1. Chapter 13: The Estate Tax

2. 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

3. The Estate Tax Formula (1 of 3)
Gross Estate
- Deductions (exp, debts, & losses; marital, charitable and state death tax deductions) _
= Taxable estate
+ Prior Taxable Gifts
= Estate tax base

4. 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

5. 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

6. 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

7. 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

8. 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

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

10. Estate Tax Deductions (2 of 2)
§ Casualty and theft losses
§2055 Charitable contributions
Unlimited
§2056 Marital deduction
§2058 State death taxes
See Table C13-2

11. 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 47%

12. 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

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

14. Computation of Estate Tax Liability (4 of 4)
Credits (continued)
Gift tax credit on pre-1977 gifts
Credit for estate taxes paid on prior transfers
Credit for foreign death taxes

15. 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

16. 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

17. 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 47% (2005)
Highest gift or estate tax rate
Tax applies to taxable terminations of and taxable distributions from generation-skipping transfers

18. 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

19. 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

20. Generation-Skipping Transfer Tax (GSTT) (4 of 4)
Grantor gets $1.5M exemption in 2005
Same amount as applicable exclusion amount for estate tax purposes

21. End of Chapter 13
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