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Chapter 13:The Estate Tax

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THE ESTATE TAXTHE ESTATE TAXThe estate tax formulaGross estate valuationGross estate itemsEstate tax deductionsComputation of estate tax liabilityLiquidity concernsGeneration-skipping transfer tax

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The Estate Tax The Estate Tax FormulaFormula

(1 of 3)(1 of 3)

Gross Estate- Deductions (exp, debts, & losses;

marital, charitable and state death tax deductions) _

= Taxable estate+ Prior Taxable Gifts= Estate tax base

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The Estate Tax The Estate Tax FormulaFormula

(2 of 3)(2 of 3)

Taxable estate is gross estate minus deductions

All taxable gifts made after 1976, other than gifts included in gross estate, are added to taxable estate

Gifts valued at date-of-gift valuesSum of two amounts is tax base

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The Estate Tax The Estate Tax FormulaFormula

(3 of 3)(3 of 3)

Compute tentative tax on estate tax base

Tentative tax- Recomputed gift tax- Available unified credit- Other credits= Estate tax due

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Gross Estate ValuationGross Estate Valuation

Gross estate valued at FMV at eitherDate of death or alternate ORAlternate valuation date

6 mo. after death unless dispositions occurBoth gross estate & tax liability must

be reduced for alternate date to be effective

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Gross Estate ItemsGross Estate Items(1 of 2)(1 of 2)

Property in which decedent had an interest

Property transferred to others but which decedent still controlled or obtained benefits

Gift taxes paid on gifts w/in three years of date of death

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Gross Estate ItemsGross Estate Items(2 of 2)(2 of 2)

Annuities and other retirement benefitsJointly owned propertyProperty not owned, but decedent had

general powers of appointmentLife insurance

If decedent had “incidents of ownershipSee Table C13-1

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Estate Tax DeductionsEstate Tax Deductions(1 of 2)(1 of 2)

§2053 authorizes deductions for Mortgages Other debt owed by decedentFuneral expensesAdministration expenses

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Estate Tax DeductionsEstate Tax Deductions(2 of 2)(2 of 2)

§2054 - Casualty and theft losses§2055 Charitable contributions

Unlimited§2056 Marital deduction

Unlimited§2058 State death taxes See Table C13-2

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Computation of EstateComputation of EstateTax LiabilityTax Liability (1 of 4) (1 of 4)

Progressive tax rates Applied to estate tax base to

determine tentative taxRate varies from 18% to 47%

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Computation of EstateComputation of EstateTax LiabilityTax Liability (2 of 4) (2 of 4)

Gift tax reductionIf taxable gifts have been added to base,

recompute gift tax using rates in effect at date of death

Subtract unified credit ACTUALLY taken in gift year

Reduce tentative estate tax by net gift tax

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Computation of EstateComputation of EstateTax LiabilityTax Liability (3 of 4) (3 of 4)

CreditsUnified credit not previously used

Maximum credit of $555,800 for 2005 shelters estate/gift tax of up to $1.5M

Unified credit increases through 2009

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Computation of EstateComputation of EstateTax LiabilityTax Liability (4 of 4) (4 of 4)

Credits (continued)Gift tax credit on pre-1977 giftsCredit for estate taxes paid on

prior transfersCredit for foreign death taxes

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Liquidity ConcernsLiquidity Concerns(1 of 2)(1 of 2)

Deferral of payment of estate taxesSec. of Treasury may extend payment for up

to 12 monthsSec. can extend payment for up to 10 yrs. if

reasonable cause can be shownDue date for remainder or reversionary interests

owned by estate can be extended up to 6 mo. after other interests terminate

Payment of taxes related to closely held businesses can be spread over 10 years

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Liquidity ConcernsLiquidity Concerns(2 of 2)(2 of 2)

Stock redemptions to pay death taxesEstate may treat redemption as an

exchange even if it does not meet provisions of §302

Special use valuation of farm real property

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Generation-Skipping Generation-Skipping Transfer Tax (GSTT)Transfer Tax (GSTT) (1 of (1 of

4)4)

Purpose of GSTEnsure some form of transfer tax imposed at

least once per generationGST tax levied at a flat 47% (2005)

Highest gift or estate tax rate Tax applies to taxable terminations of and

taxable distributions from generation-skipping transfers

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Generation-Skipping Generation-Skipping Transfer Tax (GSTT)Transfer Tax (GSTT) (2 of (2 of

4)4)

Generation-skipping transfer dispositionsProvide interests for > one generation of

beneficiaries in a younger generation than the transferor OR

Provide an interest solely for a person two or more generations younger than the transferor

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Generation-Skipping Generation-Skipping Transfer Tax (GSTT)Transfer Tax (GSTT) (3 of (3 of

4)4)

Termination of an interest in a G-S arrangement is a taxable terminationTermination triggers imposition of GSTTGSST levied on pre-tax amount

transferredTrustee pays tax

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Generation-Skipping Generation-Skipping Transfer Tax (GSTT)Transfer Tax (GSTT) (4 of (4 of

4)4)

Grantor gets $1.5M exemption in 2005Same amount as applicable

exclusion amount for estate tax purposes

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