FEDERAL ESTATE & GIFT TAX

Question 1

1. For estates of decedents dying in 2013, if decedent’s “gross estate” (the estate tax base) is less than $5.25 million,

Answer 1

decedent’s executor doesn’t have to file an estate tax return.

Question 2

2. Unlimited marital deduction under both gift tax and estate tax.

Answer 2

Any property passing into the spouse’s outright ownership (gift, will, intestacy, life insurance proceeds, etc.) qualifies for a marital deduction. (Certain trusts can be used to qualify for the marital deduction, but for Bar Exam purposes this is not a concern.)

Example: Wendy has a substantial separate property estate inherited from her mother. Wendy gives Walmart stock worth $1 million to her husband Horace. The gift qualifies for the unlimited marital deduction; Wendy doesn’t even have to file a gift tax return.
Example: Wendy dies in January 2012, leaving a gross estate (her SP and her 1/2 CP) valued at $8 million. Wendy’s will bequeaths 1/2 of her estate to Horace, and the other 1/2 to a trust for her children. Wendy’s executor must file an estate tax return, but no estate tax will be due:
$8,000,000 - 4,000,000 = $4,000,000
$0 for federal estate tax

Question 3

3. There is also a $5.25 million exemption under the federal gift tax.

Answer 3

As a result, no gift tax must be paid by a donor unless cumulative lifetime taxable gifts (i.e., the total of all taxable gifts for this year and all prior years) exceeds $5.25 million.

Question 4

4. Life insurance and community property issues. Jane, who is single, is the insured under a $1 million life insurance policy. Jane names her daughter Diane as beneficiary. Jane dies, and the $1 million in policy proceeds is paid to Diane.
   a. Is the $1 million subject to income taxation as ordinary income to Diane?
   b. Same facts and same $1 million life insurance policy, except that Jane was married to Henry. The policy was community property (Jane acquired the policy during marriage and paid premiums from her salary.) With Henry’s consent, Jane named Diane as beneficiary, and the $1 million was paid to Diane after Jane’s death (survived by Diane and Henry).

Answer 4

The $1 million is includible in Jane’s gross estate for estate tax purposes, because Jane (the insured) owned the policy.

no, excluded from gross income

500k; her 1/2 CP is includible in Jane’s gross estate for federal estate tax purposes.