chapter 13: the estate tax

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Chapter 13:The Estate Tax

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THE ESTATE TAXTHE ESTATE TAXThe estate tax formulaGross estate valuationGross estate itemsEstate tax deductionsComputation of estate tax liabilityLiquidity concernsGeneration-skipping transfer tax

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The Estate Tax FormulaThe Estate Tax Formula(1 of 3)(1 of 3)

Gross Estate- Deductions (exp, debts, & losses)= Adjusted Gross Estate- Marital & charitable deductions= Taxable estate+ Prior Taxable Gifts= Estate tax base

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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 valuesSum of two amounts is tax base

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Compute tentative tax on estate tax base

Tentative tax- Recomputed gift tax- Available unified credit- Other credits= Estate tax due

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Gross Estate ValuationGross Estate ValuationGross 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

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Gross Estate ItemsGross Estate Items(1 of 2)(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

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Gross Estate ItemsGross Estate Items(2 of 2)(2 of 2)

Annuities and other retirement benefitsJointly owned propertyProperty not owned, but decedent had

general powers of appointmentLife insurance

– If decedent had “incidents of ownershipSee Table C13-1

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Estate Tax DeductionsEstate Tax Deductions(1 of 2)(1 of 2)

§2053 authorizes deductions for – Mortgages – Other debt owed by decedent– Funeral expenses– Administration expenses

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Estate Tax DeductionsEstate Tax Deductions(2 of 2)(2 of 2)

Deductions permitted by other Code sections– Casualty and theft losses– Charitable contributions

»Unlimited– Marital deduction

»UnlimitedSee Table C13-2

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Computation of EstateComputation of EstateTax LiabilityTax Liability (1 of 4) (1 of 4)

Progressive tax rates – Applied to estate tax base to determine

tentative tax– Rate varies from 18% to 48%

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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

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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

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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

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Liquidity ConcernsLiquidity Concerns(1 of 2)(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

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Liquidity ConcernsLiquidity Concerns(2 of 2)(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

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Generation-Skipping Generation-Skipping Transfer Tax (GSTT)Transfer Tax (GSTT) (1 of 4) (1 of 4)

Purpose of GST– Ensure some form of transfer tax imposed at least

once per generationGST 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

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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

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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

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Grantor gets $1.5M exemption in 2004– Same amount as applicable exclusion

amount for estate tax purposes

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Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark atUniversity of Northern Colorado’s

Kenneth W. Monfort College of [email protected]

chapter 13: the estate tax

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