Chapter 6: Estate Tax

List three available deductions from a decedent's gross estate.

- Charitable Deduction - Unlimited Marital Deduction - State Tax Deduction

List three valuation discounts.

- Minority Discount - Lack of Marketability Discount - Blockage Discount

What are the requirements for an estate to elect the alternate valuation date?

1. Total value of the estate must decline after death 2. The total estate tax must be less than the estate tax calculated using the date of death values.

Jack had been working with an estate planner for several years prior to his death. Accordingly, Jack made many transfers during his life in an attempt to reduce his potential estate tax burden, and Jack's executor, Tom, is thoroughly confused. Tom comes to you for clarification of which assets to include in Jack's gross estate. Which of the following transactions will not be included in Jack's gross estate? a. Jack gave $40,000 to each of his three grandchildren two years ago. No gift tax was due on the gifts. b. Jack purchased a life insurance policy on his life with a face value of $300,000. Jack transferred the policy to his son two years ago. c. Jack and his wife owned their personal residence valued at $250,000 as tenants by the entirety. d. After inheriting a mountain vacation home from his mother, Jack gifted the vacation home to his daughter to remove it from his gross estate. Jack continued to use the property as a weekend getaway and continued all maintenance on the property.

A

What is meant by "incidents of ownership" in a life insurance policy?

Ability to enjoy the benefits of the life insurance policy. Such as changing the beneficiary, surrender or cancel the life insurance policy, assign the life insurance policy, revoke an assignment, pledge the life insurance policy for a loan, or obtain from the insurer a loan against the surrender value of the policy

Charitable Deduction

An unlimited charitable deduction is allowed for the value of assets included in the decedent's gross estate which are transferred to a charitable organization at the decedent's date of death.

Unlimited Marital Deduction

An unlimited marital deduction is allowed for the value of assets included in the decedent's gross estate, which are transferred to the decedent's surviving spouse.

The gross estate of a decedent who died in the current year would not include which of the following items? a. A luxury sedan, valued at $60,000, driven every day by the decedent. b. Cash of $1,000,000 given to decedent's daughter two years ago. No gift tax was paid on the transfer. c. A bond given to decedent's cousin last year. Gift tax of $4,000 was paid on the transfer. d. A home which the decedent owned as tenants by the entirety with his wife.

B

Jude has begun some estate planning. What is the maximum amount of estate tax Jude can avoid by using the applicable estate tax credit during 2020? a. $780,800. b. $3,500,000. c. $4,577,800 d. $11,580,000.

C

Gus dies owning several shares of an infrequently traded stock. If Gus dies on Wednesday, November 7th, and the stock has the following trading information: Monday, 11/5 $31 Thursday, 11/8 $36 Monday 11/12, $28 What is the per share value (rounded to the nearest dollar) of the stock on the federal estate tax return? a. $31. b. $33. c. $34. d. $36.

C. =[(2*36)+(1*36)]/3 = 103/3

Assets Listed in Gross Estate

Cash Stocks & Bonds Retirement Accounts Notes Receivables Personal Residence Other Real Estate Household Goods Automobiles Life Insurance Collectibles Outstanding Loans, Etc.

Johnny died eight months ago and his executor is finalizing his estate tax return. The executor has determined that Johnny's gross estate includes $400,000 of real estate, $750,000 of cash and cash equivalents, and $300,000 of qualified retirement plans. The total gross estate is $1,450,000. As the executor reviews the deductions, which of the following will he deduct from the total gross estate to arrive at the adjusted gross estate on his Form 706? a. Income in Respect of Decedent (IRD). b. Unlimited charitable deduction. c. Unlimited marital deduction. d. Executor's fee.

D

Explain the availability of the credit for tax on prior transfers.

If property included in a decedent's gross estate was inherited from someone else within the recent past and estate tax was paid at that transfer, a credit is available for the estate taxes paid at that time.

What is a general power of appointment?

Power to decide who will enjoy or own the property

Lack of Marketability Discount

a reduction in the value caused by the transfer of an asset that has an inherent lack of marketability

Minority Discount

a reduction in the value of an asset caused by the transfer of a minority interest in a business. Any interest that is not controlling interest (NCI)

How is the holding period of inherited property in the hands of the heir calculated?

always deemed to be long-term even if the property is disposed of at a gain or loss regardless of the holding period

What is a straight single life annuity?

an annuity that is paid until you die

Blockage Discount

attributable to the value of large blocks of corporate stock that are listed on a public exchange. Usually at discount because a large block of stock is not as marketable as a smaller amount of stock (more eggs in one basket)

State Tax Deduction

deduction for estate, inheritance, legacy, or succession taxes paid to any state, territory, or the District of Columbia is allowed for decedents dying after 2004.

If a decedent owns a life insurance policy on his own life, at what value is it included in his gross estate?

face value of the policy

What is an heir's adjusted basis in property inherited?

for income tax purposes is the property's fair market value as reported on the decedent's estate tax return. This can be either the fair market value at the decedent's date of death or the alternate valuation date

What is a revocable transfer?

interest in property transferred by the decedent if the enjoyment of the interest was subject to any change through the exercise of a power by the decedent to alter, amend, revoke, or terminate the gift, or if the decedent relinquished these powers in contemplation of death.

When is a decedent's federal estate tax return due?

nine months after the decedent's date of deathnine months after the decedent's date of death

How is real estate valued for purposes of inclusion in a decedent's gross estate?

require an appraisal to determine the value of the property.

To what extent is the value of a straight single life annuity included in the decedent's gross estate?

since the contract terminates at death none of the annuity is included in gross estate

How are publicly traded common stocks valued in a decedent's gross estate?

the average of the high and low trading price for the decedent's date of death or the alternate valuation date