©2008 Prentice Hall, Inc.

THE ESTATE TAX The estate tax formula The gross estate: valuation The gross estate: inclusions Deductions Computation of tax liability Liquidity concerns Generation-skipping transfer tax ©2008 Prentice Hall, Inc.

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 ©2008 Prentice Hall, Inc.

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 ©2008 Prentice Hall, Inc.

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 ©2008 Prentice Hall, Inc.

The 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 ©2008 Prentice Hall, Inc.

The Gross Estate: Inclusions (1 of 3) 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 ©2008 Prentice Hall, Inc.

The Gross Estate: Inclusions (2 of 3) 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 ©2008 Prentice Hall, Inc.

The Gross Estate: Inclusions (3 of 3) Probate estate State law concept Basically any property that passes subject to the will and is subject to court administration See Table C13-1 ©2008 Prentice Hall, Inc.

Deductions (1 of 2) §2053 authorizes deductions for Mortgages Other debt owed by decedent Funeral expenses Administration expenses ©2008 Prentice Hall, Inc.

Deductions (2 of 2) §2054 - Casualty and theft losses §2055 - Charitable contributions Unlimited §2056 - Marital deduction §2058 - State death taxes See Table C13-2 ©2008 Prentice Hall, Inc.

Computation of Tax Liability Progressive Tax Rates Gift Tax Reduction Credits Unified Other ©2008 Prentice Hall, Inc.

Progressive Tax Rates Applied to estate tax base to determine tentative tax Rate varies from 18% to 45% ©2008 Prentice Hall, Inc.

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 claimed in gift year Reduce tentative estate tax by net gift tax ©2008 Prentice Hall, Inc.

Unified Credit Unified credit not previously used Maximum credit of $780,800 Shelters estate/gift tax of up to $2M Unified credit increases through 2009 ©2008 Prentice Hall, Inc.

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 ©2008 Prentice Hall, Inc.

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 ©2008 Prentice Hall, Inc.

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 ©2008 Prentice Hall, Inc.

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 ©2008 Prentice Hall, Inc.

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% Highest gift or estate tax rate Tax applies to taxable terminations of and taxable distributions from generation-skipping transfers ©2008 Prentice Hall, Inc.

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 ©2008 Prentice Hall, Inc.

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 ©2008 Prentice Hall, Inc.

Generation-Skipping Transfer Tax (GSTT) (4 of 4) Grantor gets $2M exemption Same amount as applicable exclusion amount for estate tax purposes ©2008 Prentice Hall, Inc.

©2008 Prentice Hall, Inc.