13-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

13-1©2011 Pearson Education, Inc. Publishing as Prentice Hall

13-2

THE ESTATE TAX(1 of 2)

As of the publication date there is no estate tax for 2010 only

The estate tax formulaThe gross estate: valuationThe gross estate: inclusionsDeductions

©2011 Pearson Education, Inc. Publishing as Prentice Hall

13-3

THE ESTATE TAX(2 of 2)

Computation of tax liabilityLiquidity concernsGeneration-skipping transfer tax Tax planning considerationsCompliance and procedural

considerations


13-4

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


13-5


Taxable estate is gross estate minus deductions

All taxable gifts made after 1976, other than gifts included in gross estate, are added to taxable estateGifts valued at date-of-gift valuesSum of two amounts is tax base


13-6


Tentative tax on estate tax base

Tentative tax- Recomputed gift tax- Available unified credit- Other credits= Estate tax due


13-7

The Gross Estate: Valuation

(1 of 2)

Gross estate valued at FMV at eitherDate of death or alternate ORAlternate valuation date

6 mo. after death unless dispositions occur

Prop Reg would allow alternate valuation only for reductions due to “market conditions”

Both gross estate & tax liability must be reduced for alternate date to be effective


13-8

The Gross Estate: Valuation

(2 of 2)

If Congress does not reinstate the estate tax for 2010, the decedent’s property will be valued using a modified step-up in basisMost property will have a carryover

basisOnly a limited amount of property will

receive a step-up in basis©2011 Pearson Education, Inc. Publishing as

Prentice Hall

13-9

The Gross Estate: Inclusions

(1 of 3)

§2033 - Property in which decedent had an interest

§2035 - Gift taxes paid on gifts w/in three years of date of death

§2036 - Property transferred to others but which decedent still controlled or obtained benefits


13-10


(2 of 3)

§2038 - Property not owned, but decedent had general powers of appointment

§2039 - Annuities and other retirement benefits

§2040 - Jointly owned property§2042 - Life insurance

If decedent had “incidents of ownership ©2011 Pearson Education, Inc. Publishing as

Prentice Hall

13-11


(3 of 3)

§2044 - QTIP trust for which marital deduction claimed by decedent’s spouse

Probate estateState law conceptBasically any property that passes

subject to the will and is subject to court administration

See Table 1©2011 Pearson Education, Inc. Publishing as Prentice Hall

13-12

Deductions(1 of 2)

§2053 authorizes deductions for Mortgages Other debt owed by decedentFuneral expensesAdministration expenses


13-13

Deductions(2 of 2)

§2054 - Casualty and theft losses

§2055 - Charitable contributionsUnlimited

§2056 - Marital deductionUnlimited

§2058 - State death taxes See Table 2©2011 Pearson Education, Inc. Publishing as

Prentice Hall

13-14

Computation of Tax Liability

Progressive Tax RatesReduction for post-1976 gift

taxesCredits

UnifiedOther


13-15

Progressive Tax Rates

Applied to estate tax base to determine tentative tax

Rate varies from 18% to 45% in 2009


13-16

Reduction for Post-1976 Gift Taxes

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


13-17

Unified Credit

Unified credit not previously usedMaximum credit of $1,455,800 in

2009Shelters estate/gift tax of up to

$3.5MUnified credit increases through

2009Unified credit never generates a

refund©2011 Pearson Education, Inc. Publishing as

Prentice Hall

13-18

Other Credits

Pre-2005 state death tax creditGift tax credit on pre-1977 giftsCredit for estate taxes paid on

prior transfersCredit for foreign death taxes


13-19

Liquidity Concerns(1 of 3)

Deferral of payment of estate taxesSec. of Treasury may extend

payment for up to 12 monthsSec. can extend payment for up to

10 yrs. if reasonable cause can be shown


13-20


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


13-21


Stock redemptions to pay death taxesEstate may treat redemption as an

exchange even if it does not meet provisions of §302

Special use valuation of farm real property


13-22

Generation-Skipping Transfer Tax (GSTT) (1 of 4)

Purpose of GSTEnsure some form of transfer tax

imposed at least once per generation

GST tax levied at a flat 45% in 2009Highest gift or estate tax rate

Tax applies to taxable terminations of and taxable distributions from generation-skipping transfers


13-23


Generation-skipping transfer dispositionsProvide 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


13-24


Termination of an interest in a G-S arrangement is a taxable terminationTermination triggers imposition of

GSTTGSST levied on pre-tax amount

transferredTrustee pays tax


13-25


Grantor gets $3.5M exemption in 2009Same amount as applicable

exclusion amount for estate tax purposes

No GST in 2010


13-26

Tax Planning Considerations

(1 of 2)

Use of inter vivos giftsUp to per-donee annual exclusion

amountUse of exemption equivalent for

transfers to other people than spouse$3.5M in 2009

Role of life insuranceProvides liquidity©2011 Pearson Education, Inc. Publishing as

Prentice Hall

13-27

Tax Planning Considerations

(2 of 2)

Qualifying estate for installment paymentsInterest rate only 2%

Where to deduct administration expensesEstate tax return OREstate’s income tax return


13-28

Compliance and Procedural

Considerations

Filing requirementsForm 706Due date 9 mo after decedent’s

death6-mo extension available

Alternate valuation date electionMade on estate tax returnIrrevocable©2011 Pearson Education, Inc. Publishing as

Prentice Hall

Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark at University of Northern Colorado’s

Kenneth W. Monfort College of [email protected]

13-29©2011 Pearson Education, Inc. Publishing as Prentice Hall

Documents

13-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall