Lesson 7: Estate Tax

Riley died recently. His assets are listed below at the fair market value as of the date of death (DOD) and as of six months after his DOD: Item Value at DOD Value Six Months after DOD Land $5,000,000 $4,500,000 Stock $300,000 $310,000 Annuity $100,000 $95,000 Condominium $300,000 Sold 2 months after DOD for $295,000 Total $5,700,000 $5,205,000

If Riley's executor properly elects the alternate valuation date, Riley's total estate will be $4,500,000 + $310,000 + $100,000 + $295,000 = $5,205,000. The land and stock are valued at the alternate valuation date, the annuity (a wasting asset) must be valued at Riley's DOD ($100,000), and the condominium will be valued as of the sale (disposition) date ($295,000).

Carrie died owning 2% interest in a closely held business. The business is valued at $500,000 and an appraiser applied a lack of marketability discount and a minority discount that totaled 40%. The value of the 2% interest included in Carries gross estate is

only $6,000 [$500,000 x 2% x (100% - 40%)].

When a decedent dies, the basis of all property in the decedent's estate is _____________" or adjusted, to fair market value (or the alternate valuation date's value if elected by the executor). This adjusted basis is commonly referred to as "_______________, although be aware that if a property's fair market value drops below the property's basis, the basis will be decreased (or stepped-down), to the fair market value.

"step-up" basis

The Estate tax is generally paid by the (1) or the (2) before the assets are distributed to the beneficiaries. If there is no (1) or (2), then the beneficiary who (3) must pay. If the (1) distributes to heirs before paying tax, then the (1) may be personally liable for the entire tax amount.

1. executor 2. administrator 3. received the property

The alternate valuation date is exactly _______ month(s) following the date of death?

6

While the general rule is that assets are valued at the date of the decedent's death, the executor may instead choose the alternate valuation date, which is ______ months after the date of death.

6

Blockage Discount

A Blockage Discount is applied when a large block of corporate stock is sold at once. These large blocks are often less marketable than smaller amounts of stock. The discount value is based on the decrease in the realizable price below the current market price of the stock.

Key Person Discount

A Key Person Discount is applied when the business success relies heavily upon a specific employee or owner, and that person has died or become disabled, since future revenues of the business will be negatively impacted. Discounts may be reduced by the value of key person life insurance proceeds payable to the corporation after the key person's death.

Lack of Marketability Discount

A Lack of Marketability Discount is the reduction in the value caused by the transfer of an asset that has no public market, because these assets are more difficult to sell than interests in publicly traded stock. This discount ranges between 15% to 50% and can be applied to both minority and majority interests.

Minority or Lack of Control Discount

A Minority or Lack of Control Discount is applied if the business interest transferred does not represent control of the business. Any interest that is not a controlling interest is a minority interest. The discount ranges between 15% to 50%.

foreign death credit

A credit is available to reduce the tax burden for taxes paid to foreign jurisdictions for property owned by the decedent that is located in the foreign country. This credit is only available for U.S. citizens or U.S. residents and must represent taxes actually paid (not simply taxes owed) to the foreign countries with taxation reciprocity agreements.

The enactment of the Tax Cuts and Jobs Act of 2017 (TCJA) doubled the federal threshold to over $11 million dollars through 2025 (adjusted annually for inflation). In addition, the ____________________ entitles a surviving spouse to utilize any unused exemption from the first deceased spouse, effectively doubling the threshold to over $22 million (adjusted annually for inflation) for married couples. Therefore, most estates are now "small estates". This will remain true even when the increased threshold limits return back to the pre-TCJA levels in 2026.

portability provision

Like the income tax, the estate and gift tax is ___________________

progressive.

The adjusted gross estate is a critical factor in the estate and gift tax calculation. Certain estate planning strategies are dependent on the value of the adjusted gross estate. The adjusted gross estate is calculated by

subtracting certain expenses from the gross estate, as follows:

the estate tax calculation begins with

the gross estate

If the decedent owned policies on the lives of others, the policies are valued at the

interpolated terminal reserve plus unexpired premiums if the policy is in "in pay" status. If not in "in pay status," the policy's replacement value applies. If the decedent owned a policy on their own life at the time of their death or within 3 years of death, the death benefit of policy is included in the gross estate.

When the property is distributed to an heir, the heir's basis in the property is the stepped-up basis. If the heir sells the property, the holding period for the property is characterized as ________________ regardless of how long the heir held the property before the sale.

long term

in order to use the alternative valuation date of 6 months after date of death, 3 requirements must be met

-The executor must make the election by the filing date of the estate tax return -The election must lower the gross estate -The election must lower the amount of the estate tax due

Since small estates are not subject to transfer taxes, the tax planning required may be simplified, however, small estates still require planning to ensure .

healthcare directives are in order assets are transferred effectively unnecessary expenses are minimized

Form 706 is due (1) months after death. The executor must timely file Form 706 within (2) days after the due date (unless extensions were filed). An extension to file (but not to pay) can be granted for an additional (3) months, and additional extensions can be granted in certain circumstances for up to almost (4) years.

1. 9 2. 45 3. 6 4. 15

Eric died on July 24, 2020. At the time of his death, he owned 1,000 shares of Jefferson Crab stock. Given the daily trade prices for Jefferson Crab surrounding Eric's date of death, at what value will the Jefferson Crab shares be included in Eric's gross estate? Price Open High Low Close Thursday, July 15, 2020 $101 $107 $95 $105 Monday, July 19, 2020 $104 $108 $100 $103 Tuesday, July 27, 2020 $103 $105 $101 $104 Wednesday, July 28, 2020$108 $112 $108 $109

$103,290 Since the stock is not traded on the date of Eric's death, the value is determined utilizing the artificial valuation formula in the text, the average of the high and low for the 2 relevant dates, Monday and Tuesday. [($104 x 2) + ($103 x 5)]/7 = $103.29 x 1,000 shares = $103,290. Saturday and Sunday are not counted as trading days for purposes of the calculation.

The term "small estates" refers to estates that fall under the federal exemption threshold (_____________ in 2020) for gifts and bequests.

$11.58 million

Grant inherited an art collection valued at $450,000 from his aunt Beatrix. She acquired the collection 20 years ago for $130,000. Within 1 month of inheriting the property, Grant sold the collection for $455,000. What is Grant's taxable gain for income tax purposes? $5,000 short-term capital gain. $5,000 long-term capital gain. $320,000 short-term capital gain. $320,000 long-term capital gain.

$5,000 long-term capital gain. Grant's basis in the property is equal to the date of death value, of $450,000. The holding period for inheritances is long term regardless of how long the decedent or the legatee held the property. Thus, his gain is $5,000 (sale price) - $450,000 (his basis in the property). His holding period is a long-term capital gain.

When Ronnie died seven months ago he left his prize art collection to his daughter Kate. Ronnie had a fantastic eye for selecting artwork by unknown painters, buying the painting cheap, and then selling them for a high profit once the painter was recognized by the general public. Three months before his death, Ronnie purchased an enchanting oil painting of a beautiful woman that Ronnie claimed would be "as famous as the Mona Lisa" for $4,000. Kate has been exhibiting the painting since her father's death and a local art collector offered her $100,000 for the painting. Kate is extremely excited because the painting was only valued at $15,000 when her father died. If Kate sold the painting today, what would her taxable gain be for income tax purposes?

$85,000 long-term capital gain Kate's basis in the property is equal to the date of death value. The holding period for inheritances is long term regardless of how long the decedent or the legatee held the property. Thus, her gain is $100,000 (sale price) - $15,000 (Kate's basis in the property).

Rex died on Friday, June 11. His gross estate included 100 shares of XCD Corporation stock. On the date of Rex's death, the XCD Corporation stock closed at a price of $10, but had traded at a high price during the day of $11 and a low price of $8. The value of the 100 shares of XCD Corporation stock in Rex's gross estate is

$950 [(($11 + $8) / 2) X 100], the average of the high and low price for the date of death.

step up basis: gifts reverting to the original owner

A gift reverting to the original owner occurs if the decedent received property as a gift prior to death from an individual, and then bequeaths that property to the original owner at death. If the death occurred within 12 months of receiving the gift, this is considered a reversion. The step-up basis rule will not apply and the heir will inherit the property at the decedent's basis prior to death. Example Darnell received a gift of a valuable art collection worth $2.5 million from his cousin, Rayna. Rayna purchased the art several years ago, when the artist was relatively unknown, for $45,000. Since the art collection is a gift, Darnell's basis in the property is Rayna's carryover basis, or $45,000. 8 months later, Darnell passed away. At the time of his death, the fair market value of the art collection had grown to $3 million. In his will, Darnell left his entire estate to Rayna. The art collection is considered a gift reverting to the original owner since Rayna re-acquired the property she gifted to Darnell within 12 months of making the gift. Rayna will receive the art collection with a basis of $45,000.

The gross estate of a decedent who died in the current year would not include which of the following items? -A life insurance policy on the life of the decedent, owned by the decedent's son, with the decedent's estate named as the beneficiary. -A life insurance policy owned by the decedent on the life of his business partner. -A life insurance policy transferred by the decedent to his daughter 6 years ago. -A life insurance policy on the life of the decedent, owned by a trust that is directed to use the proceeds to pay estate expenses.

A life insurance policy transferred by the decedent to his daughter 6 years ago. Since the decedent transferred the policy to his daughter more than 3 years before his death, the policy value will not be included in his gross estate.

A minority interest discount may be available when all of the following conditions apply to the holder of a limited partnership interest EXCEPT: No voting control. A minor management role in the limited partnership. The ability to dissolve the FLP. The ability to require a return of his or her capital contributions.

A minor management role in the limited partnership. A minority interest discount depends on the holder of the limited partnership, along with other criteria, not having any management role or control over the operations of the FLP.

Which of the following incidents of ownership held during the three-year period before death will cause the inclusion of life insurance proceeds in the gross estate? -The right to change the beneficiary. -The right to borrow against the policy. -The right to convert group coverage to an individual contract. -Any of the above incidents of ownership would be enough to bring the proceeds into the gross estate.

Any of the above incidents of ownership would be enough to bring the proceeds into the gross estate.

At Mario's death, he was the joint owner with his son, Richard, of a building that had a fair market value of $130,000. Six years ago at the time the building was purchased, Mario paid the full purchase price of $60,000 to the seller. Richard received his interest in the property as a gift from his father four years prior to Mario's death. Because Mario contributed the full amount toward the purchase price of the building, the full fair market value of the building as of his date of death is included in his gross estate. As such, Mario's gross estate will include $130,000, with regard to the jointly owned building. Assume the same facts as above except that at the purchase of the building, Mario and Richard each contributed $30,000 toward its purchase price. Accordingly, Mario's gross estate will include 50% of the fair market value of the building or, $65,000, in relation to the jointly owned building.

Assuming the same facts as above except that Mario and Richard had both received their ownership interested as gifts from Mario's father. Since Mario's father retained no ownership in the property, the property is gifted entirely by Mario's father. Mario would include the fair market value attributable to his ownership interest of 50%, or $65,000, in his gross estate.

Gifting Strategies for Small Estates

Because donees receive gifts with a carryover basis, it may be more beneficial to pass assets at death in order to realize the benefits of the step-up (step to FMV) basis rules, particularly for assets that have significantly appreciated. If gifts are made, property with little appreciation potential is the best type of property to gift. Keep assets with high appreciation potential in the estate to qualify for a step-up in basis. Make gifts of retained interests (gifts where the donor retains some benefit or control over the property).Gifts with retained interests have split ownership interests, making it more difficult for creditors to claim the property.Retained interest gifts are included in the decedent's gross estate, qualifying the gift for step-up basis. At the end of the day, the name of the game is basis planning for income tax purposes as opposed to estate tax planning for small estates.

Which of the following is the most appropriate strategy for a small estate? Maximize annual gifting under the annual exclusion each year. Implement irrevocable trusts for marital transfers. Name a relative as power of attorney to handle all healthcare and estate matters. Create healthcare planning documents and create an estate plan that minimizes the probate estate while ensuring the estate has sufficient liquidity to satisfy state death taxes.

Create healthcare planning documents and create an estate plan that minimizes the probate estate while ensuring the estate has sufficient liquidity to satisfy state death taxes. Statement (D) The last choice addresses healthcare planning and planning for costs. Statement (A) The first choice is incorrect because gift tax is not an issue with small estates. Statement (B) The second choice is incorrect because irrevocable trusts are only necessary for large estates. Statement (C) The third choice is incorrect because creating a power of attorney is not a substitute for a healthcare and estate plan.

Which of the following is an appropriate estate planning strategy for a small estate? -Transfer all assets out of the probate estate to eliminate all probate costs and state death taxes. -Name a relative as power of attorney to handle all healthcare and estate matters. -Create healthcare planning documents in the event of incapacity and rely on state intestacy statutes for the transfer of property. -Create healthcare planning documents and create an estate plan that minimizes the probate estate while ensuring the estate has sufficient liquidity to satisfy state death taxes.

Create healthcare planning documents and create an estate plan that minimizes the probate estate while ensuring the estate has sufficient liquidity to satisfy state death taxes. The last choice addresses healthcare planning and planning for costs. The first choice is incorrect because state intestacy statutes should not be relied upon for effective property transfers. The second choice is incorrect because elimination of the probate estate will not reduce state death taxes. The third choice is incorrect because creating a power of attorney is not a substitute for a healthcare and estate plan.

Section 2034: Property rights between spouses.

Dower: Originally the right of the wife to receive a life estate between 1/3 and 1/2 of the land owned by the husband at the husband's death if one or more child was born. Now more in line with curtesy (life estate in land). Curtesy: Husband's right to receive a life estate in land owned by the wife at the wife's death if one or more child was born. Modernized to apply to any spouse.

IRC 2041 - Powers of Appointment

General power of appointment: if a powerholder allows a general power of appointment to lapse (does not exercise the power), the value of the asset will be included in the powerholder's gross estate. Exceptions: Certain limitations on the general power of appointment will prevent the asset from being included in the powerholder's gross estate. These exceptions include: Ascertainable standard (HEMS): If the asset is subject to an ascertainable standard such as the HEMS limitation (allowing the asset to be distributed only for health, education, maintenance, and support). 5 and 5 Power. Distribution only with consent of an adverse party.

Which of the following is not a deduction from the gross estate? Estate tax marital deduction. Estate tax charitable deduction. Gift tax deduction. State death tax deduction.

Gift tax deduction.

Joint Tenancy with Right of Survivorship (JTWROS) as exception to step up basis

If property is owned jointly with rights of survivorship, only the portion of the property owned by the decedent will receive stepped-up basis. Example Liam and Christy own a mountain cabin as joint tenants with right of survivorship. They purchased the cabin for $250,000 and contributed equally to the purchase price. Christy died this year. The fair market value of the cabin is $400,000. The cabin will pass to Liam as an operation of law. Liam's basis in the cabin will be: Liam's original half of the property, $125,000 (original basis) + Half of the property inherited from Christy: $200,000 (stepped up basis) Liam's basis in the cabin: $325,000

step up basis: Income in respect of a decedent (IRD)

Income in respect of a decedent (IRD) is income owed to the decedent that was not collected before his/her death. This income is distributed to the decedent's heirs, however, the estate is responsible for payment of income tax. Heir receives the property at the decedent's basis prior to death IRD assets include: qualified retirement plans401(k) and 403(b) plans IRAs annuities savings bonds installment notes uncollected accounts receivable

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 and assuming no prior gifts have been made?

Jude can shelter estate tax of $4,577,800 using the applicable estate tax credit. The applicable estate tax credit equivalency or exclusion amount is $11,580,000 for 2020.

Estate and Gift Tax Rates

Like the income tax, the estate and gift tax is progressive. The taxable estate/gift is taxed in brackets, with increasing values corresponding to higher tax brackets. As the chart below shows, the cumulative tax on the first $1 million of taxable estate/gift equals $345,800. After the first $1 million of taxable estate/gift, each additional dollar is simply taxed at 40% (the highest marginal bracket).

IRC 2042 - Proceeds of Life Insurance

Proceeds from a life insurance policy are included in a decedent's gross estate if the decedent was the insured and: Decedent possessed an incident of ownership in the policy. An incident of ownership is a significant right to control the policy, such as actual ownership of the policy, the right to change beneficiaries, surrender or cancel policy, assign the policy, revoke an assignment, or pledge the policy for a loan. Proceeds are receivable by the decedent's executor or trustee but are required to be used for the estate's benefit (e.g, for payment of estate taxes, debts, expenses, etc.).

IRC 2044 - QTIP Property

Property for which a QTIP election was made in the gross estate of the first-to-die spouse is included in the gross estate of the second-to-die spouse.

step up basis: community property

Recall that community property is considered marital property between spouses. If one spouse dies, the entire property's basis is stepped-up even though only 50% of the property is included in the decedent's gross estate. In this way, the surviving spouse receives the benefit of stepped-up basis for their own half of the property. Example Casey and Jessie are married in a community property state, in which they own a home they purchased for $450,000. Casey died this year. At the time of her death, the home's fair market value is $700,000 and she left her interest in the home to her daughter, Bella. Jessie's basis in her half of the home is increased to $350,000, even though she didn't inherit Casey's half of the home.

IRC 2040 - Jointly Owned Property

Recall that jointly owned property is non-probate property that passes by operation of law. Jointly owned property is included in the gross estate differently depending on whether or not the joint tenants are spouses. For married joint tenants, 50% of the property value is included in the decedent's gross estate. Example Jamie and John are married. They purchased a rental property. John funded the entire purchase from his own accounts and the property was titled jointly with right of survivorship. Jamie dies this year. 50% of the property's value is included in Jamie's gross estate. For unmarried joint tenants, or spousal joint tenants plus other tenants, property is included in the gross estate in proportion to the decedent's percentage of contribution. Example Bill and his brother Ted own a lake house jointly with right of survivorship. Bill contributed 75% of the purchase price and Ted contributed the remaining 25%. Ted dies this year. 25% of the property's value will be included in his gross estate.

incapacity planning

Regardless of the wealth of the client or the size of their estate, they are human and susceptible to the same physical, mental, and emotional risks as everyone else. Having the following documents in place and up to date can help reduce the stress and make the financial decision-making process more manageable when dealing with a client who becomes incapacitated. General Powers of Attorney and Revocable Trusts to manage financial matters Healthcare powers of attorney to manage healthcare decisions Living wills to express desires concerning end-of-life treatment

IRC 2033: Property Owned at Death

Section 2033 is a broad provision that covers property the decedent owned outright at death and property in which the decedent had an interest at death. Examples include: Income in Respect of a Decedent (IRD). IRD is income that was owed to the decedent before they died that the decedent had not yet collected, such as rental income accrued before death, salary, accounts receivable from the decedent's business, stock options, interest earned, etc. Cash surrender value of a life insurance policy owned on the life of another. State income tax refunds. Medical insurance reimbursements. Awards for pain and suffering (but not wrongful death). Patents, copyrights Example Cash, stocks, bonds, retirement accounts, automobiles, personal property, etc.

IRC 2035 et. al - Retained Interests and the Three-Year Rule

Section 2035 requires that any interests the decedent retained at death or within 3 years of death will be included in the decedent's gross estate. This includes IRC 2036 Transfer with a life estate. IRC 2037 Transfer taking effect at death, or interests where the decedent retained a reversionary interest in the property of at least 5% of the property's value IRC 2038 Revocable transfer. IRC 2042 Transfer of life insurance on the life of the decedent. Gift tax paid

Minimizing Costs in Small Estates

Small estates are still subject to fees, expenses, and state death taxes (state estate and inheritance taxes). Probate costs can be minimized by reducing the probate estate through transfers by contract (e.g., lifetime trusts) and transfers by operation of law (e.g., joint titling). State death taxes include state estate and state inheritance taxes. About half of the states have estate and/or inheritance taxes. Typically, states allow an exemption for asset transfers, however, the exemption amount is generally far lower than the federal estate exemption. A state may have different exemptions and tax rates within a class according to the blood relationship of the beneficiary to the decedent. The closest blood relatives to the decedent have the largest exemptions and lowest tax rates. To minimize state death taxes, careful planning should be done to ensure full use of the exemption and lower tax rates for the closest blood relatives. State death taxes are deductible on the decedent's federal estate tax return.

IRC 2039 - Annuities

Straight Life Annuity: Not included in gross estate. Survivorship Annuity: Included at fair market value of remainder interest. Lump-sum payments: Included at full value. Installment payments: Valued at the present value of right to receive future income.

credit for prior transfers

The Credit for Prior Transfers reduces the tax burden for deathtime transfers that occur relatively close together (where the second death occurs between 2 years before and 10 years after the first death). The credit offsets a portion of the tax that was paid on the transfer at the first death in order to minimize the burden borne by the second estate. Diane, a wealthy widow, died and left her entire estate to her daughter Roseanne. 18 months later, Roseanne died and left her estate to her children. Since Diane's estate paid the transfer tax at her death and the deaths occurred close together in time, Roseanne's estate will receive a credit to offset some of the tax already paid by Diane's estate.

applicable credit

The applicable credit amount is the most significant credit as it represents the tax that would be due on the federal exemption amount. In this way, the IRS provides a credit to offset the taxes due on the assets, so that the transfer of assets up to the exemption amount is tax-free.

what are the exceptions to the alternative valuation date?

The exceptions involve wasting assets (e.g., annuities) and assets disposed of between death and the alternate valuation date. Excluding the exceptions noted above, the valuation method selected must be applied to all assets in the estate. In other words, the executor cannot value some assets using the alternate date and others as of the date of death.

The executor elects to use the alternate valuation date. Which of the following statements is incorrect? This election is irrevocable. This election applies to all property included in the estate. The executor makes this election to decrease the value of the gross estate. The executor makes this election in order to obtain a higher stepped-up basis for income tax purposes.

The executor makes this election in order to obtain a higher stepped-up basis for income tax purposes. The executor cannot elect the alternate valuation date for the purpose of obtaining a higher stepped-up basis.

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? -income in respect of decendent (IRD) -charitable deduction -marital dedutction -executor's fees

The executor's fees are deductions from the gross estate to arrive at the adjusted gross estate. The second and third answer choices, the marital deduction and charitable deduction, are deductions from the adjusted gross estate to arrive at the taxable estate. Income in respect of a decedent, the first answer choice, is included in the decedent's gross estate, and is not a deduction on the decedent's Form 706.

Which of the following statements is true regarding the gross estate? The gross estate includes property that avoids probate, such as life insurance proceeds payable to a named beneficiary. The gross estate only consists of taxable probate property. The gross estate excludes marital deduction property. The gross estate is calculated after deducting administrative expenses, debts, and losses.

The gross estate includes property that avoids probate, such as life insurance proceeds payable to a named beneficiary. The correct answer is (A). Statement (B) is incorrect because the gross estate consists of probate and non-probate property. Statement (C) is incorrect because the gross estate includes marital deduction property. Statement (D) is incorrect because those expenses are subtracted from the gross estate to calculate the adjusted gross estate.

Portability and Small Estates

The portability provision permits the transfer of the deceased spouse's unused exemption (DSUEA). However, the portability provision has some limitations: If the surviving spouse remarries, portability of the first deceased's spouse's unused exemption is lost. If the surviving spouse is young, remarriage may be likely. The surviving spouse may change dispositive plans after the first spouse dies, thwarting the intentions of the deceased spouse. Trusts can be utilized in conjunction with the portability provision to ensure the first spouse's intentions will be carried out. Example: Lucy died in 2011 with an estate of $10 million. The federal exemption in 2011 was $5 million. She left $2 million in assets to her children and passed the remaining estate to her husband, Mark. Mark never remarried and died in 2020 with a taxable estate of $14.58 million. Portability allows Mark to utilize his individual federal exemption of $11.58 million as well as the remaining balance ($3 million) of Lucy's unused exemption to shield his taxable estate from federal estate tax.

At the time of her death, Kathy owned an annuity with payments that will continue after her death to her beneficiary. What amount of the annuity, if any, will be included in Kathy's gross estate? None. The present value of any future payments. The full initial value of the annuity. It depends on whether the annuity is from an IRA, a tax-sheltered annuity, or a qualified plan.

The present value of any future payments. The present value of future payments will be included in the gross estate.

Last medical expenses relate to the costs related to the decedent's last illness.

These costs cannot be deducted on decedent's final income tax return, so they are deducted on the estate tax return instead.

Of the following is an allowable deduction from the adjusted gross estate to arrive at the taxable estate? Applicable credit for the lifetime exemption. Gift of $350,000 to non-citizen relative living overseas. Deduction of each gift made under the annual exclusion. Transfers to the decedent's spouse totaling $450,000 during their marriage.

Transfers to the decedent's spouse totaling $450,000 during their marriage. Transfers between spouses are deductible via the marital deduction. The applicable credit is applied after the calculation of the tentative tax before credits. Gifts to non-spouse relatives are not deductible. Gifts made under the annual exclusion are not taxable and are not included in the taxable estate calculation, and are therefore not deductible.

The calculation of federal estate tax begins with the concept of the gross estate. A decedent's estate is comprised of

all of the assets a decedent owned at death and property the decedent had certain interests in at the time of death. Sections 2033-2044 of the Internal Revenue Code govern what property is included in the gross estate.

It is important to note that many assume the federal exemption amount is simply subtracted from the taxable assets. This is not true! Instead, the applicable credit provides

an offset to the tax on the federal exemption.

Financial Securities are valued at the

average of the high and low trading prices on the date of the decedent's death (or alternate valuation date).

gross estate

decendent's assets at death, exclusing specific assets ("exclusions") noted in the IRS code. The gross estate is made up of both the probate estate and non-probate estate

Casualty and theft losses can be deducted from the gross estate as long as they occurred

during the administration of the estate (while the estate was open), and only to the extent the losses were reimbursed by insurance.