To calculate a gross estate for federal tax purposes, add up the fair market value, as of the date of death, of every asset the decedent owned outright plus certain assets they didn’t technically own but had strings attached to: life insurance they controlled, jointly held property, retirement accounts, and lifetime transfers where they kept a beneficial interest or the power to change things. The total matters because in 2026 anything above the $15 million basic exclusion is taxed at rates reaching 40 percent.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Start With Everything the Decedent Owned
Federal law includes in the gross estate all property, real or personal, tangible or intangible, wherever located in the world.2Office of the Law Revision Counsel. 26 USC 2031 – Definition of Gross Estate Every ownership interest the decedent held at death is the starting point.3Office of the Law Revision Counsel. 26 USC 2033 – Property in Which the Decedent Had an Interest
In practice, that means:
- Real estate: primary residence, vacation home, undeveloped land.
- Financial accounts: bank accounts, brokerage accounts, certificates of deposit.
- Business interests: partnerships, closely held corporations, LLC memberships.
- Tangible personal property: vehicles, jewelry, artwork, antiques, collectibles, and ordinary household belongings like furniture and electronics.
The individual items in that last category often get overlooked because any single piece seems modest. They still count.
Community property adds a wrinkle. In community property states, half the value of community property is included in the decedent’s gross estate; the other half already belongs to the surviving spouse.4Internal Revenue Service. Community Property Splitting it correctly matters beyond the estate tax calculation, because both halves receive a stepped-up basis at death.
Assets That Count Even When They Don’t Feel Owned
Several major asset types get pulled into the gross estate even though they usually pass outside probate and don’t feel like part of the “estate” in ordinary conversation. These are where families most often undercount.
Life Insurance
If the decedent held any “incidents of ownership” in a life insurance policy at death, the full death benefit is included in the gross estate.5Office of the Law Revision Counsel. 26 USC 2042 – Proceeds of Life Insurance Incidents of ownership means the power to change beneficiaries, borrow against cash value, or cancel the policy. A cheap term policy with a large face amount can push an estate past the exclusion by itself. Transferring the policy to an irrevocable life insurance trust more than three years before death is the standard way to keep the proceeds out.
Jointly Owned Property
For property held in joint tenancy with right of survivorship, the full value is presumed to be in the decedent’s gross estate unless the surviving joint owner can prove they contributed their own funds.6Office of the Law Revision Counsel. 26 USC 2040 – Joint Interests For married couples, exactly half is included regardless of who paid. The same rule applies to joint bank accounts.
Retirement Accounts and Annuities
IRAs, 401(k) plans, pensions, and commercial annuities are included to the extent the decedent had a right to receive payments, in proportion to the decedent’s contributions. Employer contributions count as the decedent’s own for this purpose.7Office of the Law Revision Counsel. 26 U.S. Code 2039 – Annuities For most people with employer plans, that means the full balance goes in.
Lifetime Transfers Pulled Back In
Giving property away before death doesn’t automatically remove it. Federal law targets several categories of lifetime transfers specifically because they let people shed paper title while keeping the real benefits.
Retained Life Estates
If the decedent transferred property but kept the right to use it, receive income from it, or decide who gets it, the full value comes back into the gross estate.8Office of the Law Revision Counsel. 26 USC 2036 – Transfers With Retained Life Estate Deeding the family home to your children while continuing to live there rent-free is the textbook example.
Revocable Transfers
Any transfer the decedent could have revoked or altered before death is included.9Office of the Law Revision Counsel. 26 USC 2038 – Revocable Transfers The revocable living trust is the everyday case: because the grantor can change or cancel it at any point, everything inside sits in the gross estate. Transfers that take effect only if the recipient outlives the decedent are also pulled in when the decedent kept a reversionary interest worth more than 5 percent of the property.10Office of the Law Revision Counsel. 26 USC 2037 – Transfers Taking Effect at Death
The Three-Year Rule
Some gifts made within three years of death are added back. This mainly catches transfers of life insurance policies and the release of powers that would otherwise have triggered inclusion under the retained-interest rules.11Office of the Law Revision Counsel. 26 USC 2035 – Adjustments for Certain Gifts Made Within 3 Years of Decedents Death Any federal gift tax the decedent paid on gifts during those final three years is also added to the gross estate. Ordinary gifts, and bona fide sales for full value, are not pulled back.
Powers of Appointment
Property subject to a general power of appointment the decedent held at death is included.12Office of the Law Revision Counsel. 26 U.S. Code 2041 – Powers of Appointment A general power is the ability to direct property to yourself, your estate, your creditors, or your estate’s creditors. Limited or “special” powers, which restrict who can receive the property, do not trigger inclusion. A trust that lets someone withdraw assets at will is creating a general power, and that person’s own gross estate grows accordingly.
Valuing Each Asset at Fair Market Value
Once you have the list, every asset needs a fair market value as of the date of death. The IRS defines that as the price a willing buyer and a willing seller would agree on, neither under compulsion, both with reasonable knowledge of the facts.13eCFR. 26 CFR 20.2031-1 – Definition of Gross Estate; Valuation of Property What the decedent originally paid does not matter.14Internal Revenue Service. Estate Tax
Publicly Traded Stocks and Bonds
Value equals the mean between the highest and lowest quoted selling prices on the date of death.15eCFR. 26 CFR 20.2031-2 – Valuation of Stocks and Bonds If nothing traded that day, the executor uses a weighted average of the nearest trading days before and after, weighted inversely by the number of trading days between each sale and the valuation date.
Real Estate, Private Businesses, and Collectibles
Assets without a public market need formal appraisals from qualified professionals following recognized industry standards. Real estate, closely held businesses, artwork, and rare collectibles all fall in this bucket, and the appraisal reports go with the return.
Private business interests often qualify for two valuation adjustments. A minority interest discount reflects that a small stake is worth less per share than a controlling one because the minority holder can’t force dividends or a sale. A lack-of-marketability discount accounts for the difficulty of selling an interest that isn’t publicly listed. Both can be substantial, but both need solid appraisal support.
Undervaluation Penalties
The IRS imposes a 20 percent penalty on any underpayment caused by a “substantial” valuation understatement, which means the reported value was 65 percent or less of the correct value.16Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments It jumps to 40 percent for a gross misstatement, defined as 40 percent or less of the correct amount. The penalty only applies when the resulting underpayment exceeds $5,000, but at estate-tax scale that threshold is almost always crossed. A credentialed appraisal is the best defense.
Picking the Valuation Date
Alternate Valuation Date
Default is date of death, but the executor may elect an alternate valuation date exactly six months later.17Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation The election is only available if it lowers both the total gross estate and the estate tax due. It applies to every asset, not a chosen few. Any asset sold or distributed during the six-month window is locked in at the value on that transaction date, not the six-month anniversary. In a rising market the option is off the table.
Special Use Valuation for Farms and Businesses
Real property used in a family farm or closely held business may be valued at its actual use rather than its highest-and-best-use market value. To qualify:
- The property must be in the United States, and the decedent must have been a U.S. citizen or resident.
- The property must pass to a qualified heir, generally a close family member.
- At least 50 percent of the estate’s adjusted value must be qualifying farm or business property, and at least 25 percent must be qualifying real property.
- The decedent or a family member must have materially participated in the farm or business for at least five of the eight years ending on the date of death.18Office of the Law Revision Counsel. 26 U.S. Code 2032A – Valuation of Certain Farm, Etc., Real Property
The election is irrevocable, every person with an interest must consent in writing, and if the heir stops the qualifying use within 10 years the tax savings are clawed back.
From Gross Estate to the Amount Actually Taxed
The gross estate is not the number the IRS taxes. Several deductions reduce it to the taxable estate, and that figure is what runs through the rate table.
Funeral costs, executor and attorney fees, accounting fees, and court costs are deductible if allowable under the law of the jurisdiction administering the estate. Debts, unpaid mortgages, and claims against the estate are also deductible; encumbered property enters the gross estate at its full undiminished value and the debt is subtracted separately.19Office of the Law Revision Counsel. 26 U.S. Code 2053 – Expenses, Indebtedness, and Taxes
Property passing outright to a surviving spouse who is a U.S. citizen qualifies for an unlimited marital deduction. If the surviving spouse is not a U.S. citizen, the deduction is only available if the property passes into a qualified domestic trust.20Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse Bequests to qualifying charities, religious organizations, educational institutions, and government entities are fully deductible with no cap.21Office of the Law Revision Counsel. 26 U.S. Code 2055 – Transfers for Public, Charitable, and Religious Uses
After deductions, the tax is calculated on the taxable estate and offset by the unified credit, which for 2026 shelters the first $15 million.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
State Taxes Are a Separate Calculation
The federal gross estate calculation does not answer the state question. Roughly a third of states impose their own estate or inheritance tax, and their exemption thresholds can start as low as $1 million, with top rates from about 10 to 20 percent. An estate that owes nothing federally can still face a real state bill. Some state inheritance taxes also vary by the beneficiary’s relationship to the decedent, hitting distant relatives and unrelated heirs at higher rates than spouses or children. Where assets or beneficiaries touch multiple states, get a tax professional who knows the rules in each one.