Fundamentals of Estate Planning
What is in the gross estate
Start with §2033 (all property owned at death), then add the strings: §2036 (retained life estate or right to income), §2037 (reversionary interest above 5%), §2038 (revocable transfers and powers to alter), §2041 (general power of appointment), §2042 (incidents of ownership in life insurance), and §2035 (certain transfers within three years of death, including life insurance policies transferred while retaining incidents). Deductions come off the top: administration expenses and debts (§2053), casualty losses (§2054), charitable gifts (§2055), and the marital deduction (§2056) for property passing to a spouse in qualifying form.
Credits, gifts, and basis
The unified credit shelters the applicable exclusion amount; unused exclusion is portable to a surviving spouse through a timely Form 706. Lifetime gifts use the same unified credit, while the indexed annual exclusion (e.g., $19,000 per donee in 2025) lets donors give without touching it; gift splitting doubles that for married donors. Property included in the gross estate takes a basis step-up to date-of-death value (§1014); gifted property carries over basis (§1015).
Traps
- A revocable living trust avoids probate, not estate tax.
- The marital deduction defers tax; it does not eliminate it at the second death without portability or a credit-shelter trust.
- Incidents of ownership include the rights to change the beneficiary, borrow, surrender, or cancel - not just holding title.
- An ILIT fails if premiums are paid without withdrawal powers or if the grantor dies within three years of transferring an existing policy.
Worked example
A $10 million gross estate leaves $4 million to charity and $6 million to the surviving spouse: taxable estate is zero, and the survivor also receives the deceased spouse's unused exclusion if a return is filed.