What Is Included in the Calculation for Estate Taxes?

Understanding the Basics of Your Estate Tax Liability

What is included in the calculation of an estate?
When calculating your estate for the purposes of estate taxes, what needs to be included? The IRS provides some clear guidelines that can help. Nick M Do / Photographer's Choice RF / Getty Images

When we looked at two easy ways to reduce your estate tax burden, you learned that an individual can exclude $5,450,000 in net worth from his or her estate, while a married couple can double this to $10,900,000.  This begs the question: What is included in the calculation of your estate?  

According to the IRS, your gross estate for estate tax calculation purposes must include “the value of all property in which you had an interest at the time of death.” In other words, quite literally the kitchen sink.

 This means, among other things:

  • Stocks
  • Bonds
  • Mutual Funds
  • Cash
  • Money Markets
  • Real Estate
  • Retirement Accounts
  • Business Partnerships
  • Automobiles
  • Intellectual Property
  • Revocable Trusts
  • Personal Residences (less the outstanding mortgage value)
  • Collectibles (Art, Musical Instruments, Fine China)
  • Taxable Lifetime Gifts (those you made in excess of the $14,000 per annum tax-free threshold)
  • Clothing
  • Furniture
  • Annuities Payable to Your Estate
  • Certain Property You Transferred Within 3 Years Prior to Death
  • Life Insurance Proceeds Payable to Your Estate or the Heirs
  • Jewelry
  • Equipment
  • The Present Value of any Structured Annuity or Future Lump Sum Payments (e.g., those you won in a lawsuit or somehow entered into as part of a settlement or financial arrangement for one reason or another)
  • Gold, Silver, and Other Commodities
  • Mineral Rights, Timber Rights, and Other Natural Resource Rights

However, the good news is that there are a few deductions.

 These are mostly limited to funeral expenses, debts owed at the date of death, and assets transferred to a spouse (e.g., a husband or wife could inherit his or her husband's assets and not pay estate taxes provided the form was filled out correctly with the right election selected).

Practically, the inclusion of illiquid assets in the calculation of your estate tax liability can force your heirs to sell off part of their inheritance.

A classic illustration is a family farm.  Imagine that it had been in the family for generations.  In recent years, the local township  experienced tremendous growth, pushing up the appraised value of your property.  Unless you have a sufficient life insurance policy in place to provide the cash necessary to cover the estate tax bill, you might have to break up the farm by selling off bits and pieces of it, or you might have to give up the ghost and walk away entirely.

One thing that is important to note: Irrevocable trust funds are not included in the value of your estate presuming you've structured them intelligently.  That is, if you were using the gift tax techniques, among others, that we discussed in the earlier article, transferring money into a trust for the benefit of another person or persons, and the trust instrument could not be changed, even by you, so that there was no way you could ever reclaim the money, the money no longer belongs to you, it belongs to the trust.  This is one of the reasons wealthy families utilize things such as generation-skipping trusts; to get money, and the future compounding it will produce, out of their hands and into the hands of a legal construct that will ultimately benefit their grandchildren.