Estate Tax Compliance and Tax Calculations, Sources for Estate Liquidity and Power of Appointment

Question 1

Estate tax filing and calculation

Answer 1

• form 706 filed for all resident or citizen decedents with total gross estate + adjustable taxable gifts >= exemption amount
• executor pays tax

Question 2

Form 706 order of operations

Answer 2

Gross estate (probate and non-probate)
- funeral, admin, debts, taxes and casualty loss
= Adjusted gross estate (AGE)
- marital and charitable deductions
= Taxable estate
+ adjusted taxable gifts (amounts exceeding annual exclusion)
= Tax base
- estate tax deductions (12,920,000) (remainder 40%)
= Tentative tax
- gift taxes paid
= Net Estate Tax

Question 3

Gross estate

Answer 3

• FMV of all property and interest owned by decedent at time of death
• Probate assets: fee simple, TIC, estate as beneficiary, community property
• Non-probate assets: JTWROS, TBE, LI, POA, gift taxes paid within 3 years of death (except GSTT)
• Joint tenancy is 1/2 if spouse and consideration if non-spouse

Question 4

Gross estate - 3 year rules

Answer 4

• if made within 3 years of death, included in gross estate
  1. certain transfers of LI by insured
  2. gift tax paid out of pocket (GSTT excluded)

Question 5

Survivorship annuities

Answer 5

• includable in decedents gross estate
• annuity full value used if survivor has right to take lump sum
• if survivor takes periodic payments the PV of future payments is included

Question 6

Transfers with retained life estate

Answer 6

• property transferred during decedents life is included in estate if they retained right to use or enjoy
• even retaining a lifetime tight to designate who will possess or enjoy property counts (529 exception)

Question 7

Exclusions from gross estate

Answer 7

• LI owned by others
• completed gifts
• life estate for decedents life only

Question 8

Adjusted gross income (net estate)

Answer 8

gross estate - funeral expenses, admin expenses, debts, taxes, income taxes, casualty losses

Question 9

Taxable estate

Answer 9

adjusted gross estate - martial and charitable deductions
- sometimes state level death or inheritance tax

Question 10

Marital deduction

Answer 10

• unlimited amount if property passing to the surviving spouse can pass estate tax free if requirements met
  1. property included in gross estate
  2. property actually passes to surviving spouse

Question 11

Charitable deductions

Answer 11

• outright transfers to qualified charities are 100% deductible for both estate and gift tax

Question 12

State estate taxes

Answer 12

• state level death or inheritance taxes can be deducted from AGE

Question 13

Adjustable taxable gifts

Answer 13

• taxable gifts made after 1976
• not included in gross estate
• added to taxable estate to arrive at tentative tax

Question 14

Tax base

Answer 14

• amount used to calculate estate tax due

Question 15

Tentative tax

Answer 15

• subtract 12,920,000 from tax base
• multiply excess by 40%

Question 16

Net estate tax

Answer 16

• gift taxes paid are subtracted from tentative tax to arrive at net tax due

Question 17

Gift tax on lifetime gifts and estate tax on testamentary transfers

Answer 17

similarities
- 40% tax rate
- share 12,920,000 exemption (can be used in full while living but will be added back at death
- unlimited marital deduction
- unlimited charitable deduction

Question 18

Prior transfer credit

Answer 18

• property sometimes passes swiftly through two taxable estates
• estate tax credit allowed when property is included in the transferors taxable estate (paid tax) and transferee dies with in 10 years of the transferor (paying tax)
• credit for double taxation

Question 19

Sale of assets - sources for estate liquidity

Answer 19

• appreciated assets receive step up in basis: sold with little taxability
• annuities: can be liquid but subject to income tax over basis
• buy sell for businesses

Question 20

Life insurance - sources for estate liquidity

Answer 20

• any incidents of ownership in the policy will make it includable in gross estate

Question 21

Power of appointment - use and purpose

Answer 21

• interest held by a person providing the ability to determine who shall enjoy property
• generally in trusts or estates

Question 22

General and special (limited) powers

Answer 22

• depends on conditions power may be exercised
• if holder can exercise power without any conditions or restrictions it is general power of appointment
• if power can only be exercised under certain conditions, limited time, its special appointment

Question 23

General power of appointment - outright ownership

Answer 23

• entitles holder to transfer property to anyone
• can transfer to holder, holder estate, holder creditors
  -power to consume trust corpus
• beneficial enjoyment of trust or amending/revoking rights

Question 24

Special power of appointment

Answer 24

• limits the class of individuals who may receive trust/estate property
  -can transfer only to specifically designated individuals or under specific circumstances

Question 25

Five or five power

Answer 25

• used by estate planners to provide flexibility and financial security for a beneficiary
• property subject to general power will be included in donee estate only to extent property exceeds greater of
  1. $5k
  2. 5% total value of fund subject to power at time of lapse

Question 26

Lapse/exercise or release of power

Answer 26

• if general appointment is not exercised in given time it lapses
• if holder uses power it is exercised
• holder relinquishing all control will be release of power

Question 27

Distributions for an ascertainable standard

Answer 27

• power limited by some unit of measure
• if right to exercise is limited by needs for health, education, maintenance, support (HEMS) it is not a general power