5. Estate Tax Calculations Flashcards
Federal estate tax
Tax on right to transfer property/interest in property when a person dies, measured by value of the property rights shifted from decedent to others, levied on certain lifetime transfers/testamentary dispositions and transfers where decedent retained certain interests/powers
Tax inclusive (tax levied on property including amount to pay for estate tax)
Value of the Gross Estate
FMV on DoD/AVD:
-Property owned outright by the decedent.
-Certain property transferred gratuitously within three years of death, as well as any gift tax paid within three years of death.
-Certain lifetime transfers where the decedent retained the income or control over the income from the property transferred.
-Certain gratuitous lifetime transfers where the transferee’s possession or enjoyment of the property is conditioned on surviving the decedent.
-Gratuitous lifetime transfers over which the decedent retained the right to alter, amend or revoke the gift.
-Annuities or similar arrangements purchased by the decedent and payable for life to both the annuitant and to a specified survivor.
-Certain jointly held property where another party will obtain the decedent’s interest at death by survivorship.
-General powers of appointment.
-Life insurance in which the decedent possessed incidents of ownership or which was payable to or for the benefit of the decedent’s estate.
-QTIP in the estate of the surviving spouse.
50-50 Rule
only 50% of certain property titled and held jointly by the decedent and spouse with rights of survivorship, or as tenants by the entirety, will be includable in the decedent’s estate, regardless of contribution after 1976
alternate valuation date (AVD)
executor will elect the alternate valuation date on the estate tax return Form 706 when a significant portion of the estate assets have decreased in value, not applicable if going to surviving spouse since there is no estate tax liability
not applicable to property types that decline in value eg annuities (DoD FMV used)
Which of the following properties are NOT includable in the gross estate?
-Property gifted within three years of death of decedent
-Property to which decedent holds the legal title but has no beneficial interest
Deductions from gross estate
- funeral and admin: collection/preserving/distributing probate assets
-bonafide debts (mortgages/liens that were personal obligations) including certain taxes (income, gift and property)
-casualty and theft losses (from fire, storm-loss must have occurred during the time the estate was in the process of settlement and before it was closed, reduced by insurance/compensation)
Deductions can’t exceed amount allowed by jurisdiction
Usually attorney’s fees and executor’s commissions deducted from estate’s income tax return form 1041 in which tax rates are higher, resulting in overall tax saving
Funeral expenses, subject to certain limitations, are deductible. Deductions are generally limited to a reasonable amount. Identify all expenses that would be eligible for a deduction.
Grave marker
Transportation
Interment
Burial lot or vault
Perpetual care of the grave site
Deductions from adjusted gross estate
A marital deduction,
A charitable deduction, and
A deduction for state death taxes
Marital deduction conditions
- included in the decedent’s gross estate.
-pass at the decedent’s death to a surviving spouse.
-transferred in a qualifying manner. This means that it must be passed in a manner that gives the surviving spouse control and enjoyment essentially tantamount to outright ownership or that meets the requirements of QTIP.
maximum amount allowable for federal estate tax is net value of the property passing to the surviving spouse in a qualifying manner; otherwise no limit
Deceased Spouse Unused Exclusion (DSUE) election can be used to transfer any unused lifetime exclusion amount to the surviving spouse
Qualifying property for marital deduction
-Will, intestacy, a will contest, or an election against the will.
-Property transferred to a surviving spouse via dower, curtesy, or nuptial agreements.
-Operation of law such as joint tenancy with right of survivorship (JTWROS) or by tenancy by the entirety. The value of the marital deduction is the 50% share of the decedent’s property included in their gross estate.
-General power of appointment over property interests given to the surviving spouse.
-Contracts such as life insurance proceeds payable to the surviving spouse when the decedent was the owner and insured or when the surviving spouse is named the new owner of a life insurance policy owned by the decedent who is not the insured.
-Pension benefits payable to the spouse as a joint and survivor annuity that was included in the decedent’s estate.
-IRAs that name the spouse as beneficiary.
-Property transferred into marital trusts such as Power of Appointment trusts, Q-Tip trusts, Estate trusts, or QDOTs.
-Life income interest from a charitable remainder trust.
Lifetime income interest from a Pooled Income Fund when the executor elects Q-TIP treatment.
-Remainder interest given to a spouse from a charitable lead trust.
-Life estates given to the spouse when the executor makes a Q-TIP election or when the spouse is given a general power of appointment over the life estate property. Also, when the life estate is directed to pass to the surviving spouse’s estate at death.
-When both spouses die simultaneously and there is a presumption-of-survivorship clause in the will.
-When a bequest to a spouse is conditional upon the spouse surviving longer than 6 months after the decedent’s death, and the spouse outlives the 6-month period. If the spouse dies before the 6 month period ends, no marital deduction can be taken for that property interest.
QDOT / qualified domestic trust
decedent’s estate will qualify for the federal marital deduction if assets transfer into a QDOT and ensures that the assets will not ultimately leave the US without being taxed.
can be established a living trust or through will by either, but must be done before estate tax return is due
Requirements:
- trustee must be a US citizen or a domestic corporation, or a US bank if trust assets exceed 2 million,
- trust must retain sufficient assets to cover the non-citizen’s spouse’s estate taxes,
- trust must be set up as a QTIP trust or an Estate Trust, and
- trustee must approve all distributions of principal, and withhold estate taxes from principal distributions that are not subject to an ascertainable standard (HEMS).
Disadvantage: assets remaining in the trust at the non-citizen spouse’s death are calculated and taxed as if they had been included in the citizen spouse’s estate
Terminable Interest Property
surviving spouse’s interest would cease upon the occurrence or nonoccurrence of a particular event, and the children or some other party would receive the marital property instead, eg life estate or provision that surviving spouse is entitled to trust income until remarriage
Exceptions:
-if spouse is given life estate in trust and general power of appointment (POA)
-QTIP elections- passes from decedent, gives surviving spouse lifetime income at least annually and irrevocable election on estate tax return
Other deductions from adjusted gross estate
charitable deduction: FMV of gift to a qualified charity
A deduction for state death taxes can be taken for any death taxes paid to a state because of property includable in the decedent’s gross estate. This includes estate, inheritance, legacy, or succession taxes.
Estate Tax Payable Before Credits / Adjusted taxable gifts
Taxable gifts that exceed:
Annual gift tax exclusion,
Gift tax marital deduction, which is similar to the estate tax marital deduction, but for lifetime gifts to a spouse, or
Gift tax charitable deduction.
Credits
- unified credit amount,
- credit for foreign death taxes (if death taxes are paid in a foreign country that is included in gross estate and situated in that country and subject to tax),- only for US citizens and residents
- credit for gift tax on pre-1977 gifts, and
- credit for taxes on prior transfers.
Estate tax payment
Due at time of return/9 months after death (form 706)- late returns incur 5% penalty
Reasonable cause extension of up to 12 months from date fixed for payment, could run as long as 10 yrs from due date, eg rights to receive future payments may be impeded by substantial loss, litigation or illiquidity
Installment payment of estate tax
Section 6166 closely held business owner’s estate taxes paid on installment basis to improve liquidity, applies to decedent’s interest in sole proprietorship. 14 annual installments, interest only for first 4 years. 2% interest on first $1,750,000. Value must >35% adjusted gross estate, including gifts made within 3 years
Adjusted taxable gifts must NOT be added to the taxable estate if:
The gift was made before 1976.
Brent transferred a life insurance policy into an ILIT this year along with 100 BIF AAA bonds yielding 7%. The annual premium on the life insurance is $5,000. He is currently in the 32% marginal tax bracket.
Calculate the tax due on the trust income within the ILIT.
Brent has established a funded ILIT. Within this type of ILIT, trust income will pay for the policy premiums, and the grantor is taxed on trust income due to grantor trust rules. In this case, Brent has 100 BIF AAA bonds with a 7% coupon. These will generate $35/bond semi-annually, or $70/bond annually ($7,000 total). Brent will be taxed on all the income generated, regardless of whether it is used for policy premiums.
Therefore, $7,000 of trust income will be taxed at 32% resulting in $2,240 in tax due ($7,000 x 0.32).
