Welcome to this Week’s Online Class with The American College

Welcome to this Week’s Online Class with The American College
Your instructor has not yet joined the session. If you are still seeing this slide 10 minutes after the scheduled start time of your class, please have one student call our Online Delivery Team at Thank you for studying with us!

Reminder: Start Archive

Deductions from the Gross Estate
GS 815: Estate Taxation Assignment 11: Deductions from the Gross Estate and Charitable Transfers

Importance of State Law
Determines legitimate debts no federal deduction is permitted unless it is “allowable under state law” Must permit the debt to be paid by the executor of the estate out of estate assets

Property Subject to Claims
Includes property that passes through the probate estate was owned outright at the time of death that can be called upon under state law to pay expenses, claims, and debts of the estate (reduced by casualty losses) May be used to satisfy debts of the decedent and expenses of the estate

Deduction Limitations
Deductions of the following expenses are limited to property subject to claims funeral expenses administrative costs generated by probate property claims against the estate charges against property includible in the estate

Deductible Funeral Expenses
Must be payable out of probate estate under state law May not exceed actual costs When combined with administration expenses, claims, and debts may not exceed the total value of probate assets Actual Cost Issues an amount otherwise deductible as a funeral expense must be reduced by any Veterans Administration payments (if applicable) excluded from the gross estate (reimbursements) and lump sum social security pbenefits that were paid to a party other than the surviving spouse

Administration Expenses
Deductible if “actually and necessarily incurred” includes expenses of selling property if necessary to pay debts, expenses, or certain taxes Must be actually incurred and allowable under state law

Allowable Administration Expenses
executor commissions attorney fees court costs accountant & appraiser fees clerical costs storage expenses excise taxes on sale or disposition of property

Trustee Fees Generally are not allowed as deductible administration expenses Benefits flow to trust beneficiaries, not estate

Estate Income Subject to income tax
Executor must file a return (in addition to decedent’s final income tax return) Obligation to file continues as long as the estate is open

Estate Tax vs. Income Tax Deduction
consider tax ramifications cannot deduct same expense from both sources if estate tax deduction disallowed, can be taken as income tax deduction if statute of limitations has not yet run once made, election to forgo estate tax deduction is irrevocable apportionment is allowed

Nonprobate Assets Costs and expenses of non-probate assets in the gross estate are deductible if: caused by the decedent’s death incurred in administering property subject to claims paid before the estate tax statute of limitation runs out

Claims Against the Estate

Deductibility of Claims
Claims are deductible if: personal obligations of the decedent existed at the time of the decedent’s death there is consideration in money or money’s worth for the debt Intra-family debts are examined carefully

Tax Claims If the IRS determines after the decedent’s death that a tax deficiency resulted from activity when the decedent was alive, a deduction is allowed if: there is an arm’s-length settlement or actual adjudication

No deduction is allowed for:
income tax liability on income received after decedent’s death property taxes accrued after decedent’s death estate, succession, legacy, or inheritance taxes some exceptions apply (example: credit for state death taxes)

Mortgages & Liens deductible from the gross estate only if decedent was fully liable for repayment of the debt liability must exist regardless of asset values securing the debt treatment of non-recourse debt value of asset is reduced by the debt when including it in the gross estate this treatment impacts Sec basis step-up

Casualty Losses and Thefts

Deductibility of Losses
must be incurred during estate administration must be incurred prior to distribution must arise by theft, fire, storm, flood, shipwreck other casualty (destruction or damage from a sudden, unexpected, or unusual cause) where the extent of the loss can be fully measured as of time the loss is allowed.

Offset Rule if the loss is covered by insurance, the deductible amount is reduced by insurance proceeds received

Charitable Estate Tax Deduction

Federal Estate Tax Charitable Deduction
Unlimited Available for transfers that are “predictable or ascertainable” at the time of decedent’s death Estate expenses apportioned to the charitable contribution reduce size of the charitable contribution

Qualified Charity religious, charitable, scientific, literary, sports competition or educational organization federal or state governments or subdivisions thereof specified veteran’s organizations

Split Gifts Generally: No Deduction Unless -
Donor Transfers Entire Interest

Deductible Partial Interest Transfers
Undivided portion of entire property interest Remainder in residence or farm Charitable Remainder Trust Pooled-Income Fund Charitable Lead Trust Conservation contribution

Charitable Remainder Annuity Trusts (CRATs)
Fixed annuity or percentage (at least 5%, but not more than 50%) of donated principal Term (not to exceed 20 years) or measuring lives No additional contributions Inflexible, but advantageous if interest rates are high Deduction denied if charitable remainder is less than 10%

Charitable Remainder Unitrusts (CRUTs)
Stated percentage (at least 5%, but not more than 50%) of annual value of principal Term (not to exceed 20 years) or measuring lives Additional contributions permitted Flexible, but involves difficulty with hard-to-value assets Tax deduction denied if charitable remainder is less than 10%

Assignment 11 Review Question
What taxes are deductible on a decedent’s federal estate tax return?

Assignment 11 Review Answer
1. Certain taxes are deductible on the estate tax return as claims against the estate. These include income taxes, unpaid gift taxes, and real property taxes accrued to the date of death. Federal income taxes owed to the date of death are deductible only on the federal estate tax return. However, state, local, or foreign income taxes, as well as property taxes, may be deducted on either the federal estate tax return or the federal estate income tax return. Real estate taxes not accrued before death, as well as local and foreign income taxes on estate income, are deductible on the income tax return of the estate. Any federal income taxes on estate income are not deductible either on the estate tax return or for income tax purposes.

2. Melvin Marvel died leaving an $800,000 apartment complex as well as other items. He was not married and was the sole owner of the apartment complex. The apartment complex has a $300,000 mortgage and the full value of $800,000 is included in his estate. Is the estate entitled to a deduction for the mortgage?

2. A mortgage debt will be allowed as a deduction for federal estate tax purposes if the following two conditions are met: (1) the full value of the property unreduced by the mortgage amount or indebtedness must be included in the value of the gross estate; and (2) the decedent’s estate must be liable for the amount of the indebtedness. Since the two foregoing conditions have been met, a deduction of $300,000 is permitted for federal estate tax purposes.

3. Simon Simple’s estate included a yacht valued at $150,000 on the federal estate tax return. During the period of estate administration, the yacht was severely damaged by fire. It cost $80,000 to repair the yacht. The estate received $55,000 under its insurance claim. a. What amount, if any, may the estate deduct on the decedent’s estate tax return? b. Would it be possible to deduct this or some other amount as a casualty loss on the decedent’s final income tax return instead?

3. a. The estate may deduct $25,000 as a casualty loss calculated as follows: Cost of repair $80,000 less Insurance ($55,000) = Loss ($25,000) b. A casualty loss accruing during estate settlement may be deducted from either the federal estate tax return or the estate’s income tax return but not from the decedent’s final income tax return.

4. If an executor is also a beneficiary of the estate, when would it be wise for the executor to waive the fee?

4. Executors who are also named beneficiaries of the decedent may consider the desirability of waiving their executor fees, since they receive a bequest that is income tax free. If an executor’s commission is deductible on the federal estate tax return, it is then received as taxable income whether or not the executor is a beneficiary of the estate. However, if the commission or devise is considered a bequest, it is not deductible by the estate for either estate or income tax purposes. Executors can waive any commissions if they find that more tax is saved by receiving the bequest income tax free than is saved by characterizing the executor’s commission as a deductible expense of the estate. The critical factor to evaluate is whether greater tax savings results from a deduction on the federal estate tax return when the additional income tax incurred by the executor is taken into consideration.

5. Describe the general rule for the charitable deduction and any limitations on the deduction.

5. An estate tax charitable deduction is allowed for the full value of property transferred to a qualified charity, but only if the property is included in the donor’s gross estate.

6. How may a disclaimer be used to pass property to a charity?

6. If property is transferred from a decedent’s estate to a charitable organization because there has been a qualified disclaimer by a prior beneficiary, a charitable deduction is allowed for amounts actually transferred to the charity.

7. Assuming that all debts, expenses, and taxes are to be paid from the residuary estate, how is the amount of a charitable bequest affected if the charitable gift is to be made from the residue?

7. If, under the terms of the will or provisions of local law, payment of death taxes or other deductible expenses is to be made from the charitable bequest, the charitable deduction is reduced by those amounts used to pay debts or taxes. In other words, the deduction is limited to the actual amount that passes free and clear to the charity for its charitable purposes. If the will provides that taxes and administration expenses are payable from the residue and the charitable bequest is also payable out of the residue, the residuary bequest is diminished by the amount of expenses and taxes paid.

8. What are the four general types of partial interests passing to charity that can qualify for the charitable deduction?

8. The four general types of partial interests passing to charity that can qualify for the charitable deduction are: a testamentary gift of an undivided portion of the decedent’s entire interest in property not held in trust a nontrust remainder interest in a person’s residence a nontrust remainder interest in a farm transferred by the decedent at death remainder interests in trust to charitable remainder trusts and pooled-income funds.

9. Explain how transfers to charity may be split to take advantage of both the charitable and marital deductions.

9. Since 1982 a donor-decedent may create a charitable remainder trust and obtain deductions for both the charitable and noncharitable bequests. If a spouse is the only noncharitable income beneficiary for life, the estate obtains a marital deduction for the income interest to the surviving spouse as well as a charitable deduction for the gift of the remainder interest to the charity. The result is that no transfer tax is imposed on the creation of a charitable remainder annuity or unitrust for either the remainder or income portion, provided that the income interest to a spouse qualifies under the qualifying terminable interest rules.

10. What are the three ways that remainder interests in trusts may be given to charities so they will qualify for the charitable deduction? In all cases, assume that there is also a noncharitable beneficiary.

10. If the decedent transfers a remainder interest in property to a charity in trust, it must be made in the form of a charitable remainder unitrust, annuity trust, or pooled-income fund. Otherwise, no estate tax charitable deduction is allowed. These arrangements usually provide for an income interest to a noncharitable beneficiary with the remainder to the charitable organization.

11. What is a charitable gift annuity and what are its advantages?

11. A charitable gift annuity is a contract between a donor and a qualified charity. Under the agreement the qualified charity receives a deferred gift. In addition the charity makes annual income payments to the donor or someone named by the donor for life. The advantages of a charitable gift annuity include: Donor receives an immediate income tax deduction. Donor may defer gain on contribution of appreciated property. Donor is able to receive fixed annual payments for life. It is simple in design and administration. There are no trust drafting or trustee expenses.

12. Explain how community foundations are grant-making entities.

12. Community foundations are considered to be grant- making entities because they are charitable organizations that consist of an amalgamation of separate accounts used to provide grants usually benefiting local communities.

Assignment 11 True/False Questions
1. Funeral expenses are deductible either on the federal estate tax return or on the decedent’s last income tax return.

2. Executors’ commissions are considered to be costs of administering property that are included in a decedent’s gross estate and are, therefore, deductible from the gross estate.

3. Unpaid mortgages on property included in the gross estate for which the decedent was liable are allowable as deductions from the gross estate in arriving at the adjusted gross estate.

4. Expenses in the administration of nonprobate assets are deductible if incurred on behalf of assets includible in the gross estate.

5. There are certain deductions that may be taken on either the federal estate tax return or the estate’s income tax return.

6. When an executor who is an heir takes a commission for services, he or she must report the commission as ordinary income.

7. A charitable deduction is allowed for the entire value of a bequest to a qualified charity even though the property is not included in the donor’s gross estate.

8. A charitable deduction will be allowed for the full value of property that passes to a qualified charity as a result of a qualified disclaimer made by a prior beneficiary.

9. So that gifts of remainder interests made to charity may qualify for the charitable income, estate, or gift tax deduction, the gift must be in the form of a charitable remainder trust or a pooled-income fund.

10. It is now possible to create a charitable remainder trust in combination with a qualified terminable interest property (QTIP) trust in favor of the surviving spouse and to avoid federal estate tax liability entirely.

11. When the donor makes a gift of a remainder interest in a CRT, the donor escapes all gift taxation as a result of the transfer.

12. With a charitable remainder annuity trust, one or more noncharitable income beneficiaries receive a fixed percentage of not less than 5 percent of the net fair market value of the trust assets as revalued annually.

13. Under current tax law, the value of a remainder interest passing to charity in a CRT must be at least 10 percent of the value of the property transferred to the trust.

14. Pooled-income funds are used primarily by wealthy donors making sizable charitable contributions so that more income will be generated within the fund.

15. Charitable lead trusts are structured so that one or more noncharitable beneficiaries receive the remainder interest in the trust when it terminates.

16. One of the disadvantages of the charitable gift annuity is that it is an arrangement requiring a trust agreement and has on-going trustee fees.

17. Once a donor makes a contribution to a community foundation, the donor’s involvement ends.

18. A recognized advantage of private foundations is that they are subject to few and simple taxation rules.

19. Often donors establishing a private foundation intend the foundation to be a way of involving future family generations in social and philanthropic endeavors.

20. Private foundations provide lower annual charitable deduction percentages than are generally allowed for charitable contributions to public charities.

21. The fair market value of a charitable remainder interest is the present value of the interest at the time of transfer.

Assignment 11 True/False Answers
1. False. Reasonable funeral expenses are deductible for estate tax purposes only. 2. True. 3. True. 4. True. 5. True. 6. True. 7. False. A charitable deduction will be received for a gift of one’s entire estate to a qualified charity at death only if the subject property is included in the donor’s gross estate.

8. True. 9. True. 10. True. 11. False. It is possible for the donor to have gift taxation on the transfer if a taxable gift has been made to one or more noncharitable income beneficiaries of the CRT. 12. False. A charitable remainder annuity trust provides a noncharitable income beneficiary with a fixed annuity worth not less than 5 percent of the initial net fair market value of the property contributed to the trust. It is a charitable remainder unitrust that provides a fixed percentage, revalued annually, of the fair market value in the trust. 13. True.

14. False. Pooled-income funds are sometimes referred to as the poor person’s charitable remainder trust. They are used mostly by donors having relatively small amounts to contribute to charity. By using a pooled-income fund, donors are spared the expense and effort of having separate trusts established. 15. True. 16. False. One of the advantages of charitable gift annuities is that they are simple in design and administration and do not require a trust arrangement or involve trust fees. 17. False. One of the advantages of community foundations is that the donor may play a decision-making role in how the funds in his or her account benefit the local community.

18. False. Private foundations are subject to strict and limiting tax rules. 19. True. 20. True. 21. True.

Tax Rates, Liability for Payment, & Credits
GS 815 Assignment 12 Tax Rates, Liability for Payment, & Credits

Tax Credits Dollar for dollar reduction in tax
Cannot exceed the tax imposed

The Basic Credit Amount
Exempts a certain amount of the value of assets from Estate Taxation

Credit for Prior Transfers
Allowed for taxes imposed on transfers to the present decedent by a person who died within 10 years before or 2 years after the present decedent’s death

Equals the smaller of: the amount of the federal estate tax attributable to the transferred property in the transferor’s estate, or the amount of the federal estate tax attributable to the transferred property in the present decedent’s estate.

Restrictions for a transferor who died more than 2 years before the present decedent 80% if transferor died 3-4 years prior 60% if transferor died 5-6 years prior 40% if transferor died 7-8 years prior 20% if transferor died 9-10 years prior

Credit for Foreign Death Taxes
Minimizes double taxation Allowed for U.S. Citizens Resident Aliens Estate must show the tax was actually paid Limited to Tax actually paid, or Federal estate tax attributable to foreign property

State Death Taxes Inheritance Tax Estate Tax State Death Tax
tax on the right of a beneficiary to succeed to ownership of property Estate Tax tax imposed on the privilege of the deceased to leave property State Death Tax allowed as Deduction from the Adjusted Gross Estate

Where is the Property Taxed
Real Property State where located Tangible Personal Property Intangible Personal Property State of decedent’s domicile Multiple state taxation is possible

Elimination of the State Death Tax Credit and the “De-Coupled” States
States with no tax—AL, AK, AZ, AR, CA, CO, DE, FL, GA, HI, ID, LA, MI, MO, MS, MT, NV, NH, NM, ND, SC, SD, TX, UT, WV, & WY States with separate inheritance tax—CT, IN, IA, KS, KY, MD, NJ, OH, OK, PA, TN, & WA States with decoupled pick-up tax—DC, IL, KS, ME, MD, MA, MN, NE, NJ, NY, NC, OR, RI, VT, VA (repealed 7/1/07), & WI

Life Insurance & State Death Taxes
Majority Rule: Life insurance proceeds paid to a named beneficiary avoid state death taxation Life insurance payable to the estate or an inter-vivos trust may be subject to state death taxes

Assignment 12 Review Questions
1. Briefly describe the two current types of state death tax.

Assignment 12 Review Answers
1. Inheritance Tax The inheritance tax is a tax imposed on an individual’s right to inherit property from the estate of a decedent. The amount of inheritance tax is based on two factors: (1) the value of the property received by each beneficiary and (2) the rate of the tax (and the amount of exemption, if any exists), which depends on the beneficiary’s degree of blood relationship to the deceased. Estate Tax A state estate tax is similar in nature to the federal estate tax. It differs from the inheritance tax in that the inheritance tax is imposed on a beneficiary’s right to inherit, while the estate tax is imposed on a decedent’s right to transfer or pass property to beneficiaries.

2. What effect do beneficiary classes and exemptions have on state death taxation?

2. In the majority of states, state law groups beneficiaries who are entitled to receive estate assets into classes. The closest blood relatives of the decedent have the lowest state death tax rate and the largest exemption. In a state that provides for two classes, Class 1 (or Class A) may include the deceased’s surviving spouse, children, parents, and grandchildren. Class 2 (or Class B) may include aunts, uncles, brothers, sisters, nephews, nieces, and all other beneficiaries. The Class 2 individuals are subject to a higher tax rate than those in class 1. If the particular state also provides exemptions, the beneficiaries in Class 2 will have smaller exemptions than those in Class 1. A state might also have different exemptions within a class according to how closely the beneficiary is related to the decedent.

3. Describe the general rules used to determine which state has the right to tax the following types of property: a. real estate b. tangible personal property c. intangible personal property

3. a. Real property is real estate and property that is permanently attached to the land. Generally, real property is taxable only by the state in which the property is located (has situs). b. Tangible personal property is property such as cars, furniture, jewelry, and artwork. Tangible personal property generally is taxable by the state in which the property is usually kept, whether or not the state is the decedent’s state of domicile. c. Intangible personal property includes stocks, bonds, insurance policies, mortgage liens, notes, debt instruments, and the like. These kinds of property may be taxable by more than one state if the states can establish a sufficient nexus or contact with the property.

4. Describe the most common circumstances in which intangible property is subject to double or multiple state death taxation.

4. Intangible property may be subject to multiple state death taxation under the following circumstances: The decedent owned residences in more than one state and it is unclear which of the states was the decedent’s state of domicile. Intangibles held in trust may be taxable by the deceased grantor’s state of domicile and the trustee’s state of domicile. Securities transferred due to the shareholder’s death may be taxable by the shareholder’s state of domicile and by the issuing company’s state of incorporation.

1. At the present time, there are basically two types of state death taxes—state estate taxes and inheritance taxes.

2. For federal estate tax purposes, from 2005 through 2012, state death taxes are a deduction for the entire amount of state death taxes paid.

3. Decoupling refers to states that have both an inheritance tax and a state estate tax.

4. If a decedent’s estate does not have to file a federal estate tax return (Form 706), there is no deduction for state death taxes paid.

5. In many states, beneficiaries of different classes are taxed at different rates.

6. The closest blood relatives of a decedent typically have the lowest state death tax rate and the largest exemption.

7. Real estate transferred at a decedent’s death is taxed only by the decedent’s state of domicile.

8. Intangible personal property may be subject to death taxation by more than one state.

9. Life insurance proceeds payable to a named beneficiary other than the estate are specifically exempt from state death taxes in some states.

10. A decedent-spouse’s one-half interest in community property is exempt from state death taxation in most of the community-property states.

11. Many states have adopted a time frame of 6 months from the date of the decedent’s death for filing and paying death taxes.

1. True. 2. True. 3. False. Decoupling is a relatively recent term used to identify the legislation of states that no longer reference state death taxation to EGTRRA 2001 for purposes of the state death tax credit (allowed prior to 2005) and/or the basic exclusion amount increases. 4. True. 5. True. 6. True.

7. False. While the state of domicile has a claim against all the decedent’s property for state death tax purposes, the state in which the decedent’s real estate is situated may impose some form of transfer tax at death. The state of domicile will probably exempt from taxation real estate owned by the decedent located outside its borders. 8. True. 9. True. 10. False. A decedent-spouse’s one-half interest in community property is subject to death taxation in most of the community-property states. 11. False. Many states have adopted the federal government’s time frame of 9 months from the date of the decedent’s death for filing and paying death taxes.

Welcome to this Week’s Online Class with The American College

Similar presentations

Presentation on theme: "Welcome to this Week’s Online Class with The American College"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

Welcome to this Week’s Online Class with The American College

Similar presentations

Presentation on theme: "Welcome to this Week’s Online Class with The American College"— Presentation transcript:

Similar presentations

About project

Feedback