Estate Tax Calculations Flashcards
The Federal Estate Tax
The federal estate tax is a tax on the transfer of property when a person dies. It is measured by the value of the property rights that are shifted from the decedent to others. It is a tax on the right to transfer property or an interest in property, rather than a tax on the right to receive property, which is the basic characteristic of an inheritance tax.
It is important to recognize that the estate tax is not limited to property actually transferred by the decedent at death. To thwart tax avoidance schemes, the tax is levied on certain lifetime transfers that are essentially testamentary dispositions, and on transfers over which the decedent retained certain interests or powers.
The estate tax is tax inclusive. This means that the tax is levied upon all property that is included in the estate, including the amount used to pay the estate tax.
Steps in the Calculation of the Estate Tax
(1) determining the value of the gross estate,
(2) arriving at the adjusted gross estate,
(3) determining the taxable estate,
(4) calculating the federal estate tax payable before credits, and
(5) applying the allowable credits to arrive at the net federal estate tax.
50/50 Rule
The 50-50 rule provides that 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. This is regardless of the size of his or her contribution. This rule applies to property interests included in the decedent’s estate.
This 50-50 rule applies to both real and personal property regardless of how it was acquired or when it was purchased. However, it can be used only in the case of a joint tenancy between spouses or a tenancy by the entirety and if the joint interest was created after 1976.
Qualified spousal property applies to probate and non-probate property and includes 50% of property held as JTWROS between spouses and 50% of property held as Tenants by the Entirety.
Arnold Fox picked up a booklet at his attorney's office that had a section on computing federal estate tax. Some of the steps in the computation were in the wrong order. Select the correct order. I. gross estate value II. adjusted gross estate III. estate tax payable before credits IV. taxable estate V. net federal estate tax. Select One Answer
A. I, II, IV, III, V. B. II, I, V, III, IV. C. IV, I, V, III, II. D. V, I, III, II, IV. E. III, I, II, IV, V.
Correct Answer: A. I, II, IV, III, V
Explanation: The adjusted gross estate must be calculated before determining the taxable estate. The correct sequence for computation of federal estate tax is (1) gross estate value (2) adjusted gross estate (3) taxable estate (4) estate tax payable before credits (5) application of allowable credits to equal the net federal estate tax.
Which of the following properties are not includable in gross estate?
A. Property owned outright by decedent at the time of his or her death
B. Property gifted within three years of death of decedent
C. Annuities payable for life to both annuitant and a specified survivor
D. Life insurance in which the decedent possessed incidents of ownership
E. Property to which decedent holds the legal title but has no beneficial interest
Correct Answers: B. and E.
Explanation: Property gifted within three years of the death of donor is generally not included in gross estate. The exceptions are found in IRC Section 2035 and pertain to relinquishing life estates, reversionary interests, revocable trusts and life insurance policies owned by the insured.
What is the maximum amount allowable as a marital deduction for federal estate tax purposes?
The maximum amount allowable as a marital deduction for federal estate tax purposes is the net value of the property passing to the surviving spouse in a qualifying manner. Otherwise, there is no limit to the marital deduction. An individual could conceivably transfer his or her entire estate to the surviving spouse estate tax-free.
A gift is taxable to the extent that it exceeds any allowable:
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.
Herbert is in the process of drafting his will and is keen on minimizing estate tax. He found out that the unlimited marital deduction would allow:
A. an entire estate to be transferred to his heirs without estate tax.
B. a portion of the estate to be transferred to heirs without estate tax.
C. an entire estate to be transferred to the surviving spouse without estate tax.
D. a portion of the estate to be transferred to the surviving spouse without estate tax.
Correct Answer: C. an entire estate to be transferred to the surviving spouse without estate tax.
Explanation: The maximum amount allowable as a marital deduction for federal estate tax purposes is the net value of the property passing to the surviving spouse in a qualifying manner. Otherwise, there is no limit to the marital deduction. An individual could conceivably transfer his or her entire estate to the surviving spouse estate tax-free.
Adjusted taxable gifts must not be added to the taxable estate:
A. The gift was made before 1976.
B. The gift exceeded the annual gift tax exclusion.
C. The gift exceeded the gift tax marital deduction.
D. The gift exceeded the gift tax charitable deduction.
Correct Answer: A. The gift was made before 1976.
Explanation: Adjusted taxable gifts are defined as the taxable portion of all post-1976 gifts. A gift is taxable to the extent it exceeds any allowable annual gift tax exclusion, gift tax marital deduction or gift tax charitable deduction.
The unified credit or applicable credit is used as an offset against:
A. gift tax
B. estate tax
C. income tax
D. inheritance tax
Correct Answers: A. and B.
Explanation: The term unified credit is used because under the unified transfer tax system the same credit amount is used to offset gift taxes and estate taxes. This credit does not offset the income tax or the inheritance tax.
The unified tax credit is used as an offset against:
A. gift tax
B. estate tax
C. income tax
D. inheritance tax
Correct Answers: A. and B.
Explanation: The term unified credit was adopted because that credit is used as an offset against gift as well as estate taxes. It does not offset income tax and inheritance tax.
Federal Estate Tax
The federal estate tax is calculated on the value of property included in the gross estate. For this reason, the estate tax is tax inclusive. It is a tax on the right to transfer of property or an interest in property. The taxable estate is the gross estate less allowable expenses, deductions and credits. The federal estate tax return is due within nine months after the date of the decedent’s death.
Computing the Estate Tax: Calculation of estate tax involves five steps:
(1) determining the fair market value of the gross estate,
(2) determining the adjusted gross estate,
(3) calculating the taxable estate,
(4) calculating the federal estate tax payable before credits, and
(5) applying the allowable credits to arrive at the amount of net federal estate tax owed.
Formula for Computing Estate Tax
(1) Determine the value of the gross estate.
(2) Subtract relevant expenses and debts.
(3) Subtract the allowable deductions.
(4) Add the value of taxable gifts and apply the estate and gift tax rates.
(5) Subtract the unified credit amount and other allowable credits.
