1. 13-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2. 13-2 THE ESTATE TAX (1 of 2)  As of the publication date there is no estate tax for 2010 only  The estate tax formula  The gross estate: valuation  The gross estate: inclusions  Deductions ©2011 Pearson Education, Inc. Publishing as Prentice Hall

3. 13-3 THE ESTATE TAX (2 of 2)  Computation of tax liability  Liquidity concerns  Generation-skipping transfer tax  Tax planning considerations  Compliance and procedural considerations ©2011 Pearson Education, Inc. Publishing as Prentice Hall

4. 13-4 The Estate Tax Formula (1 of 3) Gross Estate - Deductions (exp, debts, & losses; marital, charitable and state death tax deductions = Taxable estate + Adjusted taxable gifts (post ’76) = Estate tax base ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5. 13-5 The Estate Tax Formula (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 values  Sum of two amounts is tax base ©2011 Pearson Education, Inc. Publishing as Prentice Hall

6. 13-6 The Estate Tax Formula (3 of 3)  Tentative tax on estate tax base Tentative tax - Recomputed gift tax - Available unified credit - Other credits = Estate tax due ©2011 Pearson Education, Inc. Publishing as Prentice Hall

7. 13-7 The Gross Estate: Valuation (1 of 2)  Gross estate valued at FMV at either  Date of death or alternate OR  Alternate valuation date  6 mo. after death unless dispositions occur  Prop Reg would allow alternate valuation only for reductions due to “market conditions”  Both gross estate & tax liability must be reduced for alternate date to be effective ©2011 Pearson Education, Inc. Publishing as Prentice Hall

8. 13-8 The Gross Estate: Valuation (2 of 2)  If Congress does not reinstate the estate tax for 2010, the decedent’s property will be valued using a modified step-up in basis  Most property will have a carryover basis  Only a limited amount of property will receive a step-up in basis ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9. 13-9 The Gross Estate: Inclusions (1 of 3)  §2033 - Property in which decedent had an interest  §2035 - Gift taxes paid on gifts w/in three years of date of death  §2036 - Property transferred to others but which decedent still controlled or obtained benefits ©2011 Pearson Education, Inc. Publishing as Prentice Hall

10. 13-10 The Gross Estate: Inclusions (2 of 3)  §2038 - Property not owned, but decedent had general powers of appointment  §2039 - Annuities and other retirement benefits  §2040 - Jointly owned property  §2042 - Life insurance  If decedent had “incidents of ownership ©2011 Pearson Education, Inc. Publishing as Prentice Hall

11. 13-11 The Gross Estate: Inclusions (3 of 3)  §2044 - QTIP trust for which marital deduction claimed by decedent’s spouse  Probate estate  State law concept  Basically any property that passes subject to the will and is subject to court administration  See Table 1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

12. 13-12 Deductions (1 of 2)  §2053 authorizes deductions for  Mortgages  Other debt owed by decedent  Funeral expenses  Administration expenses ©2011 Pearson Education, Inc. Publishing as Prentice Hall

13. 13-13 Deductions (2 of 2)  §2054 - Casualty and theft losses  §2055 - Charitable contributions  Unlimited  §2056 - Marital deduction  Unlimited  §2058 - State death taxes  See Table 2 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

14. 13-14 Computation of Tax Liability  Progressive Tax Rates  Reduction for post-1976 gift taxes  Credits  Unified  Other ©2011 Pearson Education, Inc. Publishing as Prentice Hall

15. 13-15 Progressive Tax Rates  Applied to estate tax base to determine tentative tax  Rate varies from 18% to 45% in 2009 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

16. 13-16 Reduction for Post-1976 Gift Taxes  If taxable gifts have been added to base, recompute gift tax using rates in effect at date of death  Subtract unified credit ACTUALLY claimed in gift year  Reduce tentative estate tax by net gift tax ©2011 Pearson Education, Inc. Publishing as Prentice Hall

17. 13-17 Unified Credit  Unified credit not previously used  Maximum credit of $1,455,800 in 2009  Shelters estate/gift tax of up to $3.5M  Unified credit increases through 2009  Unified credit never generates a refund ©2011 Pearson Education, Inc. Publishing as Prentice Hall

18. 13-18 Other Credits  Pre-2005 state death tax credit  Gift tax credit on pre-1977 gifts  Credit for estate taxes paid on prior transfers  Credit for foreign death taxes ©2011 Pearson Education, Inc. Publishing as Prentice Hall

19. 13-19 Liquidity Concerns (1 of 3)  Deferral of payment of estate taxes  Sec. of Treasury may extend payment for up to 12 months  Sec. can extend payment for up to 10 yrs. if reasonable cause can be shown ©2011 Pearson Education, Inc. Publishing as Prentice Hall

20. 13-20 Liquidity Concerns (2 of 3)  Deferral of payment (continued)  Due 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

21. 13-21 Liquidity Concerns (3 of 3)  Stock redemptions to pay death taxes  Estate may treat redemption as an exchange even if it does not meet provisions of §302  Special use valuation of farm real property ©2011 Pearson Education, Inc. Publishing as Prentice Hall

22. 13-22 Generation-Skipping Transfer Tax (GSTT) (1 of 4)  Purpose of GST  Ensure some form of transfer tax imposed at least once per generation  GST tax levied at a flat 45% in 2009  Highest gift or estate tax rate  Tax applies to taxable terminations of and taxable distributions from generation-skipping transfers ©2011 Pearson Education, Inc. Publishing as Prentice Hall

23. 13-23 Generation-Skipping Transfer Tax (GSTT) (2 of 4)  Generation-skipping transfer dispositions  Provide 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

24. 13-24 Generation-Skipping Transfer Tax (GSTT) (3 of 4)  Termination of an interest in a G-S arrangement is a taxable termination  Termination triggers imposition of GSTT  GSST levied on pre-tax amount transferred  Trustee pays tax ©2011 Pearson Education, Inc. Publishing as Prentice Hall

25. 13-25 Generation-Skipping Transfer Tax (GSTT) (4 of 4)  Grantor gets $3.5M exemption in 2009  Same amount as applicable exclusion amount for estate tax purposes  No GST in 2010 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

26. 13-26 Tax Planning Considerations (1 of 2)  Use of inter vivos gifts  Up to per-donee annual exclusion amount  Use of exemption equivalent for transfers to other people than spouse  $3.5M in 2009  Role of life insurance  Provides liquidity ©2011 Pearson Education, Inc. Publishing as Prentice Hall

27. 13-27 Tax Planning Considerations (2 of 2)  Qualifying estate for installment payments  Interest rate only 2%  Where to deduct administration expenses  Estate tax return OR  Estate’s income tax return ©2011 Pearson Education, Inc. Publishing as Prentice Hall

28. 13-28 Compliance and Procedural Considerations  Filing requirements  Form 706  Due date 9 mo after decedent’s death  6-mo extension available  Alternate valuation date election  Made on estate tax return  Irrevocable ©2011 Pearson Education, Inc. Publishing as Prentice Hall

29. Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard.newmark@PhDuh.com 13-29 ©2011 Pearson Education, Inc. Publishing as Prentice Hall