Estates and Trusts
FNBSLW 442
Federal Estate Tax and
Federal Generation-Skipping Tax
Estate Tax
A tax on a donor’s privilege of making a
gratuitous transfer at death.
Basic Computation – Estate Tax
Determine Contents of Gross Estate
Value Gross Estate
Subtract Deductions
Determine Tax Base
Compute Estate Tax
Contents of the Gross Estate
Gross Estate – for the purpose of the
estate tax, property in which a decedent
had an interest at death.
All property, real or personal, tangible or
intangible, wherever located.
Includes probate and nonprobate assets,
as well as some lifetime transfers.
Contents of the Gross Estate -
Examples
Wedding ring, wallet, home and personal
property, other real property, stocks and bonds,
remainder interests, cds, spouse’s elective share,
business interests, some joint tenancy interests,
some annuity and death benefit interests,
general power of appointment held by decedent.
Not included – life estate interests from others,
expectancy interest, some joint tenancy
interests, some annuity and death benefit
interests.
Joint Tenancy Interests
If J/T is with non-spouse, 100% interest is
included in gross estate unless survivor
purchased % of property w/ own funds.
If J/T is with spouse, 50% interest is
included in gross estate (but marital
deduction applies).
Annuity and Death Benefit Interests
If decedent had right to receive benefits,
the value of the benefits that remain is
part of the gross estate.
However, if decedent did not have the
power to name the beneficiary b/c they
are statutorily payable to decedent’s
spouse or children, the benefits are not
included in the gross estate.
Transfers w/ Retained Life Estate
or Control of Beneficial Interests
Gross estate includes property transferred
by decedent during life if decedent
retained:
Life estate,
Right to income for period not ending prior to
decedent’s death,
Right to income for period not ascertainable
(with no reference to decedent’s death), or
Right to designate the recipients of that
property or the income therefrom.
Transfers w/ Retained
Reversionary Interest
Gross estate includes property transferred
by decedent during life if decedent
retained reversionary interest and:
donee must survive decedent to receive the
property, and
decedent retained reversionary interest that
exceeds 5% of the value of the transferred
property.
Powers of Appointment
Gross estate includes general power of
appointment decedent had at time of
death.
Recall, a general power of appointment is
one the decedent could exercise in favor
of the decedent, his estate, or his
creditors.
Valuation of Gross Estate
Property in the gross estate is normally
valued as of the date of the decedent’s
death.
Some discounts might be applicable.
Fractional discount
Marketability discount
Blockage discount
Special Use Valuation
Real property used for farming and closely
held business real property that passes to
a member of decedent’s family may
qualify for special use valuation.
Alternate Valuation Date
Personal representative may elect to value
the property at the alternate valuation
date, six months after decedent’s death, if
doing so would reduce both:
value of the gross estate and
amount of estate tax
If selected, must be used for all assets.
Deductions
Marital Deduction
Charitable Deduction
Deductions for Expenses, Debts, and
Taxes
Deductions for Expenses, Debts,
and Taxes
Funeral expenses, administration
expenses, debts and taxes are deductible
from the gross estate. Also deductible
are:
Certain losses incurred during the
settlement of the estate.
Under EGTRRA, state death taxes on gross
estate property, if decedent dies before
2005 or after 12/31/2010.
Computation of Estate Tax
Begins by determining the taxable estate,
i.e., the value of the gross estate reduced
by the estate tax deductions.
Tax Base
Determined by adding to the taxable estate all
taxable gifts (except those already in the gross
estate) the decedent made on or after January
1, 1977, at their date of gift values.
(Gifts covered by the annual exclusion, medical
and educational expense exclusion, marital
deduction and charitable deduction are not
included in the tax base.)
Tentative Tax
Computed on the tax base by using the
rate schedule in I.R.C. § 2001(c).
Exceptions:
If the decedent dies in 2010, there is no
federal estate tax owed regardless of the
estate under EGTRRA.
If the decedent dies in 2011 or thereafter, a
different rate chart applies (the pre-EGTRRA
chart).
Tentative Tax Rate Schedule
If the amount with respect to which the The tentative tax is:
tentative tax to be computed is:
Not over $10,000 18% of that amount Over 250,000 but not over $500,000 $70,800 + 34% of excess over
$250,000
Over $10,000 but not over $20,000 $1,800 + 20% of excess over $10,000
Over $500,000 but not over $750,000 $155,800 + 37% of excess over
$500,000
Over $20,000 but not over $40,000 $3,800 + 22% of excess over $20,000
Over $750,000 but not over $1,000,000 $248,300 + 39% of excess over
$750,000
Over $40,000 but not over $60,000 $8,200 + 24% of excess over $40,000
Over $1,000,000 but not over $1,250,000 $345,800 + 41% of excess over
$1,000,000
Over $60,000 but not over $80,000 $13,000 + 26% of excess over
$60,000 Over $1,250,000 but not over $1,500,000 $448,300 + 43% of excess over
$1,250,000
Over $80,000 but not over $100,000 $18,200 + 28% of excess over
$80,000 Over $1,500,000 but not over $2,000,000 $555,800 + 45% of excess over
$1,500,000
Over $100,000 but not over $150,000 $23,800 + 30% of excess over Over $2,000,000 $780,800 + 49% of excess over
$100,000 $2,000,000
Over $150,000 but not over $250,000 $38,800 + 32% of excess over
$150,000
The former 5% additional tax on estates and gifts over $10 million is repealed after
2001.
Estate Tax Credits and Related
Adjustments
Estate tax credits and adjustments are
subtracted from the tentative tax,
including:
Gift tax payable on decedent’s inter vivos
taxable gifts made after 12/31/76, and
Applicable credit amount (formally called the
unified credit when the gift and estate taxes
were the same).
State Death Tax Credit
If the decedent dies before 2005 or after 2010,
the decedent’s estate will be entitled to a credit
for state death taxes that the decedent’s estate
actually pays subject to a cap based on the size
of the decedent’s estate.
Step one - compute the tentative maximum credit
under the table,
Step two – multiply the tentative credit by the
appropriate percentage based on the decedent’s year
of death from the chart.
Estate Tax Return
The estate tax return must be filed and
the estate tax paid within 9 months of the
decedent’s death.
Liability for Estate Tax
The personal representative of the
decedent’s estate is obligated to pay the
federal estate tax.
If no personal representative has been
appointed, “any person in actual or
constructive possession of any property of
the decedent is required to pay the entire
tax to the extent of the value of the
property in [the person’s] possession.”
Federal Generation-Skipping
Transfer Tax
A tax on specified transfers to donees who are
more than one generation younger than the
donor.
Imposed on certain inter vivos and @ death
transfers.
An additional flat-rate tax on top of any federal
gift or estate tax that the donor or decedent
might also owe on the transfer.
The tax rate is the highest marginal estate tax
rate.
Skip Person Defined
Skip person triggers the GST.
Person who is two or more generations
younger than the decedent.
Unless lineal descendants are involved,
second generation begins @ 37½ years
younger.
Transfers Subject to GST Tax
Direct Skip – transfer directly to a skip person
that is also subject to federal or estate gift tax.
Taxable Termination – occurs when property
passes to a person because of the termination of
a trust.
Taxable Distribution – occurs when the trustee
of a trust makes a distribution of income or
principal to a skip person (that doesn’t qualify as
a direct skip or taxable termination).
Exemptions and Exclusions
Annual Exclusion
Educational and Medical Expense
Exclusion
Lifetime Exemption
GST Lifetime Exemption Chart
2002-2003 $1,060,000 + inflation
2004-2005 $1,500,000
2006-2008 $2,000,000
2009 $3,500,000
2010 No GST tax
2011 + $1,060,000 + inflation