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

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

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

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

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

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

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

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

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

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

13-11 The Gross Estate: Inclusions (3 of 3)  § 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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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