The Estate Tax is a tax on your right to transfer property at your death. It is an accounting of everything you own or have certain interests in at the date and time of death. The total of all of these items is the "gross estate." The “gross estate” may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
The fair market value is used, not necessarily what was paid for them or what their values were when they were acquired. Fair market value is defined by the Internal Revenue Service as:
"The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate." Regulation §20.2031-1.
Once the gross estate has been accounted for, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at a "Taxable Estate". These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.
After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed. The tax is then reduced by the available unified credit. Presently, the amount of this credit reduces the computed tax so that only total taxable estates and lifetime gifts that exceed $1,000,000 will actually have to pay tax. In its current form, the estate tax only affects the wealthiest 2% of all Americans.
