estate. Types of gifts that are subject to this rule include:
If the right is retained over only a portion of the transferred property, only that part is included in the gross estate. If a decedent transferred property in which he retained a lifetime interest, but the transfer was a sale for adequate and full consideration, the value of the transferred property is not included in the gross estate.
If the income from transferred property is or can be used to discharge a decedent's legal obligations, such as to support a minor child, the decedent is deemed to have a right to income from the property, resulting in the property being included in the gross estate.
Gifts made within three years of a decedent's death are not generally included in the decedent's gross estate. If the donor retained a power to amend or revoke the gifts, however, the transferred property is included in the donor's gross estate. A gift of life insurance is also includable if the policy is transferred within three years of the donor's death.
Proceeds of insurance on a decedent's life payable to the decedent's estate are included in the decedent's gross estate. Life insurance proceeds payable to other beneficiaries are also included in the gross estate if the decedent retained incidents of ownership in the policy. Incidents of ownership include the power to change the beneficiary and the ability to use the policy as security for a loan or borrow against the policy.
The value of an annuity or other similar payment is included in the gross estate of a decedent under the following circumstances:
The includable portion of the payment is the portion of the value attributable to the amounts paid by the decedent or the decedent's employer on the decedent's behalf.
A power of appointment is a right given to someone other than the donor of property to dispose of the property. The power holder has a general power if he can exercise it in favor of himself, his creditors, his estate, or the creditors of his estate. Powers that cannot be so exercised are called special or limited powers of appointment. Property subject to a general power of appointment at the death of the power holder is included his or her gross estate.
General rule. The gross estate of a decedent includes the entire value of property owned jointly with another, except to the extent that the estate is able to prove that consideration was provided by the survivor.
Special "50-percent rule" for husband and wife. Where the property is held by a husband and wife with rights of survivorship, one-half of the property is treated as belonging to the first spouse to die, without regard to which spouse furnished the original consideration.
Community property. One-half of any community property will be included in your gross estate. Community property is property that is acquired other than by gift, devise, bequest, or inheritance by spouses domiciled in community property states. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and (for some purposes) Wisconsin are community property states.
Qualified farms and businesses are eligible for an exclusion from a decedent's gross estate for federal estate tax purposes. For 1999, the maximum exclusion is $650,000.
The $650,000 exclusion will decrease as the unified credit equivalent (currently $650,000) increases. The law provides that the exclusion, combined with the unified credit equivalent, cannot exceed a total of $1.3 million. Therefore, when the unified credit equivalent reaches $1,000,000 in 2006, the business exclusion will be $300,000.
In order to qualify for the exclusion, at least 50% of the estate must consist of a qualified family owned business interest. A qualified family owned business interest is defined as an entity carrying on a trade or business with the principal place of business within the United States where one family owns at least 50% of that business, two families own at least 70%, or three families own at least 90%, provided that the decedent's family owns at least 30%. The following do not qualify for the exclusion: (1) an interest in a trade or business if the stock or debt of the business were publicly traded within three years of the decedent's death, (2) passive assets, and (3) cash and marketable securities in excess of working capital requirements.
The qualified business interest must pass to qualified heirs. The definition of qualified heirs is fairly broad (e.g., an active employee who is employed for at least ten years can qualify). The decedent or a member of the decedent's family must have owned and materially participated in the business for at least five of the eight years prior to the decedent's death.
The tax savings are subject to recapture if certain events occur, including sale of the business within 10 years of the decedent's death (and before the qualified heir who received the business dies), to anyone other than to a member of the qualified heir's family.
General Rule. The gross estate is valued at its fair market value at the date of the decedent's death.
Alternate valuation date. An executor of an estate can also elect to value the estate at six months after the decedent's death. However, the alternate valuation date election is available only if it would decrease the estate tax liability. Thus the alternate valuation date cannot be used just to "step up" (increase) the tax basis of inherited property.
Special use valuation. If a farm or real property used in a closely held business is part of the gross estate, the executor may elect to value the property at its special use value, rather than its fair market value. The real property is then valued at its business use value, not its fair market value at its highest and best use.
The reduction in value as a result of this election is limited to $750,000. (Beginning in 1999, the $750,000 amount is indexed for inflation.) Special use valuation is elected on the estate tax return.
Under certain conditions, the estate tax savings from special use valuation may be recaptured. Generally, recapture occurs when an heir transfers an interest in the qualified property to someone other than to a family member or stops using the property in the manner that made it eligible for the special use valuation.
Federal estate taxes are not paid on the gross estate but rather on the taxable estate.
To arrive at the taxable estate, the gross estate is reduced by: (1) funeral expenses, administration expenses, debts and any casualty losses during estate administration not compensated for by insurance; (2) the marital deduction (for property passing to a spouse); and (3) the charitable deduction (for transfers to qualified charitable organizations).
For computation of the tax, see the section, Estate and Gift Taxes, Federal estate tax.
Prepared by Gregory Herman-Giddens, a Board Certified Specialist in Estate Planning and Probate Law, practicing law in Chapel Hill and Wilmingtin, NC.
This publication is provided as a public service and is designed to acquaint you with certain legal issues and concerns. It is not designed as a substitute for legal advice, nor does it tell you everything you may need to know about this subject. Future changes in the law cannot be predicted, and statements in this publication are based solely on the laws in force on the date of publication.
Date: July 2000
| NC State
University College of Agriculture and Life Sciences North Carolina Cooperative Extension Service Department of Family and Consumer Sciences |
North Carolina Bar
Association Elder Law Section |
Employment and program opportunities are offered to all people regardless of race, color, national origin, sex, age, or disability.
Copyright Gregory Herman-Giddens