1. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company1 Tax on transfer of property when a person dies Note: EGTRRA 2001 repealed the estate tax for one year in 2010 Tax Act of 2010 reinstates estate tax for 2010, 2011, and 2012 with $5 million estate tax exemption (indexed for inflation beginning in 2012) 2013 Tax Act of 2010 expires and pre-EGTRRA 2001 rules apply ($1 million exclusion, top estate tax rate 55%) What is it?

2. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company2 1.Gross Estate: Total of all property in which decedent had an interest and that is required to be included in the estate 2.Adjusted Gross Estate: Determined by subtracting certain allowable debts, taxes, losses, funeral, and administration expenses –Used for determining whether or not IRC Sec. 303 redemption or IRC 6166 installment payout tests can be met 3.Taxable Estate: Determined by subtracting any allowable marital, charitable, or state death tax deduction 5 Stage Estate Tax Calculation

3. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company3 4.Federal Estate Tax Payable Before Credits: a)Tentative tax base: Determined by adding any adjusted taxable gifts to the taxable estate b) c)Tentative tax: Determined by applying tax rate schedule to base a)Subtract gift taxes payable on post-1976 adjusted taxable gifts 5 Stage Estate Tax Calculation (cont’d)

4. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company4 5.Federal Estate Tax Due within 9 Months of Decedent’s Death: Estate tax payable before credits is reduced dollar-for-dollar by subtracting any of the following allowable credits a)Unified credit b)State death tax credit c)Credit for pre-1977 gift tax d)Credit for tax paid on prior transfers e)Credit for foreign death taxes 5 Stage Estate Tax Calculation (cont’d)

5. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company5 1 Year of Death______________ 2 Gross Estate (before exclusions)$______________ 3 - Conservation Easement Exclusion($______________) 4 Gross Estate$______________ 5 - Funeral and Administration Expenses Deduction$______________ 6 - Debts and Taxes Deduction$______________ 7 - Losses Deduction$______________ 8 - Subtotal: 5 to 7($______________) 9 Adjusted Gross Estate$______________ 10 - Marital Deduction$______________ 11 - Charitable Deduction $______________ 12 – Other Deductions $______________ 13 - Subtotal: 10 to 12($______________) 14 Taxable Estate$______________ 15 + Adjusted Taxable Gifts$______________ 16 Computation Base$______________ 17 Tax on Computation Base$______________ 18 - Gift Tax on Adjusted Taxable Gifts($______________) 19 Tentative Tax$______________ 20 - Unified Credit$______________ 21 -State Death Tax Credit $______________ 22 - Pre-1977 Gift Tax Credit$______________ 23 - Previously Taxed Property Credit$______________ 24 - Foreign Death Tax Credit$______________ 25 - Total Credits($______________) 26 Federal Estate Tax$______________ Federal Estate Tax Worksheet

6. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company6 Property owned outright (§2033) Certain property transferred gratuitously within three years of death (§2035) Gratuitous lifetime transfers where the decedent retained the income or control over the income (§2036) Gratuitous lifetime transfers conditioned on surviving the decedent (§2037) Ascertaining the Gross Estate

7. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company7 Gratuitous lifetime transfers in which the decedent retained the right to alter, amend, or revoke the gift (§2038) Annuities or similar arrangements purchased by the decedent and payable for life to both the annuitant and specified survivor (§2039) Jointly held property where another party will obtain the decedent’s interest at decedent’s death by survivorship (§2040) Ascertaining the Gross Estate

8. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company8 General powers of appointment (§2041) Life insurance in which the decedent possessed incidents of ownership or which was payable to or for the benefit of the decedent’s estate (§2042) Assets that have qualified for qualified terminable interest property (QTIP) treatment and must be included in the surviving spouse’s estate (§2044) Ascertaining the Gross Estate (cont’d)

9. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company9 Exclusion available for the lesser of: 1.Applicable percentage of the value of the land subject to the conservation easement, reduced by the amount of any charitable deduction for the easement under IRC Sec. 2055(f), or 2.Exclusion limitation of $500,000 (2011) Qualified Conservation Easement Exclusion

10. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company10 Applicable Percentage Calculation: 40% reduced (but not below zero) by two percentage points for every percentage point (or fraction thereof) by which the value of the conservation easement is less than 30% of the value of the land (determined without regard to the easement and reduced by any development right) Qualified Conservation Easement Exclusion (cont’d)

11. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company11 Land subject to conservation easement must generally: 1.Be located within the U.S. or its possessions on date of decedent’s death, and 2.Be owned by decedent or members of decedent’s family at all times during the 3 year period ending at decedent’s death Qualified Conservation Easement Exclusion (cont’d)

12. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company12 Generally, Fair Market Value (FMV) on: 1.Date of death, or 2.Alternate valuation date (6 months after date of decedent’s death) where: a)Executor election results in reduction of federal gross estate size (total property value), and b)Reduction of federal estate tax liability Valuation

13. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company13 2006 GIFT AND ESTATE TAX TABLE Taxable Gift/EstateTax onTax on Rate on FromToCol. 1Col. 1 Excess $0$10,000$018% 10,00020,0001,80020% 20,00040,0003,80022% 40,00060,0008,20024% 60,00080,00013,00026% 80,000100,00018,20028% 100,000150,00023,80030% 150,000250,00038,80032% 250,000500,00070,80034% 500,000750,000155,80037% 750,0001,000,000248,30039% 1,000,0001,250,000345,80041% 1,250,0001,500,000448,30043% 1,500,0002,000,000555,80045% 2,000,000………780,80046% Estate Tax Rates

14. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company14 2007-2009 GIFT AND ESTATE TAX TABLE Taxable Gift/EstateTax onTax on Rate on FromToCol. 1Col. 1 Excess $0$10,000$018% 10,00020,0001,80020% 20,00040,0003,80022% 40,00060,0008,20024% 60,00080,00013,00026% 80,000100,00018,20028% 100,000150,00023,80030% 150,000250,00038,80032% 250,000500,00070,80034% 500,000750,000155,80037% 750,0001,000,000248,30039% 1,000,0001,250,000345,80041% 1,250,0001,500,000448,30043% 1,500,000……….555,80045% Estate Tax Rates (cont’d)

15. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company15 2010 - 2011 GIFT AND ESTATE TAX TABLE Taxable Gift/EstateTax onTax on Rate on FromToCol. 1Col. 1 Excess $0$10,000$018% 10,00020,0001,80020% 20,00040,0003,80022% 40,00060,0008,20024% 60,00080,00013,00026% 80,000100,00018,20028% 100,000150,00023,80030% 150,000250,00038,80032% 250,000500,00070,80034% 500,000……….155,80035% Estate Tax Rates (cont’d)

16. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company16 GIFT TAX UNIFIED CREDIT ESTATE TAX UNIFIED CREDIT Exemption UnifiedExemptionUnified YearEquivalentCredit YearEquivalentCredit 2002-2009$1,000,000$345,8002006-2008$2,000,000$ 780,800 2010$1,000,000$330,800 2009$3,500,000$1,455,800 2011$5,000,000$1,730,800 2010$5,000,000$1,730,800 2011$5,000,000$1,730,800 Unified Credit

17. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company17 The lower of: –Federal estate tax attributable to the transferred property in the transferor’s estate, or –Federal estate tax attributable to the transferred property in the estate of the present decedent Limitations: The credit is reduced in 20% increments every 2 years and no credit is allowed 10 years after the transferor’s death Credit for Taxes Paid on Prior Transfers

18. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company18 Example: Mary Green died in 2011 with a $6,000,000 taxable estate. She made one $300,000 taxable gift during her lifetime (protected by the unified credit). Her estate had funeral and administration expenses of $35,000, debts of $45,000 and state death taxes of $266,400 (taxable estate = $6 million - $35,000 - $45,000 - $266,400) Taxable estate$5,653,600 + Adjusted taxable gifts 300,000 Total$5,953,600 Tax on $5,953,600$ 2,064,560 - Gift taxes paid on adj. taxable gifts( 0) - Unified credit($1,730,800) Tax due$ 337,760 Determining the Estate Tax Payable

19. Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company19 A return (Form 706) must be filed if the gross estate exceeds the exemption equivalent for the year in which the decedent died Estate tax is due at the time the return is filed, 9 months after decedent’s death –Reasonable cause extension –Up to 14-year closely held business interest extension Payment of the Estate Tax