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Gross Estate - Definition

The value of the gross estate of the decedent shall be determined by including, at the time of his death, all property, real or personal, tangible or intangible, wherever situated.


Valuation - Generally

Estate value is comprised of all property at “moment of death;” this will be the “fair market value” (what a willing buyer would pay a willing seller with no reservations).


Valuation - Stocks

Fair market value of stocks is calculated as the mean between the highest and lowest quoted selling prices on the date of death.



Includes property passing by intestacy and by operation of law:

1. Wills: included in the gross estate

2. Operation of Law: Includable in the gross estate to the extent of the ownership interest of the decedent.

3. Revocable Trusts: The value of all decedent's property held in a revocable trust is includable in the gross estate.

4. Life Estates: Decedent's interest is extinguished at death. If the life estate was created by someone other than the decedent, its value is not included in the gross estate.


Simplified Estate Tax Formula

Gross Estate: FMV of decedent's property

- Deductions (Expenses, debt, taxes, losses, charitable gifts, marital deduction)

- Unused exclusion amount (equal to the year of death exclusion amount minus accumulated taxable gifts

= Net taxable estate

Multiply the net taxable estate by 40%

= Net estate tax due


Simplified Gift Tax Formula

Gifts subject to tax made during the calendar year at FMV

- Deductions (marital and charitable)

- Annual exclusion

= Taxable gifts for the year

- Unused exclusion amount (equal to the year of gift exclusion amount minus prior years' accumulated taxable gifts.

= Net taxable gifts

Multiply the net taxable gifts by 40%


Generation Skipping Tax - Generally

GST discourages generation skipping transfers by applying the highest applicable rate at the time of the transfer.

Gift tax will be imposed on the GST paid for inter-vivos transfers.


Generation Skipping Tax - Exceptions

1. Skipped Generation: if donee's parents are deceased, there is no GST because there is no person alive that is being skipped.

2. Life Tenant with General Power of Appointment: No GST because the property will be included in the life tenant's gross estate anyway.

3. Other Relatives: Leaving property to a niece/nephew is not considered a "skip," but leaving it to a grand niece/nephew is considered a "skip".

4. Non-Relatives: If decedent leaves the estate to a non-spouse or non-relative who is more than 37.5 years younger, GST applies.


Gross Estate - Alternative Valuation Date

The estate representative can select a date which is six months after the date of the decedent's death to value the property in the gross estate if it results in a decrease of the gross estate and the estate tax liability.


Co-ownership of Property: Tenancy in Common/Community Property

The amount included in the decedent's estate is the percentage of ownership of the property which the decedent held.


Co-ownership of Property: Joint Tenancy

When a joint tenant dies, the entire value of the property is generally included in the gross estate.

No valuation discounting is available for joint tenancy property.


Co-ownership of Property: Joint Tenancy Exceptions

1. Contribution: If the executor can prove that the surviving joint tenant made a monetary contribution to the acquisition or improvement of the property, that proportionate share will be deducted from the gross estate.

2. Gift: If both of the joint tenancy interests were acquired by gift, the proportionate ownership interest is included in the gross estate.

3. Spouses: If spouses own property as joint tenants with right of survivorship, only one-half is includable in the gross estate of the first joint tenant to die. Contributions to the purchase and maintenance of the property are irrelevant for spouses.


Income Tax Basis to Survivor: Tenants in Common

Surviving co-tenant gets a "step-up" in basis to its date of death value of only the interest acquired at death.


Income Tax Basis to Survivor: Joint Tenant Spouses

Surviving co-tenant spouse gets a step up in basis on only one-half of property.


Income Tax Basis to Survivor: Non-Spouse Joint Tenants

Surviving joint tenant who did not contribute to the consideration paid for acquisition or improvement of the property gets a full step up.

If the survivor furnished part of the consideration, only that proportionate share of the property contributed by the decedent joint tenant would be stepped up in value.


Income Tax Basis to Survivor: Community Property

The basis to the surviving spouse is equal to the value of the entire property at the death of the first spouse. Holding record title as community property or executing a transmutation agreement will allow a double step up, thus saving income tax.


Transfer with Retained Life Estate - Generally

If the life estate was held by the creator of the life estate, the property is included in full in the gross estate when they die.


Transfer with Retained Life Estate - Retained Rights

If the creator of the power retains the right to the income from the property or the right to affect the enjoyment of the property, it will be included as if it were a retained life estate.


Transfers Taking Effect at Death - Taker Survival

Requires inclusion in the estate of the creator of a gift if:

1. The instrument requires the taker to survive the creator of the power, and
2. The reversionary interest retained must be worth more than five percent in value at the time of the creator's death.

E.g. If the possibility of getting the property back is greater than five percent (on a present value basis), then the full value of the property will be included in the creator's estate.


Revocable Transfers - Generally

If a person creates a trust in which they retain the power to revoke or amend, they are treated as an outright owner of the trust. The entire value of the trust must be included in the grantor's gross estate.


Powers of Appointment - Generally

A right given by a grantor to someone else to determine who will receive property.


Powers of Appointment - General vs. Special Powers of Appointment

General: The open-ended ability to leave the property to whomever one wishes is tantamount to full ownership.

• The full value of the trust property must be included in the gross estate of the holder of the right.

Special: A limited power. Limits the group of persons to whom the property can be left, e.g. children of holder of the power.

• The trust property is not included in the estate of the holder of the right.


Life Insurance - Generally

The proceeds of a life insurance policy are includable in the gross estate of the insured in any of the following three situations:

1. The proceeds are received by the estate of the insured.

2. The proceeds are received by another, such as a creditor, for the benefit of the insured.

3. The decedent held any incident of ownership with respect to the policy.

The owner of a life insurance policy is the person who holds the contractual rights under the policy.

In community property jurisdictions, a spouse's life insurance is deemed to be owned 50% by each spouse in the absence of an agreement to the contrary.


Life Insurance - Incidents of Ownership

Powers such as the right to change beneficiaries, borrow against a cash value policy, and similar contractual rights.

If the insured held any incident of ownership, the policy proceeds must be included in the insured's gross estate.

If the insured did not hold any incidents of ownership, and the proceeds were payable to a named beneficiary, none of the proceeds are includable in the decedent's gross estate.


Life Insurance - Irrevocable Life Insurance Trust

An effective device to avoid inclusion in the insured's gross estate. The insured nor his spouse should be the trustee.


Three Year Rule - Generally

Regardless of when the property was transferred, it is not includable in the gross estate, unless one of four exceptions applies:

1. Termination of a retained life estate

2. Termination of a transfer taking effect at death

3. Termination of a revocable transfer

4. Transfer of ownership of life insurance policy


Three Year Rule - Gift Tax

Gift tax attributable to any taxable gifts which was paid by the decedent within three years of death is includable in the gross estate.


Gross Estate Deductions under §2053

Qualifying deductions under §2053 include:

1. Funeral expenses

2. Administration expenses

3. Claims against the estate


Non-bona Fide Claim

Intended to prevent claims which are not supported by adequate and full consideration in money or money's worth from being used to escape estate tax.


Claims Against the Estate - Amount Considerations

Any disputed claim against the estate over $500,000 cannot be deducted until actually paid.

Disputed aggregate claims not over $500,000 may be deducted prior to actual payment.