As 2021 begins, now is a good time to revisit, review and revise your planning. It is recommended that existing planning be reviewed annually, given life’s constant change. Personal and financial circumstances often change, as happened for many people during 2020. This makes it necessary for changes to family legacy and/or business planning. Moreover, if you do not have an estate plan in place, 2020 is a stark reminder of the future’s uncertainty and of the consequences of failing to plan (for you, your family, your business, and more). As Ben Franklin wrote, “Failing to plan is planning to fail.”
The above said, an understanding of four (4) concepts is necessary to effective tax planning:
- The Gross Estate
- The Adjusted Gross Income
- The Taxable Estate
- The Net Estate
Over time, we will discuss each, but in this article, I will focus on what constitutes the “Gross Estate.”
The beginning point for determining estate tax liability is an understanding what property is included within your Gross Estate, and is therefore subject to possible estate tax (a New York estate tax and a possible Federal estate tax). It is from the amount of your Gross Estate that your Adjusted Gross Estate, Taxable Estate, and the Net Estate are then determined.
The Gross Estate includes (i) property directly owned by the decedent (both probate and non-probate property), (ii) property subject to disposition by the decedent through a general power of appointment, and (iii) property transferred by gift but for which the decedent did not give up complete control or ownership at the time of transfer.
As such, both probate and non-probate property, as well as certain gifts made during your lifetime, may be included in your Gross Estate. Let’s look at each of these individually.
Probate Property
The way property is transferred following death is dependent upon whether the property is probate property or non-probate property. Probate property is property directly owned by the decedent at the time of death for which there is no legally recognized death beneficiary designation. Therefore, it passes by will or, if there is no will, by the laws of intestacy. Probate property may include real or personal property, and tangible or intangible property. It can be property the decedent owned solely or owned jointly with another person. Examples include real estate, stocks, bonds, cash, automobiles, equipment, and household items.
Non-Probate Property
Conversely, non-probate property is all property for which the law recognizes beneficiary designations. For example, it may be real estate owned as joint tenancy by the entirety or with a right of survivorship, life insurance proceeds, retirement accounts (such as funds in an IRA, 401(k) and 403(b)), contracts with payable-on-death designations, securities held in a transfer-on-death account, and property transferred to a living trust. Title to this property passes directly to the beneficiary upon the death of its owner, by contract (legal beneficiary designation) or operation of law (for example, a surviving joint tenant with a right of survivorship). Therefore, non-probate assets will pass to automatically to a survivor (the surviving named beneficiary or surviving co-owner), whether or not the decedent had a will.
Gifts
Lifetime gifts that are complete (with no powers or other controls retained over the gifts) and qualifying for exclusions or deductions (the annual exclusion, the unlimited exclusion for transfers for certain educational and medical expenses, and the unlimited deductions for marital and charitable transfers) are not included in the Gross Estate. However, certain gifts made within three (3) years of the decedent’s death are included in the Gross Estate. Likewise, most taxable gifts are included in computation of the Gross Estate, as well as the Taxable Estate. This rule is intended to minimize the incentive for a decedent to make deathbed transfers in an effort to reduce estate taxes.
Even with recent changes in the Federal tax law, some gifts remain excluded from the Gross Estate. Still, any gift tax paid by the decedent or his or her spouse within three (3) years of death will be included within the Gross Estate for estate tax computation purposes.
As you can see, the Gross Estate can be a confusing concept, with complex issues necessary to consider and understand for effective tax planning.
Should you have questions about your Gross Estate and/or wish to design or update your estate plan for 2021 and beyond, kindly contact me as I would be pleased to speak with you.
