Federal Estate and Gift Taxes -- the Gross Estate

The federal estate tax is a tax imposed on the "privilege" of transferring property at death.  Because it's imposed on transfers of property, it taxes more than just the property in your probate estate.  The "gross estate," as we call it, consists of the probate estate, plus all sorts of arrangements that are intended to avoid probate, such as:

• Joint and survivorship assets.
• Payable-on-death and transfer-on-death assets.
• A revocable trust.
• Any irrevocable trust you've created, if you retain control over the disposition of wealth at your death--what we sometimes call a "taxable string" power--either as trustee or by some other means.
• Retirement accounts and annuities with a death benefit or survivor benefit.
• Assets which you have technically given away, but retain the right to use during lifetime.  The classic example of this is a life estate in real property.
• Assets whose disposition you control through a power of appointment, but only if that power lets you appoint the assets to yourself, your estate, or your creditors.  Powers of appointment have a lot of uses in sophisticated estate planning, and we'll go into detail about how they work in a future post.

Life insurance is something of a special case: it's only part of your gross estate if you hold what are called "incidents of ownership" in the insurance policy--the right to name beneficiaries, or the right to borrow against or take out the cash value of the policy.  If you don't hold the incidents of ownership, it doesn't matter if you're the insured, or if you pay the premiums--it's not in your gross estate.  For many of my higher net-worth clients, we take advantage of these rules in a way that allows the family the benefit of the life insurance proceeds without having to pay estate tax on them.  The insurance is held in trust by an independent trustee, and the insured has no power to change the terms of the trust.  We'll go in to how these "irrevocable life insurance trusts" work in more detail in a future installment.