How Adjusted Gross Estate Works

In order to calculate the adjusted gross estate of a person who has recently died, you must deduct any estate taxes from the gross estate. A gross estate would include the property of the deceased, investments, and cash. In a case where the deceased owes money on a mortgage on any of his or her property, you must pay the mortgage from the gross estate. However, you will not calculate estate taxes for properties that do not belong to the deceased.

Additionally, any joint accounts between the deceased and another person will be fully taxed unless the surviving relative proves that he or she has been contributing to the joint account. However, if the person contributing to the joint account is also the estate beneficiary, then they will not be taxed as highly.

This means that other bank and investment accounts belonging to the deceased will be taxed fully if the beneficiary of the accounts is not the beneficiary of the estate. However, if the beneficiary of the bank and investment accounts is also the estate's sole beneficiary, then the accounts will only be taxed by half, which is 50%. An estate, in this case, must be a big property or the ancestral home of the deceased. Sometimes, it may cover antiques, real estate, insurance, and a host of other properties belonging to the deceased.

Example of Adjusted Gross Estate

To understand an adjusted gross estate properly, we need to take a look at an example. Vivian is a deceased person who died in 2019, and she had a big estate worth $10 million in the estimate. If you subtract the costs of unsettled debts, extra charges, and a mortgage from the estate's value, the estate's value may drop down to $9 million.

This means you clear the $9 million that remained after debts, mortgage, and extra fees from the adjusted gross estate. If the federal government's total estate tax exemption limit in 2019 is above $9 million, then the estate doesn't owe the government any tax and, as such, will not pay tax for that year. However, this doesn't apply to bank and investment accounts owned by Vivian before she died.

If the beneficiary of the bank and investment accounts is not the beneficiary of the estate, the accounts will be taxed fully, which is 100%. However, if the beneficiary of the bank and investment accounts is also the estate beneficiary, the accounts will be taxed by half. In 2019, they will not need to pay tax on the estate.

Significance of Adjusted Gross Estate

An estate is basically the personal net worth of a person, excluding debts. Knowing the value of an estate is very important when the owner dies or goes bankrupt. If an individual goes bankrupt, he or she must determine the estate value to know if it can settle the debts or not. The process of assessing an estate in the case of bankruptcy is the same as in the case of an individual dying.

However, assessing an estate is taken more seriously in a case where the owner is already deceased. It includes taking charge of the estate distribution and ensuring that the deceased estate beneficiaries get their inheritance. Before an individual dies, they must write a will stating how the estate should be shared and who will benefit from it.

Those who are beneficiaries of the estate are supposed to pay tax to the government. They must pay this tax as an inheritance tax. If the beneficiary cannot afford the tax, he or she must sell a part of the estate to pay the tax. However, if the estate beneficiary is the deceased's partner or a charity organization, the beneficiary will not pay the inheritance tax.

Adjusted Gross Estate vs. Gross Estate

While adjusted gross estate and gross estate may be related, they do not mean the same thing. The adjusted gross estate refers to the cleared estate's net value after debts, mortgages, and other fees. On the other hand, gross estate refers to the value of the properties left by the deceased. It doesn't include the debt, mortgage, and taxes owed by the deceased before he or she died.

In gross estate, the total worth of the properties belonging to a deceased person is determined by an executor. This executor must have been appointed by the deceased through his or her last will. In a case where the deceased did not appoint an executor before dying, a court official will be responsible for determining the estate's value and its distribution.