What Is Included in a Taxable Estate?

Have you ever wondered what is considered part of your taxable estate? If you haven’t ever thought about it, you should. That’s because the size of your estate determines your estate tax liability. Currently, estate tax only kicks in if your gross estate exceeds $5,000,000 per person. Any amount above that gets taxed at 35%.

But that threshold is a political football, and it could become $1,000,000 or lower at the drop of a hat. Estate tax changes occur quite often. That’s why it’s critical that you understand what makes up your taxable estate if you want to protect your assets. Let’s take a tour of your assets and see how they are considered when it comes to your estate tax.

Before we dive in, this is a good opportunity to differentiate between estate tax and probate. Estate tax is the tax levied on you when you die. What is probate? It is the costly process of deciding who gets which assets.

Assets Held in Your Name

If you have money in the bank, stocks, bonds, mutual funds, real estate, partnerships, business interests, cars, etc., and you hold these assets in your name only, they are part of your taxable estate. That goes for collectibles, coins and cars.

To make matters worse, these assets will have to be probated unless you hold them in a retirement account (see below) or a “Transfer on Death” account.

Assets Held in Joint Tenancy

If you hold title to an asset in joint tenancy with your spouse, 50% of the value of the asset will be included in your gross estate. The problem starts after one spouse dies. The surviving spouse often names a child as a joint tenant to replace the deceased spouse. And if a non-spouse is your joint tenant, 100% of the value of the asset will be included in the surviving spouse’s estate unless the other joint tenant can prove they paid for some part of the asset.


At least these assets will not have to be probated. Any asset you hold as a joint tenant reverts to the surviving joint tenants probate-free when one joint tenant dies.

Assets Held in Tenant in Common

If you personally hold assets as a tenant in common, your portion of the asset is part of your taxable estate. Also, if you hold title to that property as an individual, it will have to be probated. Yuk.

Annuities

Annuities are part of your taxable gross estate if you are the owner or even partial owner. If you name a beneficiary to the annuity, the assets will pass without probate, and that’s great. But the annuity will still be included in your gross estate.

Be careful. If you fail to name a beneficiary or you name your estate as the beneficiary, the annuity will have to be probated as well. Yikes.

Life Insurance

You can easily spend a boatload of money on life insurance premiums, and up to a third of the death benefit will go to Uncle Sam rather than your beneficiaries. That’s a problem and it can happen if you are the owner of the insurance. If that happens, the life insurance will be included in your gross estate. To lose even more money, name your estate the beneficiary or fail to name a beneficiary at all. That will result in the life insurance proceeds having to be probated as well.

If you aren’t the owner or beneficiary of the life insurance but simply the insured, the death benefit will not be part of your gross estate. Sweet.

Retirement Accounts

If you die owning retirement accounts, those accounts are part of your taxable estate. That goes for Roth IRAs as well. If you fail to name a beneficiary, they will also be subject to probate. If you do name a beneficiary, you don’t have to worry about probate, but you still have to consider estate taxes.

Have you noticed what all these accounts have in common? At the end of the day, it doesn’t matter what kind of account or asset you own. It just doesn’t matter. If you have any incidence of ownership in an asset, those assets are part of your gross estate.

The Solution

The only way to reduce your estate tax liability is to get assets out of your name. If your estate is large enough, you can set up special trusts to accomplish this. You can also take your retirement accounts and convert them to a Roth. That won’t eliminate the estate tax, but it will reduce your estate because you’ll have to pay the income tax on the conversion. In effect, you are prepaying the income tax now, and by so doing, you reduce your taxable estate.

Most of us don’t have to worry about having a taxable estate right now. But this is something worth keeping your eyes on. You worked hard for the assets you’ve acquired. Take a little time now to understand the estate tax rules to so that you can continue exercising as much control over those assets as possible.