39.8 Take Inventory and Estimate the Value of Your Potential Estate

The first step in estate tax planning follows a simple business practice of taking inventory of everything you own. Listing your belongings takes thought, time, and a surprising amount of work. On your list you should include records of purchases, fire and theft insurance inventories, bankbooks, brokers’ statements, etc. You should also include your cash, real estate (here and abroad), securities, mortgages, rights in property, trust accounts, personal effects, collections, and art works. Life insurance is includible if: (1) it is payable to your estate; (2) it is payable to others and you have kept “incidents of ownership” such as the right to change beneficiaries, surrender or assign the policy, or pledge it for a loan; or (3) you assign the policy and die within three years.

If you own property jointly with your spouse, your estate includes only one-half its value.

Planning Reminder

Life Insurance

If you are buying a new policy with yourself as the insured, and you want to keep the proceeds out of your gross estate, set up an irrevocable trust to buy the policy or have the individual beneficiary buy the policy. For example, a daughter applies for a $1 million policy on her father’s life and is the policy owner under the terms of the policy. If the father pays the premiums, his payments are treated as gifts, but the proceeds paid at his death are not subject to estate tax because he never had ownership rights in the policy.

If you have an existing policy, you may assign your ownership rights, such as the right to change beneficiaries, the right to surrender or cancel the policy, the right to assign it, and the right to borrow against it, but the assignment must occur more than three years before death to exclude the proceeds from your estate.

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If you had appraisals made of specially treasured items or collections, or property of substantial value, file such appraisals with your estate papers and then enter the value on your inventory.

Retirement benefits.

The taxable estate generally includes benefits payable at your death from any of the following retirement plans: pension plan, profit-sharing plan, Keogh plan, individual retirement account, or annuity. However, the value of an annuity from an IRA or employer plan that is payable to a beneficiary other than your estate may qualify for a full or partial exclusion if IRA distributions began before 1985 or you separated from service before 1985; no exclusion is allowed to the extent of your own nondeductible contributions to the plan.

A full exclusion is allowed for IRA funds if you began taking distributions from the account before 1983 under a schedule that irrevocably set the form of benefits. If IRA distributions began in 1983 or 1984 and you irrevocably elected the form of benefits before July 18, 1984, a $100,000 exclusion is allowed.

If you began receiving distributions from an employer plan before 1983 under a schedule that irrevocably set the form of benefits, a full estate tax exclusion is allowed. If you separated from service in 1983 or 1984, a $100,000 exclusion is allowed if the form of benefits is not changed before death; this is true even if distributions did not begin until after 1984.

Estimating the value of your assets.

When you have completed your inventory, assign to each asset what you consider to be its fair market value. This may be difficult to do for some assets. Resist the tendency to overvalue articles that arouse feelings of pride or sentiment and undervalue some articles of great intrinsic worth. For purposes of your initial estimate, it is better to err on the side of overvaluation. You can list ordinary personal effects at nominal value.

If you have a family business, your idea of its value and that of the IRS may vary greatly. Estate plans have been upset by the higher value placed on such a business by the IRS. You can protect your estate by anticipating and solving this problem with your business associates and counselors.

If your business is owned by a closely held corporation, and there is no ready or open market in which the stock can be valued, get some factual basis for a figure that will be reported on the estate tax return. One of the ways to do this is by arranging a buy-sell agreement with a potential purchaser. This agreement must fix the value of the stock. Generally, an agreement that binds both the estate and the purchaser and restricts lifetime sales of the stock will effectively fix the value of the stock for estate tax purposes. Another way would be to make a gift of some shares to a family member and have value established in gift tax proceedings.

If a substantial part of your estate is real estate used in farming or a closely held business, your executor may be able to elect, with the consent of heirs having an interest in the property, to value the property on the basis of its farming or business use, rather than its highest and best use.