Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company1 Tax on transfer of property when a person

Estate Tax Chapter 15Tools & Techniques of

Estate Planning

Copyright 2011, The National Underwriter Company 1

Tax on transfer of property when a person dies

Note:

EGTRRA 2001 repealed the estate tax for one year in 2010

Tax Act of 2010 reinstates estate tax for 2010, 2011, and 2012 with $5 million estate tax exemption (indexed for inflation beginning in 2012)

2013 Tax Act of 2010 expires and pre-EGTRRA 2001 rules apply ($1 million exclusion, top estate tax rate 55%)

What is it?


Estate Planning


1. Gross Estate: Total of all property in which decedent had an interest and that is required to be included in the estate

2. Adjusted Gross Estate: Determined by subtracting certain allowable debts, taxes, losses, funeral, and administration expenses– Used for determining whether or not IRC Sec. 303 redemption or

IRC 6166 installment payout tests can be met

3. Taxable Estate: Determined by subtracting any allowable marital, charitable, or state death tax deduction

5 Stage Estate Tax Calculation


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4. Federal Estate Tax Payable Before Credits: a) Tentative tax base: Determined by adding any adjusted

taxable gifts to the taxable estateb)

c) Tentative tax: Determined by applying tax rate schedule to base

a) Subtract gift taxes payable on post-1976 adjusted taxable gifts

5 Stage Estate Tax Calculation (cont’d)


Estate Planning


5. Federal Estate Tax Due within 9 Months of Decedent’s Death: Estate tax payable before credits is reduced dollar-for-dollar by subtracting any of the following allowable creditsa) Unified credit

b) State death tax credit

c) Credit for pre-1977 gift tax

d) Credit for tax paid on prior transfers

e) Credit for foreign death taxes

5 Stage Estate Tax Calculation (cont’d)


Estate Planning


1 Year of Death ______________2 Gross Estate (before exclusions) $______________3 - Conservation Easement Exclusion ($______________)4 Gross Estate $______________5 - Funeral and Administration Expenses Deduction $______________6 - Debts and Taxes Deduction $______________7 - Losses Deduction $______________8 - Subtotal: 5 to 7 ($______________)9 Adjusted Gross Estate $______________10 - Marital Deduction $______________11 - Charitable Deduction $______________12 – Other Deductions $______________13 - Subtotal: 10 to 12 ($______________)14 Taxable Estate $______________15 + Adjusted Taxable Gifts $______________16 Computation Base $______________17 Tax on Computation Base $______________18 - Gift Tax on Adjusted Taxable Gifts ($______________)19 Tentative Tax $______________20 - Unified Credit $______________21 -State Death Tax Credit $______________22 - Pre-1977 Gift Tax Credit $______________23 - Previously Taxed Property Credit $______________24 - Foreign Death Tax Credit $______________25 - Total Credits ($______________)26 Federal Estate Tax $______________

Federal Estate Tax Worksheet


Estate Planning


• Property owned outright (§2033)

• Certain property transferred gratuitously within three years of death (§2035)

• Gratuitous lifetime transfers where the decedent retained the income or control over the income (§2036)

• Gratuitous lifetime transfers conditioned on surviving the decedent (§2037)

Ascertaining the Gross Estate


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• Gratuitous lifetime transfers in which the decedent retained the right to alter, amend, or revoke the gift (§2038)

• Annuities or similar arrangements purchased by the decedent and payable for life to both the annuitant and specified survivor (§2039)

• Jointly held property where another party will obtain the decedent’s interest at decedent’s death by survivorship (§2040)

Ascertaining the Gross Estate


Estate Planning


• General powers of appointment (§2041)

• Life insurance in which the decedent possessed incidents of ownership or which was payable to or for the benefit of the decedent’s estate (§2042)

• Assets that have qualified for qualified terminable interest property (QTIP) treatment and must be included in the surviving spouse’s estate (§2044)

Ascertaining the Gross Estate (cont’d)


Estate Planning


Exclusion available for the lesser of:

1. Applicable percentage of the value of the land subject to the conservation easement, reduced by the amount of any charitable deduction for the easement under IRC Sec. 2055(f), or

2. Exclusion limitation of $500,000 (2011)

Qualified Conservation Easement Exclusion


Estate Planning


Applicable Percentage Calculation:• 40% reduced (but not below zero) by two percentage points for

every percentage point (or fraction thereof) by which the value of the conservation easement is less than 30% of the value of the land (determined without regard to the easement and reduced by any development right)

Qualified Conservation Easement Exclusion (cont’d)


Estate Planning


Land subject to conservation easement must generally:

1. Be located within the U.S. or its possessions on date of decedent’s death, and

2. Be owned by decedent or members of decedent’s family at all times during the 3 year period ending at decedent’s death

Qualified Conservation Easement Exclusion (cont’d)


Estate Planning


Generally, Fair Market Value (FMV) on:

1. Date of death, or

2. Alternate valuation date (6 months after date of decedent’s death) where:a) Executor election results in reduction of federal gross estate size (total

property value), and

b) Reduction of federal estate tax liability

Valuation


Estate Planning


2006 GIFT AND ESTATE TAX TABLE

Taxable Gift/Estate Tax on Tax on Rate onFrom To Col. 1 Col. 1 Excess

$0 $10,000 $0 18%10,000 20,000 1,800 20%20,000 40,000 3,800 22%40,000 60,000 8,200 24%60,000 80,000 13,000 26%80,000 100,000 18,200 28%

100,000 150,000 23,800 30%150,000 250,000 38,800 32%250,000 500,000 70,800 34%500,000 750,000 155,800 37%750,000 1,000,000 248,300 39%

1,000,000 1,250,000 345,800 41% 1,250,000 1,500,000 448,300 43%1,500,000 2,000,000 555,800 45%2,000,000 ……… 780,800 46%

Estate Tax Rates


Estate Planning


2007-2009 GIFT AND ESTATE TAX TABLE

Taxable Gift/Estate Tax on Tax on Rate onFrom To Col. 1 Col. 1 Excess

$0 $10,000 $0 18%10,000 20,000 1,800 20%20,000 40,000 3,800 22%40,000 60,000 8,200 24%60,000 80,000 13,000 26%80,000 100,000 18,200 28%

100,000 150,000 23,800 30%150,000 250,000 38,800 32%250,000 500,000 70,800 34%500,000 750,000 155,800 37%750,000 1,000,000 248,300 39%

1,000,000 1,250,000 345,800 41% 1,250,000 1,500,000 448,300 43%1,500,000 ………. 555,800 45%

Estate Tax Rates (cont’d)


Estate Planning


2010 - 2011 GIFT AND ESTATE TAX TABLETaxable Gift/Estate Tax on Tax on Rate on

From To Col. 1 Col. 1 Excess$0 $10,000 $0 18%

10,000 20,000 1,800 20%20,000 40,000 3,800 22%40,000 60,000 8,200 24%60,000 80,000 13,000 26%80,000 100,000 18,200 28%

100,000 150,000 23,800 30%150,000 250,000 38,800 32%250,000 500,000 70,800 34%500,000 ………. 155,800 35%

Estate Tax Rates (cont’d)


Estate Planning


GIFT TAX UNIFIED CREDIT ESTATE TAX UNIFIED CREDIT

Exemption Unified Exemption Unified Year Equivalent Credit Year Equivalent Credit2002-2009 $1,000,000 $345,800 2006-2008 $2,000,000 $ 780,8002010 $1,000,000 $330,800 2009 $3,500,000 $1,455,8002011 $5,000,000 $1,730,800 2010 $5,000,000 $1,730,800

2011 $5,000,000 $1,730,800

Unified Credit


Estate Planning


The lower of:– Federal estate tax attributable to the transferred property in

the transferor’s estate, or– Federal estate tax attributable to the transferred property in

the estate of the present decedent

Limitations:The credit is reduced in 20% increments every 2 years and no credit is allowed 10 years after the transferor’s death

Credit for Taxes Paid on Prior Transfers


Estate Planning


Example:Mary Green died in 2011 with a $6,000,000 taxable estate. She made one $300,000 taxable gift during her lifetime (protected by the unified credit). Her estate had funeral and administration expenses of $35,000, debts of $45,000 and state death taxes of $266,400 (taxable estate = $6 million - $35,000 - $45,000 - $266,400)

Taxable estate $5,653,600+ Adjusted taxable gifts 300,000Total $5,953,600Tax on $5,953,600 $ 2,064,560- Gift taxes paid on adj. taxable gifts ( 0)- Unified credit ($1,730,800)Tax due $ 337,760

Determining the Estate Tax Payable


Estate Planning


• A return (Form 706) must be filed if the gross estate exceeds the exemption equivalent for the year in which the decedent died

• Estate tax is due at the time the return is filed, 9 months after decedent’s death– Reasonable cause extension– Up to 14-year closely held business interest extension

Payment of the Estate Tax

Documents

Estate Tax Chapter 15 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company1 Tax on transfer of property when a person