Chapter 13: The Estate Tax

THE ESTATE TAX The estate tax formula Gross estate valuation Gross estate items Estate tax deductions Computation of estate tax liability Liquidity concerns Generation-skipping transfer tax

The Estate Tax Formula (1 of 3) Gross Estate - Deductions (exp, debts, & losses) = Adjusted Gross Estate - Marital & charitable deductions = Taxable estate + Prior Taxable Gifts = Estate tax base

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

The Estate Tax Formula (3 of 3) Compute tentative tax on estate tax base Tentative tax - Recomputed gift tax - Available unified credit - Other credits = Estate tax due

Gross Estate Valuation Gross estate valued at FMV at either Date of death or alternate OR Alternate valuation date 6 mo. after death unless dispositions occur Both gross estate & tax liability must be reduced for alternate date to be effective

Gross Estate Items (1 of 2) Property in which decedent had an interest Property transferred to others but which decedent still controlled or obtained benefits Gift taxes paid on gifts w/in three years of date of death

Gross Estate Items (2 of 2) Annuities and other retirement benefits Jointly owned property Property not owned, but decedent had general powers of appointment Life insurance If decedent had “incidents of ownership See Table C13-1

Estate Tax Deductions (1 of 2) §2053 authorizes deductions for Mortgages Other debt owed by decedent Funeral expenses Administration expenses

Estate Tax Deductions (2 of 2) Deductions permitted by other Code sections Casualty and theft losses Charitable contributions Unlimited Marital deduction See Table C13-2

Computation of Estate Tax Liability (1 of 4) Progressive tax rates Applied to estate tax base to determine tentative tax Rate varies from 18% to 48%

Computation of Estate Tax Liability (2 of 4) Gift tax reduction If taxable gifts have been added to base, recompute gift tax using rates in effect at date of death Subtract unified credit ACTUALLY taken in gift year Reduce tentative estate tax by net gift tax

Computation of Estate Tax Liability (3 of 4) Credits Unified credit not previously used Maximum credit of $555,800 for 2004 & 2005 shelters estate/gift tax of up to $1.5M Unified credit increases through 2009

Computation of Estate Tax Liability (4 of 4) Credits (continued) State death tax credit (Appendix G) 25% of state death tax liability Credit replaced with deduction after 2004 Gift tax credit on pre-1977 gifts Credit for estate taxes paid on prior transfers Credit for foreign death taxes

Liquidity Concerns (1 of 2) 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 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

Liquidity Concerns (2 of 2) 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

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 48% (2004) Highest gift or estate tax rate Tax applies to taxable terminations of and taxable distributions from generation-skipping transfers

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

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

Generation-Skipping Transfer Tax (GSTT) (4 of 4) Grantor gets $1.5M exemption in 2004 Same amount as applicable exclusion amount for estate tax purposes

End of Chapter 13 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