Federal Estate Tax

Question 1

What is the difference between death, inheritance, and estate taxes?

Answer 1

Death is passing assets the decedent to beneficiary
Inheritance is receiving assets from a decedent
Estate tax is the collective name for death and inheritance taxes

Question 2

What is the formula for calculation estate tax ALWAYS?

Answer 2

Total estate - $1M. Multiply * 40% + 345,800. Subtract tax exclusion amount = total estate tax

Question 3

How is a life insurance policy, owned by the decedent on another’s life, valued?

Answer 3

Replacement cost

Question 4

How are survivorship benefits, aka annuities, taxed in estate?

Answer 4

By charitable gift or commercial product, it is the value of the premium charged as of the date of death
By charitable trust or private product, it is PV of payments left as of the date of death

Question 5

How are bonds valued at death?

Answer 5

The redemption value of the bond as of the date of transfer

Question 6

How are the different property ownership methods taxed?

Answer 6

TC - by percentage of ownership from FMV
JTWROS- 50/50 to spouse. In non-spouse, 100% to first to die unless PR can prove contribution by surviving owners
TBE - 50/50

Question 7

What is a Section 2032A special use valuation?

Answer 7

Allows PR to elect that farm or other closely held real estate, be valued at its actual use value vice it’s best use value. Ex: Tractor dealership vs potato farm - which is worth less?

Question 8

What is the alternate date of valuation?

Answer 8

A special election the PR can use, ONLY IF the decedent was going to pay estate taxes, to use a date 6 months after death to try and lower the tax bill.
If elected, it applies to all property in the estate.
Exception is that if depreciation is only due to time lapse, you can’t deduct it.

Question 9

What is the decedent’s gross estate?

Answer 9

The entirety of the estate - no deductions - including those assets subject to IRS sections 2035-2038.

Question 10

What is the taxable estate?

Answer 10

The gross estate - allowable deductions

Question 11

What is the tentative tax base?

Answer 11

The taxable estate + (adjusted) taxable gifts made during life

Question 12

What is the total tentative tax?

Answer 12

The tentative tax base applied against the cumulative tax table

Question 13

What is the net estate tax due?

Answer 13

The total tentative tax minus any available credits

Question 14

Income, such as compensation, bonuses, renewal commissions, and interest accrued, that is all payable to a decedent, is called ______ __ _________ __ _ ____________. It is income taxed and includable in the gross estate. It does not receive a stepped-up basis.

Answer 14

Income in respect of a decedent (IRD)

Question 15

What is the only way life insurance is included in the gross estate?

Answer 15

If the decedent had incidents of ownership - as in, a right to do anything or receive any benefit from the policy.

Question 16

At it’s fundamental level, what is a power of appointment?

Answer 16

The power held over all or a portion of a trust created by someone else.

Question 17

What is the difference between a special and general power of appointment?

Answer 17

General can do anything with the trust including appoint assets to themselves. Special power of appointment limits the power.

Question 18

What are the estate tax implications for someone who holds a general power of appointment?

Answer 18

The greater of 5% or $5000 over the last years allowed, but not exercised, is included in the estate

Question 19

What is the significance of IRS sections 2026-2038 on lifetime transfers?

Answer 19

The sections rule that property gifted, may be brought back into the estate if deemed not enough control was given up. Examples are a retained life estate provision, or an irrevocable trust where the grantor retains the right to specify or designate who and when income will be enjoyed. GRATs, GRUTs, CRATs and CRUTs all have similar control issues where the remaining interest at death can be brought back into the estate

Question 20

Transfers of a retained interest, transfers of life insurance where the owner is the insured, and the gross-up rule are all part of the …

Answer 20

Section 2035 3-year rule which if not obtained, subjects these assets to be part of the estate.

Question 21

What is the gross-up rule?

Answer 21

Any gift taxes paid out of pocket within 3 years of death, are included in the estate. NOT THE VALUE OF THE GIFT, just the gift tax

Question 22

What is the adjusted gross estate? (A, B, C, D)

Answer 22

The gross estate minus the sum of administrative, burial, casualty losses, and debts) A, B, C, D = AGE

Question 23

For a trust to qualify for a marital deduction, what must happen? (LAME)

Answer 23

Lifetime, Annual, Mandatory, Exclusive

There must not be terminable interest. The spouse must have outright control over the income and corpus of the trust. Known as qualifying income interest.

Question 24

What are the four exceptions to the terminable interest rule for martial deduction?

Answer 24

Life estate coupled with general power of appointment
QTIP
Sole beneficiary of a CRAT or CRUT
Survival conditioning

Question 25

What can a spouse do with a terminable interest trust that he/she is holds a general power of appointment for?

Answer 25

Anything - include make themselves the beneficiary which is why this can qualify for a martial deduction

Question 26

Why is a QTIP election allowed a marital deduction?

Answer 26

Because the marital deduction is only for a specified amount of the asset and that same amount must be reflected in the surviving spouses gross estate - it will eventually get taxed.

Question 27

Being qualified, being real, being of full interest (or partial if allowed as charitable lead or remainder trusts), being of equitable value, and being still included in the gross estate - these are all requirements for….

Answer 27

A charitable deduction

Question 28

What does making the QTIP election actually do?

Answer 28

It is the difference between taking or not taking a martial deduction. If election is made, a full or partial marital deduction can be taken. That same deduction (by percent) will then be included in the beneficiaries estate.

Question 29

What is bypass planning?

Answer 29

Planning a way to bypass the marital deduction while still allowing the spouse use of the assets and using all of the applicable credit amount

Question 30

How does a bypass trust work?

Answer 30

It intentionally eliminates a single beneficiary and/or mandatory income to ensure that the property cannot enter the surviving spouses estate.

Do not give the spouse general power of appointment

Question 31

What is decreased spouse unused exclusion (DSUE)?

Answer 31

It allows the passage of any tax exclusion amount not used by the decedent spouse to pass on to the surviving spouse

When a taxable gift is made from the surviving spouse, the DSUE amount is reduced first.

Question 32

What happens to DSUE if the surviving spouse remarries and that spouse predeceases her?

Answer 32

She will receive the latest deceased spouse’s DSUE.

Question 33

What are:
A Trusts
B Trusts
C Trusts

Answer 33

A Trust: Appointment (general power of)
B Trust: Bypass
C Trust: QTIP

Question 34

How can someone qualify for partial interest to a charity?

Answer 34

By using a qualified form. CLT, CRT, PIF, farm or pers residence, real prop contributions

Question 35

High level, what’s the estate tax calculation for GE, AGE & TE?

Answer 35

Gross - ABCD = AGE - unlimited’s + state death = TE

Question 36

What does the term “marital trust” fundamentally mean?

Answer 36

A trust using the marital deduction

Question 37

Whom the real estate will go to
How long the business was family owned and used
The amount and types of gifts w/I 3 years of death
The amount of secured debts on the business
Are all part of determining what in terms of estate tax?

Answer 37

Section 2032a special use valuation

Question 38

What is subject to the 3-year rule?

Answer 38

Gift taxes paid out of pocket, assignment of ownership rights in a life insurance policy on the assigners life, and release of a retained interest covered by IRC section 2036-2038.

Question 39

T/F. In calculating the marital deduction, one must reduce from the MD, the amount of of “A, B, C, D” and any other expenses by will, the survivor must pay

Answer 39

True