1.  Estate Tax

2.  Why are estates taxed? o Provide taxes for social welfare o Reduce some of the ability to pass wealth from one generation to another  Who pays the estate tax? o The estate (comes from assets of deceased) o Can have arrangement where owners of “shared property” pay portion of the tax

3.  Three main steps o Determine the assets in the estate Determine ownership percent Determine the value of each asset in estate Look back at potential assets that are part of estate o Determine the exemptions and credits Exemptions on assets in estate Prepaid taxes and overall tax credit on assets o Determine the tax on the Estate Rate tables taxes (gift taxes for example) Fees, fines and penalties for late submission

4.  What Assets are counted in the Gross Estate o Fair Market Value of All Interests owned by the Deceased 2033 Property Cash, stocks, bonds, retirement funds, notes receivable, residences, personal property (cars, furniture, appliances, clothes, etc.), and any other future income from activities or property due to deceased at time of death. 2034 Property Dowry or Curtesy Property (rights to property of spouse at death of spouse) 2035 Property Gift tax paid on gifts made within three years of death 2036, 2037, 2038, 2039, 2040, 2041, 2042, and 2044 Property These include the following: (1)Property transferred but with a remaining life claim, reversionary interests, or rights to revoke were retained, (2) annuities, (3) jointly owned property, (4) powers of appointment, (5) life insurance proceeds on someone else’s life, and (6) QTIP (Qualified Terminable Interest Property) Basically all property the deceased had rights to just prior to death or ability to “allocate” property at death

5.  Look-back Provision for Gross Estate o The three year look back adds to the Gross Estate (1) any gift tax paid on gifts made within three years of death (2) any gift made within three years of death that would fall under any of the property categories 2036, 2037 or 2038 (3) any death proceeds from insurance policy paid with three years of death  Gross Estate o Line One of the FORM 706 – United States Estate Tax Return  Who must file o All U.S. citizens with estate resulting in estate taxes o Foreign nationals with property interests in the U.S.

6.  Valuation of the Estate Assets o Primary Rule Fair Market Value of asset at the time of death of deceased Alternate Date Rule (six months later if value and taxes have fallen during six months after death of deceased) o Hard to Value Assets Assessed value at death usually with appraisal (expert evaluation) Discount for lack of marketability or Key person discount o Financial Asset Average over the day of death (modified if market closed) Discount for large block (disposal would lower average price) (Book is wrong on accrued interest and dividends…market price is right)

7.  Deductions and Credits from Gross Estate o Closing of Estate and Burial Funeral Expenses (reasonable) Last Medical Expenses (unpaid medical bills not covered by insurance) Administrative costs of probate, retitling assets, administrator’s or executor’s fees Debts outstanding at death Losses during administration of estate (theft, storm damage, etc. and not covered by insurance) o Charitable Donations (Usually 100% of fair market value of property or assets donated to qualified charity) o Marital Deduction (assets to surviving spouse) o State Death Tax Provision (taxes paid to state for the estate)

8.  Tentative Tax o Gross Estate minus allowable Deductions = Taxable Estate Add back to Taxable Estate All taxable gifts after 1976 o The Tentative Tax Base Total transfer of all assets during the life of the donor and Total transfer of all assets at death of deceased o Tax Calculation on rates at time of estate filing times Tentative Tax Base  Credits o Previous Gift Taxes paid o Estate Tax Credit (Federal $2,081,000) o Taxes Paid on Prior Transfers o Foreign Tax Credit  Final Amount is Estate Tax Bill due U.S. Treasury

9.  Paying and Reporting Estate Taxes o File Form 706 if estate has tax bill o Typically filed and paid nine month from death o Request extra six months to file from executor via Form 4768 o Request up to extra 12 months to pay  Failure to meet required dates o If executor fails to request extension, penalty on estate is 5% per month up to 25% of the estate o If failure is fraudulent, rates triple (15% and 75%) o Failure to pay on time is 0.5% per month up to maximum of 25% of estate  Others that pay estate tax on deceased estate o When property is not liquid and deceased had “part ownership” the remaining owners are obligated to pay the estate tax for that portion of the estate o Beneficiaries of income tax deferred accounts pay taxes on the “income” as they withdraw funds (example 401(k) accounts)

10.  Cumulative Example – Page 231 - 234 o Gross Estate What assets are included? What is Fair Market Value of assets? How were these values determined? o Deductions to Estate What expenses are legal deductions? How are these deduction values determined? o Tax Credits Where do the legal credits come from? When are the values determined for these credits  Does Estate need to file Form 706?

11.  What are the implications for Financial Planning? o Timing of gift? During life or as bequest? o Keeping track of taxable gifts and gift tax? o Tax law changes and estate taxes? o Selecting Executor for estate? o Keeping track of assets and interests? o Changes to will or trusts? o Other issues?