825 / What property is includable in the gross estate under IRC Section 2033?

“The gross estate of a decedent who was a citizen or resident of the United States at the time of death includes under IRC Section 2033 the value of all property, whether real or personal, tangible or intangible, and wherever situated, beneficially owned by the decedent at the time of his death…(see Q 897). Real property is included whether it came into the possession and control of the executor or administrator or passed directly to heirs or devisees …. . Interest and rents accrued at the date of the decedent’s death constitute a part of the gross estate. Similarly, dividends which are payable to the decedent or estate by reason of the fact that on or before the date of the decedent’s death he was a stockholder of record (but which have not been collected at death) constitute a part of the gross estate.”¹

Interest accrued, for example, on certificates of deposit owned at death and payable after death but forfeitable in the event of surrender during the owner’s life² is includable in the decedent’s estate under IRC Section 2033. The result is not changed by the fact that the decedent owned the CDs as a joint tenant at the time of death.³

Note that it is only property “beneficially owned” by the decedent that is includable under IRC Section 2033. Thus, IRC Section 2033 does not reach property held by the decedent in trust for others. On the other hand, the decedent’s beneficial interest in property held by another as trustee is includable under IRC Section 2033 unless the decedent’s death terminates the interest.

IRC Section 2033 does not include interests which terminate on the decedent’s death, such as a life interest in a trust. (But such termination may be subject to the tax on generation-skipping transfers–see Q 874.) Similarly, if a decedent sells property in exchange for notes which provide that his death will extinguish the balance owing at that time, such balance will not be includable in the decedent’s estate under IRC Section 2033 if the sale was for an adequate and full consideration and the cancellation provision was part of the bargained for consideration.⁴

Among the items includable in a decedent’s gross estate are rights to future income (for example, the right to payments under an individual deferred compensation agreement or partnership income continuation plan). Such rights – called “income in respect of a decedent” – are included at their present (commuted) value. Since the income is also subject to income tax in the hands of the person who receives it (decedent’s estate or beneficiary), the recipient is allowed an income tax deduction for the estate tax paid on the income right (see Q 747).

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Planning Point: In light of this double taxation, taxpayers beyond retirement age should consider alternatives for removing funds from retirement accounts during life to fund other investments.

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The decedent’s interest in any business owned at death, whether as a proprietor, a partner, or a shareholder in a corporation, is likewise includable under IRC Section 2033. However, the decedent’s interest may be subject to certain discounts for lack of marketability and lack of control.

Local property law (state law) determines the nature and extent of a decedent’s ownership rights in property at the time of death. Under community property law, for instance, property acquired by a husband or wife during marriage by purchase with community funds is generally considered to be owned one-half by each spouse. Consequently, upon the death of the spouse who dies first, only one-half of the community property is includable in his gross estate. Ten states—Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin—operate under some form of community property system.

The value of Social Security survivor benefits, whether paid in the form of a lump sum or monthly annuity, is not includable in the decedent’s estate under IRC Section 2033.⁵