© 2007 ME™ (Your Money Education Resource™) Estate Planning for Financial Planners Chapter 6: Estate Tax.

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Presentation transcript:

© 2007 ME™ (Your Money Education Resource™) Estate Planning for Financial Planners Chapter 6: Estate Tax

2 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Introduction  See Estate Tax Formula

3 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 The Gross Estate (1 of 2)  2033 – Property owned at death.  2034 – Dower & curtesy interests.  2035 – Gift tax paid within 3 years of death and gifts made within 3 years of death under 2036, 2037, 2038, and  2036 – Transfers with a retained life interest.  2037 – Transfers with a reversionary interest.

4 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 The Gross Estate (2 of 2)  2038 – Revocable transfers.  2039 – Annuities.  2040 – Jointly owned property.  2041 – Powers of appointment.  2042 – Proceeds of life insurance.  2044 – QTIP Property.

5 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/ – Property Owned at Death  All property in which the decedent had an interest at death  Examples: cash, stocks, bonds, retirement accounts, autos, clothes, etc.  Rental income accrued before death.  Cash surrender value of a life insurance policy owned on the life of another.  State income tax refunds.  Medical insurance reimbursements.  Awards for pain and suffering (but not wrongful death).

6 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/ – Dower & Curtesy  Replaced by right of spouse to take against will No impact today on taxable estate

7 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/ – Three-Year Lookback  Any gift tax paid within three years. Not the actual gifts  Gifts given within the last three years if the gift was a: 2036 – transfer with a life estate – transfer taking effect at death – revocable transfer – transfer of life insurance on the life of the decedent. Premiums paid on a policy not owned are not included.

8 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/ – Transfers with a Retained Interest  Property transferred where the decedent retained an interest. Express or implied understanding. Retained interest for life.  Transfer home to kids but retain life estate Retained interest for period not ascertainable without reference to death. Reserved for period that does not end before death.

9 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/ – Transfers Taking Effect at Death  Property transferred where: Possession of enjoyment requires the beneficiary to survive the decedent. Decedent has retained a reversionary interest.  Income to spouse, then back to you at spouse’s death Value of reversionary interest is > 5%. Moment immediately before death…no alternate valuation available. Back to you at grandkid’s death, value probably less than 5% so not included in estate

10 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/ – Revocable Transfers (1 of 2)  Interest subject to the power of the decedent to alter, amend, revoke or terminate. Get income from trust for life if don’t wear a Cubs hat  Also applies to affecting the time or manner of enjoyment of property or income, even if the identity of the beneficiary is not affected.

11 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/ – Revocable Transfers (2 of 2)  Does not apply if: Transfer was for full and adequate consideration, Power can only be exercised with the consent of all parties in the transferred property, or Power held solely by another person.

12 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/ – Annuities  Straight life annuity – Not included.  Survivorship annuity – Included. For portion of annuity value attributable to decedent’s contributions

13 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/ – Jointly Owned Property  JTWROS  Tenancy by the entirety Contribution rule  Spouses: each owns 50%  Others: 100% in estate unless show contributions by other joint owner

14 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/ – Powers of Appointment  General power of appointment Can appoint assets to yourself, creditors of your estate so included in estate  Except if the power is subject to an ascertainable standard. Health Education Maintenance Support Or exercise of power requires approval of an adverse party Or power limited to > 5% or $5,000 not included in estate

15 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/ – Proceeds of Life Insurance  Proceeds receivable by the decedent’s executor. Note: if beneficiary receives the proceeds but is required to remit money to the estate to pay taxes, debts, etc. then value of proceeds is included.  Decedent possessed an incidence of ownership in the policy. Own it or right to: change beneficiary, surrender or cancel policy, assign policy, revoke an assignment, pledge the policy for a loan.

16 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/ – QTIP Property  Property for which a QTIP election was made in the gross estate of the first-to-die spouse. QTIP: generally income for life to spouse, then assets to kids  Normally wouldn’t qualify for marital deduction as surviving spouse doesn’t control disposition of assets at death  Since not taxed in estate of first to die; IRS wants inclusion in second to die estate

17 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Valuation of Assets (1 of 3)  Fair market value at date of death or alternate valuation date (6 months from death)  Real estate Appraisals  Closely held business Valuation discounts Minority discount Lack of marketability discount Blockage discount Key person discount

18 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Valuation of Assets (2 of 3)  Financial Securities Average of the High and Low FMV on the trading day Accrued Interest – Included in value Accrued Dividends – Included in value Stock that is not actively traded

19 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Valuation of Assets (3 of 3)  Life insurance Cash surrender value – gifts and policies on others. Death proceeds – policies owned on the decedent’s life.

20 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Alternate Valuation Date  6 months after date of death.  Executor must make the election by the filing date of the estate tax return.  Election must lower the gross estate and estate tax due.  Election applies to all assets in gross estate.  Exceptions Wasting assets  Installment sales, annuities Assets disposed of between death and alternate valuation date.

21 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Deductions from the Gross Estate  Funeral expenses  Last medical expenses  Administration expenses  Debts  Losses during administration

22 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Funeral Costs  Reasonable expenditures Funeral Burial plot Grave markers Transportation of body Future care of burial site

23 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Last Medical  Costs related to last illness.  Cannot have been deducted on decedent’s final income tax return.

24 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Administration Expenses  Expenses actually and necessarily incurred in administering the estate.  Examples are expenses related to Collection of assets Payment of debts Distribution of property Attorney and accounting fees Appraisal and valuation

25 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Debts  Debts the decedent was obligated to pay.  Examples include: Outstanding mortgages Income Tax due Gift Tax due Credit Card Debts Monthly service providers (gas, electric, phone bills)

26 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Losses During Administration  Casualty and theft losses if not compensated for the loss by insurance.  Must be incurred during the administration of the estate.

27 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Estate Formula  Adjusted Gross Estate  Less Marital deduction – discussed in Chapter 10  Less Charitable deduction – discussed in Chapter 9  Equals Taxable Estate  Plus Post ‘76 gifts – added back to gross up  Equals Tentative Tax Base

28 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Tentative Tax  See tax rate schedule

29 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Credits  Applicable estate tax credit Covers $5,340,000 estate in 2014 Spouse’s unused estate tax credit covering up to an additional $5,340,000 estate can be used by surviving spouse Tax rate: 2013:40%  State death tax credit Repealed after 2005  Prior transfer credit Credit for estate taxes paid within the last 10 years See credit schedule on page 190  Foreign death taxes credit – tax paid on property outside the U.S.

30 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Estate Tax Liability  Paid by executor or administrator.  If no executor or administrator, then person in receipt of the property must pay.  If the executor distributes to heirs before paying tax, then the executor may be personally liable.

31 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Paying and Reporting Taxes (1 of 2)  Return Form 706 is due 9 months after death Extension to file (but not to pay) can be granted for an additional 6 months  Penalties Failure to file - 5% per month up to 25% Failure to pay - 0.5% per month up to 25% Failure to file is reduced by failure to pay

32 © 2007 ME™ (Your Money Education Resource™) Updated on 12/12/06 Adjusted Taxable Basis to Heirs  Basis = FMV at death or alternate valuation date  Except: Gifts that revert back to the original owner that were transferred one year before death JTWROS Community property IRD  Holding period = long term