1. 1 Chapter 13: The Estate Tax

2. 2 THE ESTATE TAX nThe estate tax formula nGross estate valuation nGross estate items nEstate tax deductions nComputation of estate tax liability nGeneration-skipping transfer tax

3. 3 The Estate Tax Formula (1 of 3) Gross Estate - Deductions (exp, debts, & losses) = Adjusted Gross Estate - Marital & charitable deductions = Taxable estate + Prior Taxable Gifts = Estate tax base

4. 4 The Estate Tax Formula (2 of 3) nTaxable estate is gross estate minus deductions nAll taxable gifts made after 1976, other than gifts included in gross estate, are added to taxable estate nGifts valued at date-of-gift values nSum of two amounts is tax base

5. 5 The Estate Tax Formula (3 of 3) nCompute tentative tax on estate tax base Tentative tax - Recomputed gift tax - Available unified credit - Other credits = Estate tax due

6. 6 Gross Estate Valuation nGross 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

7. 7 Gross Estate Items (1 of 2) nProperty in which decedent had an interest nProperty transferred to others but which decedent still controlled or obtained benefits nGift taxes paid on gifts w/in three years of date of death

8. 8 Gross Estate Items (2 of 2) nAnnuities and other retirement benefits nJointly owned property nProperty not owned, but decedent had general powers of appointment nLife insurance nSee Table C13-1

9. 9 Estate Tax Deductions (1 of 2) n§2053 authorizes deductions for –Mortgages –Other debt owed by decedent –Funeral expenses –Administration expenses

10. 10 Estate Tax Deductions (2 of 2) nDeductions permitted by other Code sections –Casualty and theft losses –Charitable contributions –Marital deduction nSee Table C13-2

11. 11 Computation of Estate Tax Liability (1 of 4) nProgressive tax rates –Applied to estate tax base to determine tentative tax –Rate varies from 18% to 49% –5% phase-out of lower rates repealed for tax years ending after 2001

12. 12 Computation of Estate Tax Liability (2 of 4) nGift 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

13. 13 Computation of Estate Tax Liability (3 of 4) nCredits –Unified credit not previously used »Maximum credit of $345,800 for 2003 shelters estate/gift tax of up to $1M »Unified credit increases through 2009

14. 14 Computation of Estate Tax Liability (4 of 4) nCredits (continued) –State death tax credit (Appendix G) »75% of state death tax liability »Phased out between 2002 - 2005 –Gift tax credit on pre-1977 gifts –Credit for estate taxes paid on prior transfers –Credit for foreign death taxes

15. 15 Generation-Skipping Transfer Tax (GSTT) (1 of 3) nPurpose of GST –Ensure some form of transfer tax imposed at least once per generation nGST tax levied at a flat 49% (2003) –Highest gift or estate tax rate nTax applies to taxable terminations of and taxable distributions from generation-skipping transfers

16. 16 Generation-Skipping Transfer Tax (GSTT) (2 of 3) nGeneration-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

17. 17 Generation-Skipping Transfer Tax (GSTT) (3 of 3) nTermination 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 nGrantor gets $1,120,000 exemption in 2003 (indexed for inflation)

18. 18 Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard.newmark@PhDuh.com