What Is Adjusted Gross Estate?

The adjusted gross estate is the net worth of a deceased person’s estate after deducting the cost of any outstanding debts and administrative costs.

Key Takeaways

  • Adjusted gross estate is the net worth of a deceased person's estate outstanding debts and administrative costs.
  • Taxes are levied on the adjusted gross estate minus value of any mortgages that may be present in the estate.

Understanding Adjusted Gross Estate

The adjusted gross estate is also the value on which estate taxes are levied. It is used to determine federal estate tax liability. For example, assets that are considered part of the gross estate would include any property, cash or investments owned by the deceased. However, if a mortgage is owed on the property, the value of the mortgage would be deducted from the value of the estate. There are no estate taxes calculated on assets that the deceased person does not own.

Joint bank accounts also receive special tax treatment. If the bank account is jointly owned with someone other than the survivor, then one hundred percent of the value of the account is taxed unless the other account holder can prove they also made material contributions to the account. However, if the joint account holder is a beneficiary of the estate, then the joint account is taxed at fifty percent. The same reasoning is applied to accounts of other types, like investment accounts.

Estates 

The word estate can be used to refer to the land and improvements on a large property or the historic home of a prominent family. However, in financial terms, it refers to everything of value that an individual owns, such as real estate, art collections, antique items, investments, insurance, and any other assets and entitlements. It is also used to refer to a person's net worth. Legally, an estate refers to an individual's total assets minus any liabilities.

The value of a personal estate is of particular relevance in two cases: if the individual declares bankruptcy, and if the individual dies. When an individual debtor declares bankruptcy, their estate is assessed to determine which of their debts they can be reasonably expected to pay. Bankruptcy proceedings involve the same rigorous legal assessment of an estate that also occurs upon an individual's death.

Estate Planning

Estates are most relevant upon the death of an individual. Estate planning is the act of managing the division and inheritance of a personal estate. Generally, an individual draws up a will that explains their intentions for the distribution of their estate upon their death. A person who receives assets through inheritance is called a beneficiary. 

Estate Distribution

Usually, estates are divided among members of the deceased's family. Inheritance accounts for a major proportion of total wealth in the world and is, in part, responsible for persistent income inequality. Partially as a response to the stagnation of wealth movement that occurs as a result of an inheritance, most governments require those in line for an inheritance to pay an inheritance tax on the estate. This tax can be large, forcing the beneficiary to sell some of the inherited assets in order to pay the tax bill. In the United States, if the majority of an estate is left to a spouse or to a charity, the estate tax is generally lifted.

Example of Adjusted Gross Estate

Mary passed away in 2018. She had an estate of $10 million. Available deductions, in the form of outstanding debts (such as the mortgage on her house) and administrative costs for the estate execution, bring down the total estate to $9 million. That figure is her adjusted gross estate. The total federal estate tax exemption limit that year was $11.18 million. Since Mary's adjusted gross estate is below that figure, her estate does not owe any taxes to the federal government.