Federal Estate Tax

"Buy-sell" agreements are excludable from a decedent's estate provided the agreement:

(1) is a bona fide business agreement; (2) is not a device to transfer property to the decedents family for less than full and adequate consideration; and (3) has terms similar to those entered into by persons in arm's length transactions.

A decedent's medical expenses paid by the decedent's estate are deductible on the decedent's tax return in the year incurred if:

(1) the expenses were paid within a year of the decedent's death; (2) the expenses are not deducted for federal estate tax purposes; and (3) a waiver stating that no estate tax deduction for the expenses was taken by the estate and that the estate waives its right to the deduction.

Casualty and Theft Losses

*Are deductible without any floor limitation*. The losses must be incurred during the administration of the estate. *The executor has option of deducting casualty and theft losses on the estate tax return or the estate's income tax return*. The casualty must be attributable to a federally declared disaster area.

Estate

A legal entity that comes into existence automatically at the death of a taxpayer (the decedent). he executor of the estate collects the assets of the decedent, pays the decedent's debts, and distributes the remaining assets to the beneficiaries according to the decedent's will or according to the state law governing inheritances. The estate exists for the period required by the executor to perform his or her duties.

The Generation-Skipping Tax (GST)

A supplemental tax, that prevents the avoidance of the transfer taxes by skipping one generation of recipients. Generation-skipping tax (GST) is triggered by the transfer of property to someone who is more than one generation younger than the donor or decedent (e.g., a grandparent transfers property to a grandchild, rather than a child). UNLESS the person in the between generation are deceased such, Grandparent transfers property to grandchild when parents are dead. The GST is not widely applicable because most transfers qualify for an annual gift tax exclusion and each donor/decedent is entitled to a large aggregate exemption that is equal to the amount of the unified credit for the estate tax.

Special use valuation

An executor can elect to value certain realty used in farming or in connection with a closely held business at a special use valuation. The farm or business must continue to be used in that capacity for at least five years during the eight-year period after the date of death.

Charitable Contributions

Are deductible without any limitation. The same charities as the gift tax (e.g., includes foreign charities, but excludes cemeteries)

Transfers within Three Years of Death

Certain gifts within three years of death are included in the gross estate of the decedent. Transfers with retained interests, revocable transfers, and transfers of life insurance are included in the decedent's gross estate if the transfer is made within three years of death. The property is included at the date of death value. The gift tax paid on the gift is included in the estate for any gifts made within three years of death (this is the gross up provision).

Other Deductions

Debts of the Estate—These debts, for example mortgages and accrued taxes, are deductible. Final Expenses—These expenses are deductible. (Funeral expenses and administration expenses (e.g., attorneys' and accountants' fees) are examples. State death taxes paid are also deductible.) Executor has the option to deduct final expenses on the Estate Tax Return or on the Estate Income Tax Return - must waive deduction on the estate tax return

Form 706

Federal Estate Tax Return.

Estate Tax Computation (look in book for full explanation)

First—The taxable estate is increased by adjusted taxable gifts made after 1976. Second—Apply current tax rates to total transfers. The maximum tax rate for 2018 is 40%. Third—Reduce the tentative transfer tax by gift taxes paid or payable (at current rates) on post-1976 gifts. Fourth—Subtract the unified credit and other credits.

Credits against the estate tax

For 2018, the unified credit will eliminate the tax on a net estate of $11,180,000. Example: The unified credit can be looked at in two equivalent ways. For an estate of $16,240,000 in 2018, if the entire unified credit equivalent of $11,180,000 is available, then only $5,060,000 of the estate is taxable. Assuming a flat estate tax rate of 40%, the tax due would be $2,024,000.

Estate Tax Formula

Gross Estate LESS funeral expenses, admin expenses, debts and mortgages, casualty losses, state death taxes, charitable bequests, martial deduction, = TAXABLE ESTATE ADD post-76 adjusted taxable gifts = Total taxable life and death transfers ADD transfer tax on total transfers (40%) LESS post-76 gift taxes, transfer tax credit ($4,417,800 for 2018) Foreign death and post transfer tax credits = Net estate tax liability

Retained Interests

If a decedent made a gratuitous lifetime transfer of property but *retained a life estate, the right to income from the property, or even the ability to direct who could enjoy the property or the income from the property*, then the value of the property is included in the decedent's gross estate.

Property Transferred by the Decedent at Death

Is also included in the gross estate. Transfer of property occurs without probate through operation of law. Example; property held in joint ownership with right of survivorship Other forms of property that pass by operation of law include retained life estates, revocable gifts, transfers triggered by death (retirement benefits), and life insurance.

Jointly Owned Property

Is included in the gross estate. The value of the decedent's interest as a tenant in common is included in the gross estate. For jointly owned property by a husband and wife (right of survivorship or tenancy in the entirety), 50% of the value of the property will be included in the estate of the first spouse to die. For jointly owned property with the right of survivorship (unmarried owners), 100% of the property is included in the estate of the first owner to die. If it can be proven that the decedent did not pay 100% of the cost of property when originally purchased, then the amount included is the fair market value of the property multiplied by the percentage paid for by the decedent.

Life Insurance

Proceeds are included in the gross estate under either of two conditions. The decedent had incidents of ownership (e.g., the right to designate the beneficiary). The decedent's estate or executor is the beneficiary of the insurance policy.

Valuation of Property

Property is included in the gross estate at the fair market value. The valuation date is the date of death, or the executor can elect to have the property valued on an alternative valuation date. The alternate valuation date is six months after the date of death or on the date the property is disposed of (if earlier than six months after the date of death). The election to use the alternate valuation date is only available if it causes gross estate and tax payable to decline.

Filing Requirement

The estate tax is levied on the estate, but installment payments of estate taxes is available for closely held business interests. *The estate tax return (form 706) is due nine months after date of death*. An estate tax return must be filed if the gross estate plus adjusted taxable gifts equal or exceed the exemption equivalent.

Gross Estate

The gross estate includes property owned by the decedent at death and certain property transfers.

Marital Deduction

To qualify for the marital deduction, the spouse must receive property outright and be able to control its ultimate destination. Property that passes to the surviving spouse as a result of joint tenancy qualifies. Only the net value of property subject to mortgage qualifies. Property rights that are terminable do not qualify. The deduction is unlimited in amount. No marital deduction is allowed for non-citizen spouses. An exception to this rule is a transfer to a qualified domestic trust, which assures estate tax imposition upon a non-citizen spouse's death.

Any unused credit

from a spouse dying after 2010 may be used in the future by the surviving spouse. Husband dies in 2014 and has taxable estate of $2M, the estate tax exemption in 2014 was $5.25. Wife dies in 2018 and has a taxable estate of $19M, first she can exclude the $11.8M for 2018, and the remaining $3.25M from her husbands estate.

Summary of Gross Estate

includes the fair market value (FMV) of all property in which the decedent had an interest at time of death.

Qualified terminable interest property (QTIP)

will qualify for the deduction. An election is made to use the marital deduction for a transfer to a spouse of less than a complete interest in trust. The surviving spouse must receive all of the trust income annually (or more often) for life, but the decedent determines where the property goes at the surviving spouse's death. The property must be included in the surviving spouse's estate at its value when the survivor dies.