Lesson 2 of Estate Planning: Gift and Estate Taxes Flashcards

Question

**Gifts of a Present and Future Interest** - Crumney Provision - The 5/5 Lapse Rule - What Constitutes "Taxable Gift' Under the 5/5 Lapse Rule

Answer 1

A Crummey provision is the **explicit right of a trust beneficiary to withdraw some, or all**, of any **contribution to a trust for a limited period of time, generally 30 days, after the contribution.** This power of withdrawal is **essentially a general power of appointment,** or the **ability of the power holder to appoint assets to himself.** - A Crummey provision (called a power to lapse) **may limit the withdrawal right to an amount equal to the annual exclusion or less**, thus, converting what might have been a gift of a **future interest in trust to a gift of a present interest,** which will then qualify for the annual exclusion. If a trust has **more than one beneficiary,** **the 5/5 Lapse Rule must be applied to determine if the lapse causes a taxable gift from the beneficiary** holding the Crummey power to the other beneficiaries of the trust. Such a taxable gift is a gift of a **future interest** and is **not qualified for the annual exclusion.** Under the **5/5 Lapse Rule,** a **taxable gift is deemed to have been made when a power to** withdraw an amount in **excess of the greater of $5,000 or 5% of the trust assets** has lapsed, or not been used by a beneficiary.

Answer 2

**Gifts made to political organizations are exempt** from gift tax. The term "political organization" means a party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function. **Payments of legal support** obligations are **exempt** from the gift tax rules **Payments made from one spouse to another pursuant to a divorce decree are not gifts.** Rather, they are either nontaxable property settlements with a carryover basis or alimony payments deductible for income tax by the payor and included for income tax by the payee on contracts on or prior to 12/31/18. - A property transfer is considered to be pursuant to a divorce decree if it occurs within one year of the termination of the manage or is related to the cessation or the marriage. **Any transfer within a business setting between business people** is presumed to be compensation for services rendered and is **not a gift.** An **unlimited marital deduction allows for unlimited tax-free transfers between spouses during life.** To be eligible for this unlimited marital deduction, however, the donee spouse must be a **citizen of the United States.** - Non-citizen spouses do not receive an unlimited marital deduction; however, a citizen spouse may transfer $175,000 annually to their non-citizen spouse with no transfer tax consequences. This annual exclusion is sometimes referred to as the "spousal super annual exclusion." There is an **unlimited gift tax charitable deduction** for transfers to the following: - Federal, state, or local government for public use; 501(c)3) corporations operated exclusively for religions, charitable, scientific, literary, or education purposes.

Answer 3

A qualified transfer is a payment made directly to: - **a qualified educational institution** (a qualified educational institution is an educational organization which maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance) for tuition (this does not include room and board, books, supplies, and other similar expenses which do not constitute direct tuition costs) or - a **payment made directly to a medical care provider** for qualifying medical expenses of someone else. - **Qualified transfers are not allocated against the annual exclusion** and do not reduce the applicable lifetime credit.

Answer 4

Answer: A Answers B, C, and D described qualified transfers. Answer A is not a qualified transfer because the payment was not made directly to the healthcare provider.

Answer 5

Answer: D Answer A would not result in gift tax because the gift does not exceed the annual exclusion. Answer B is incorrect because a person can gift an unlimited amount to his or her spouse without incurring gift tax, Answer C is incorrect because transfers in a business setting are presumed to be compensation. If Pete had transferred $22 000 to Patricia pursuant to a divorce decree, there would be no taxable gift, but transfers to an ex-spouse five years after the divorce was final are not considered "transfers pursuant to a divorce decree."

Answer 6

Any donor **who makes a gift during a calendar year must file a gift tax return (Form 709),** **unless** all of the gifts are less than or equal to the annual exclusion, or are not subject to gift tax, such as qualified transfers, transfers to spouses, or transfers to charities. - If a split gift election is made, a gift tax return must be filed by the spouse who makes the gift, or both spouses if both make a gift, even if after the split, the gift is under the annual exclusion. - The gift tax return (Form 709) must be filed by the donor by April 15 following the year of the gift. The filing date can be extended simply by extending the donor's income tax return, but similar to income tax, the time to pay is not extended and penalties will apply. - In the event the donor dies in the year of the gift, the gift tax return must be filed no later than the due date, including extensions, of the estate tax return. The donor is primarily liable for the payment of gift tax, but the donee may be liable in the event that the donor does not pay.

Answer 7

The statute of limitations for the **IRS to assess any additional gift tax is 3 years**, unless the gift is not adequately disclosed on a filed gift tax return. In this case, the **statute of limitations will never expire.** The following steps are used to determine the **gift tax liability** for a particular donor: - Sum the "total gifts" for the calendar year; - Subtract the total exclusions and deductions (annual exclusions, marital deduction, charitable deductions); - Add the donor's taxable gifts for the calendar year (the sum of #1 and #2) to the donor's previous taxable gifts for all prior calendar years; - Calculate the gift tax from the unified estate and gift tax rate schedule; - Reduce the gift tax by the gift tax deemed paid and the lesser of the applicable gift tax credit (85,113,800 for 2023) or the calculated gift tax. (The gift tax deemed paid is the amount of tax that would have been paid if the donor had made the gift today. The deemed-paid amount and the actual amount paid will vary in years when there has been a change in the marginal transfer tax rates.)

Answer 8

If the overall objective of the client is **federal gross estate reduction:** - the client should** gift property that has the greatest potential for future appreciation**, rather than transferring cash or fully appreciated property.

Answer 9

Gifts to **citizen spouses** are not subject to gift tax and may be in any amount. Frequently, large gifts are made to a spouse so that the spouse will have an amount equal to the estate exemption equivalency (512,920,000 for 2023). Such gifts can be outright or in a qualified trust. If the wealthy spouse simply wants to use the lifetime exemption of the nonwealthy spouse they can make use of the **split-gift election** to gift assets to a junior generation and thus use the spouse's credit equivalency.

Answer 10

Gifts to minors, excepting small amounts, are usually made ether in trust or through a custodian-type account. The Uniform Gifts to Minors Act (UGMA) provides that gifted property is transferred to a named custodian under the state UGMA. Permissible gifts include cash, securties, life insurance, and annuities. The custodian is permitted to spend money on behalf of the minor and serves without bond and normally without the need to account. The Uniform Transfers to Minors Act (UTMA) was designed to replace UGMA. The UTMA expands the kind of property that can be transferred from the limited types under UGMA to any property interests. UGMAs and UTMAs are less expensive than establishing trusts and transfers to either are considered gifts of a present interest. The only caution is that UGMA and UTMA's cannot be used to provide what would otherwise be legal support.

Answer 11

One of the most common donor objectives in a gifting program is to **reduce the overall gross estate of the donor.** To achieve this goal, it is generally **never wise to gift cash.** Rather, the donor should prepare a current balance sheet with a forecast of which property (assets) is likely to **experience the greatest appreciation.** Once determined, the donor should select from those assets which are **expected to appreciate the most.** Such a strategy will remove highly appreciating assets from the donor's gross estate and the appreciation will occur in the hands of the donee.

Answer 12

If one of the purposes of gifting is to **minimize future taxes for the donor,** and if there are multiple donees, it is wise to consider which assets to give to which donee. Here is a general set of guidelines: - Never gift property when the FMV is less than the adjusted basis. - Rather, sell the property and let the donor recognize a capital loss for income tax. The donor can then gift the cash proceeds to the donee who can then purchase the property with the proceeds. - Consider gifting property with the greatest appreciation potential to the youngest donee available who has the most time for the asset to appreciate. - When making gifts to charities, always gift appreciated property to avoid the capital gain taxes on the difference between the FMV and the donor's adjustable taxable basis. - For such property, the donor may be able to deduct the fair market value as a the income tax limitations charitable deduction, subject to the income tax limiations. - Gift income-producing property to the done in the lowest marginal income tax bracket so that the income is subject to the lowest possible income tax

Answer 13

Lifetime gifts have significant advantages from a transfer tax point of view compared to testamentary, or at death, transfers (bequests): - First, any appreciation on a gifted asset occurring after the date of the gift is excluded from the donor's gross estate. - Second, any gift tax paid on a taxable gift is excluded from the donor's gross estate if the gift was made more than three years prior to the donor's death. - Third, gifts during life, unlike bequests at death, can utilize the annual exclusion which transfers at most $17,000 (2023) free of transfer taxes. - Fourth, any gift of income-producing property transfers the income from the donor to the donee after the date of the gift and reduces the donor's gross estate. - Finally, payments of support and the expenses that would be considered qualified transfers during life are excluded from the calculation of gift tax. The estate tax calculation includes the transfers for future support and for reasons that would otherwise be a qualified transfer.

Answer 14

When a citizen or resident of the United States dies: - an estate tax is imposed on all property owned directly or indirectly by the decedent at the time of death. The following chart is an abbreviated version of the estate tax formula:

Answer 15

The starting point for determining the **estate tax due on a decedent's estate** is to: - calculate the value of a decedent's gross estate, which can be defined as the FMV of all interests owned by the decedent at his time of death. A decedent's gross estate may also include: - the FMV of certain property interests the decedent transferred during his lifetime, however, - as well as the decedent's interest in any jointly held property and, in some cases, the proceeds of life insurance on the decedent's life.

Answer 16

**Dower and Curtesy Interest (IRC Section 2034):** - The common law concepts of dower and curtesy were developed to require that a surviving spouse receive a statutory share of their deceased spouse's estate. - IRC Section 2034 includes the FMV of any property subject to dower, curtesy, or elective share rights in a decedent's gross estate. **Gifts Made Within Three Years of Death (IRC Section 2035):** - IRC Section 2035 requires a decedent's gross estate to include: - (1) any gift tax paid on gifts made within three years of the decedent's date of death, - (2) the value of any property gifted within three years of the decedent's date of death if the decedent retained an interest, and - (3) the death proceeds of any life insurance policy insuring the decedent's life that was gifted within three years of the decedent's date of death.

Answer 17

Any **gift tax paid **on gifts made **within 3 years** of a decedent's date of death **must be added to the gross estate.** Note that the **actual value** of the gifts made within 3 years of the decedent's date of death are **NOT included** in the gross estate.

Answer 18

Answer: A Gift tax paid on gifts made within three years of a decedent's date of death is included in the decedent's gross estate. In this case, Bernard made the gift more than three years before his death, so $0 is included in his gross estate related to this gift. The value of the gift, $5,000,000 is added to the decedent's taxable estate to determine the tentative tax base and Bernard will get credit for the gift tax paid of $175,000

Answer 19

The value of property gifted by the decedent within three years of his death which would otherwise have been included in the decedent's gross estate under Sections 2036 (transfers with a life estate), 2037 (transfers taking effect at death), or 2038 (revocable transfers) must be included in the decedent's gross estate.

Answer 20

Answer: A Nothing is included in Gene's gross estate. The full FMV of the trust is excluded from Gene's gross estate because the transfer to the trust was irrevocable and Gene did not retain any right to the trust's assets. Furthermore, because more than three years have passed since the transfer, the gift tax paid will not be included in his gross estate

Answer 21

Under Section 2035, the proceeds of a life insurance policy on the life of the decedent will be **included in the decedent's gross estate** if, within 3 years of the decedent's death, the decedent made a gratuitous **completed transfer** of the policy. If the decedent **continued to pay premiums on a policy gifted within three years** of death the premium payments would be a gift eligible for the annual exclusion (if a present interest), and any gift tax paid on the gift may be **included in the decedent's gross estate** under Section 2035.

Answer 22

Answer: D The death benefit of a life insurance policy transferred within three years of the decedent's date of death is included in the decedent's gross estate. In this case, Lori transferred the policy one year before her death, so the full death benefit of $2,000,000 is included in her gross estäte.

Answer 23

A decedent's gross estate includes: the value of any interest in property transferred by the decedent in which he **retained some interest in the property during his life.**

Answer 24

A decedent who **retains or reserves an interest in transferred property for his life** must **include the value of that property in his gross state** under IRC Section 2036. An example of this situation is when the decedent transfers property but retains the use or enjoyment of such property for his life.

Answer 25

Answer: C Carolyn's gross estate would include the fair market value of the home at her date of death, but not the value of the trust listed in #2. The transfer listed as #1 would be included in Carolyn's gross estate because Carolyn retained an interest in the home that terminated at her death. Therefore, the full fair market value of the transferred property would be included in the transferor's gross estate at the time of the transferors death. No amount related to the transfer listed as #2 would included in Carolvns gross estate because her annuity interest terminated before Carolyn's death.

Answer 26

A decedent who retains an interest in property for any period not ascertainable without reference to the decedent's death **must include the fair market value, determined at the decedent's date of death, of the property in his gross estate** under IRC Section 2036.

Answer 27

When a decedent transfers property and retains or reserves an interest for any period of time, and that interest does not in fact end before the decedent's death, the **fair market value of the property at the decedent's date of death must be included in his gross estate.** **The inclusion also applies when: the decedent** - retains the use, - possession, - right to the income, - other enjoyment of the transferred property, or - the right, either alone or with another person, to designate the person, or persons, who shall possess or enjoy the transferred property or its income.

Answer 28

A **decedent's gross estate includes the FMV at the decedent's date of death of any interest in property transferred by the decedent** if the transfer was conditioned on all of the following: - possession or enjoyment of the property can be obtained only by **surviving the decedent**, and - the decedent has **retained a reversionary interest** in the property, and - the value of such reversionary interest immediately before the death of the decedent **exceeds 5% of the value of such property**

Answer 29

A reversionary interest is any interest which includes a possibility that the property transferred by the decedent **may return to him** or his estate or the possibility that property transferred by the decedent may become subject to a power of disposition by him. The FMV of a decedent's reversionary interest is calculated as of the **moment immediately before his death,** and use of the alternate valuation date does not apply. To determine whether or not the decedent retained a reversionary interest in transferred property of a value in excess of 5%, the FMV of the reversionary interest in the property is compared with the FMV of the transferred property, including interests in the property which are not dependent upon survivorship of the decedent.

Answer 30

A decedent's gross estate includes the FMV at the decedent's date of death of any interest in property transferred by the decedent if the enjoyment of the interest was subject, at the date of the decedent's death to any change through the exercise of a power by the decedent to alter, amend, revoke, or terminate, or if the decedent relinquished such a power in contemplation of death. **Section 2038 does not apply:** - To the extent that the **transfer was for full and adequate consideration,** or - If the decedent's **power could be exercised only with the consent of all parties having an interest** (vested or contingent) in the transferred property, and if the **power adds nothing to the rights of the parties under local law**, or - To a **power held solely by a person** other than the decedent.

Answer 31

A **straight single life annuity** is an annuity paid to the annuitant until his death. A decedent who owned a straight life annuity before his death will not include any amount related to the annuity in his gross estate since the annuitant's interest in the contract terminated at his death. A **survivorship annuity is an annuity** that provides payments to one person, and then provides payments to a second person upon the death of the first. - When the first annuitant dies, the value of a comparable policy on the second annuitant is included in the first annuitant's gross estate. - If the second to die has contributed to the purchase of the policy, then only the proportionate value of the annuity is included in the gross estate of the first to die. Under Section 2039, the value of the survivorship annuity included in a decedent's gross estate is based on the ratio of the decedent's contributions to the survivorship annuity's total cost to the total cost of the survivorship annuity.

Answer 32

A decedent's gross estate includes the FMV at a decedent's date of death of any property **jointly held by the decedent and another person with a right of survivorship.** To prove that the entire value of jointly held property does not have to be included in a decedent's gross estate,: - the executor must submit facts sufficient to show that property was not acquired entirely with consideration furnished by the decedent, - or was acquired by the decedent and the other joint owner or owners by gift, bequest, devise, or inheritance

Answer 33

A Power of Appointment is the power to name who will enjoy or own property. The gross estate of a decedent includes any assets over which the decedent held a general power of appointment **at the time of his death.** If the right to exercise is held to an ascertainable standard (health, education, maintenance, or support), then the power is not a general power of appointment and the property is** not included in the decedent's gross estate.** If the right to exercise requires approval of the holder and someone else (who is termed an adverse party - someone who has an interest in the property), then the power of appointment is **not included in the decedent's gross estate.** If the right to exercise is limited to the greater of $5,000 or 5% of the aggregate value of the property each year, referred to as a "5-and-5" power and the power lapses before the decedent's death, then the power of appointment is **not included in the decedent's gross estate.** The "5-and-5" power is designed to limit the withdrawal right to a de minimis amount and penalize those withdrawals that exceed the de minimis amount.

Answer 34

IRC Section 2042 includes the **death benefit proceeds of a life insurance policy** on the life of the decedent in the decedent's gross estate if, at the decedent's death, **either the proceeds were receivable by the decedent's estate or the decedent possessed any incident of ownership** in the policy. **Inclusion Under Other Sections of the IRC:** - Generally, the amount to be included in a decedent's gross estate under Section 2042 is the **full death benefit payable from the life insurance policy.** If the proceeds of the life insurance policy are made payable to a beneficiary in the form of an **annuity for life, or for a term of years,** the amount to be included in the decedent's **gross estate is the value of the available lump-sum payment at the decedent's death** - If the proceeds of a life insurance policy made payable to the decedent's estate are **community property** under the local community property law and, as a result, **one-half of the proceeds belongs to the decedent's spouse**, then only one-half of the proceeds is included in the decedent's gross estate.

Answer 35

An **incident of ownership is the right of the insured, or his estate, to enjoy the economic benefits** of the policy and includes the power to: - change the beneficiary, - surrender or cancel the life insurance policy, - assign the life insurance policy, - revoke an assignment, - pledge the life insurance policy for a loan, or - obtain from the insurer a loan against the surrender value of the policy, etc. A decedent is considered to **have an incident of ownership in a life insurance policy on his life** held in trust if the decedent has the power to: - change the beneficial ownership in the policy or its proceeds, or - the time or manner of enjoyment even though the decedent may not have a beneficial interest in the trust. Thus these would be included in the decedent gross estate.

Answer 36

Answer: D Answer a is incorrect because the proceeds of the policy would be included in the estate if the proceeds are payable to the estate. Answer B is incorrect because the decedent is considered to have an incident of ownership in the policy if he retains the right to change the beneficiary of the policy. Answer C is incorrect, under IRC Section 2035, the proceeds of a policy transferred within three years of death are included in the gross estate of the transferor.

Answer 37

**A marital deduction will be allowed:** - **for property included in the gross estate** of the first spouse to die and transferred to the surviving spouse if a **QTIP election is properly made at the death of the first spouse.** - When such an election is made, then the property must be** taxed in the surviving spouse's gross estate.**

Answer 38

**The valuation of property included in a decedent's gross estate is either:** - the FMV at the decedent's date of death, or - if properly elected by the executor, the value at the alternate valuation date. **FMV is the value that would be paid for the property in a transaction where:** - there is a willing buyer and willing seller, - where neither party is acting under compulsion, and - where both parties have full knowledge of the facts.

Answer 39

Hard-to-value assets such as real estate, art, jewelry, antiques, collectibles, and closely held business interests usually require an appraisal. Closely held businesses are difficult to value because of the unique characteristics of each. The value of **closely held businesses may be significantly reduced** by using various valuation discounts. - A minority discount is a reduction in the value of an asset transferred and is often allowed if the asset transferred represents a minority interest in a business. - For transfer tax purposes, minority discounts (when available) often range between 15% to 50% - A lack of marketability discount is a reduction in the value of an asset transferred and is often allowed if the asset transferred has an inherent lack of marketability. - Lack of marketability discounts typically range between 15% to 50%, and can be used for both minority and majority interests. A lack of marketability discount can be used in combination with a minority discount to produce an even larger overall discount. - A blockage discount is a discount attributable to the value of large blocks of corporate stock that are listed on a public exchange. - The theory behind a blockage discount is that a large amount of stock included in the decedent's gross estate cannot be liquidated at one time without a decrease in the stock's market price. - A discount may be allowed for a business in which a key person has died or becomes disabled, called a key person discount.

Answer 40

The FMV of a financial security is the average of the **high and low** trading price for the decedent's death of date or the alternative valuation date. If the valuation date is a **weekend**, the valuation of the financial security is the average of the applicable values for the trading day **before and the trading day after.**

Answer 41

If the financial security included in the decedent's gross estate is a: - bond or any other type of interest-bearing instrument, **any interest accrued,** but not paid to the decedent at the decedent's date of death, is added to the value of the instrument.

Answer 42

If the financial security included in a decedent's gross estate is a dividend-paying stock: - the **value of any declared dividends** at the decedent's **date of death** may also be **included in the decedent's gross estate.** The following graphic depics the effect of a dividend on the stock price at various points.

Answer 43

If the Stock is **not traded on the decedent's date of death**, then the follwing formula must be used.

Answer 44

Answer: A Since the stock is not traded on the date of Eric's death, the value is determined as follows: [($103 × 5) + ($104 x 2)] = 7 = $103.29 x 1,000 shares - $103,290. Saturday and Sunday are not counted as trading days for purposes of the calculation.

Answer 45

The value of life insurance included in the gross estate of the insured will be its **face value (the death proceeds).** If an **annuity settlement option is chosen by the beneficiary**, the amount includable in the decedent's gross estate will be **the amount that would have been payable as a lump sum** (generally the death proceeds).

Answer 46

To determine the adjusted gross estate, **certain deductions are taken from the gross estate** in recognition that the **entire value of the gross estate will not be transferred to the heirs** because of these costs, debts, and other deductions. The **overall presumption is that the estate will be subjected to tax on the value transferred to the surviving heirs.** - The adjusted gross estate is determined by deducting the following items from the gross estate: - Funeral expenses; - Last medical expenses; - Administrative expenses; - Debt of the decedent - Losses during estate administration; and

Answer 47

**The Charitable Deduction** - An unlimited charitable deduction is allowed for the value of assets included in the decedent's gross estate which are transferred to a charitable organization at the decedent's date of death. **The Unlimited Marital Deduction** - An unlimited marital deduction is allowed for the value of assets included in the decedent's gross estate which are transferred to the decedent's surviving spouse. **The Taxable Estate** - The taxable estate is the adjusted gross estate less the unlimited charitable and marital deductions. **State Death Tax Deduction** - A deduction for estate, inheritance, legacy, or succession taxes paid to any state or territory.

Answer 48

**Post-1976 Taxable Gifts** - All taxable gifts after 1976 must be added to a decedent's taxable estate. - These gifts are added back at the FMV as of the date of the gift. These values can be directly determined from an individual's previously filed gift tax returns. **The Tentative Tax Base** - The tentative tax base is the amount used to determine the tentative tax, the total transfer (estate and gift) tax on all transfers during an individual's life and at the individual's death. - The tentative tax base equals the sum of taxable estate plus the post-1976 taxable gifts. **The Tentative Tax** - The tentative tax is the total transfer taxes, estate and gift, on all property transferred by the decedent during his life and at his death. It is determined by applying the tax rate from the unified tax rate schedule to the tentative tax base (the combined value of the taxable estate and post-1976 taxable gifts). - The tentative tax is then reduced by the total gift tax paid during the individual's life, or payable on gifts included in the tax base to give the decedent credit for the tax paid on the post-1976 taxable gifts added when determining the tentative tax base. The estate tax remaining after the reduction for the gift tax paid may be further reduced by certain available credits as discussed below,

Answer 49

Exam Tip: Know the Amount of tax due on a $1,000,000 gift ($345,800). This is not a provided number and will be useful. I thought the graph is provided.

Answer 50

The tentative tax less the gift tax paid during a decedent's life is further reduced by: - certain available credits such as the applicable estate tax credit (unified credit), - the credit for tax on prior transfers, and - the foreign death tax credit. **Applicable Estate Tax Credit (Previously Called the Unified Credit):** - The applicable estate tax credit equivalency amount will exclude up to **$12,920,000** (for 2023) **of cumulative taxable transfers** during an individual's lifetime or at death from gift or estate transfer tax. - The applicable estate tax credit equivalency can be defined as the taxable FMV of the property that transfers without creating an estate tax greater than the **applicable estate tax credit.** The applicable estate tax credit for 2023 is **$5,113,800.**

Answer 51

The federal estate tax liability is equal: - to the tentative tax less any applicable credits available to a decedent's estate.

Answer 52

Answer: B Subtract the charitable deduction from the adjusted gross estate to get the taxable estate (513,500,000 - $500,000 = $13,000,000). The tentative tax on the taxable estate is $5,145,800, calculated from: $345,800 + (40% * 12,000,000). Subtract the applicable estate tax credit to determine the federal estate tax liability of $32,000, calculated from $5,145,800 - $5,113,800.

Answer 53

The federal estate tax return, Form 706, must be filed if a **decedent's gross estate, plus adjusted taxable gifts, is greater than the applicable estate tax credit equivalency** (also called the applicable estate tax exclusion amount) for the year of death. When required, Form 706 and the payment of any estate tax owed is **due nine months after the decedent's date of death.** The executor may request an extension to file the return for an additional six months by filing IRS Form 4768 within nine months after the decedent's date of death. The executor may also request an extension of time, not to exceed 12 months, to pay the estate tax due if the request is based upon reasonable cause. Any estate tax that cannot be paid at the original due date of the estate tax return will begin to accrue interest, and if an extension has not been granted, penalties will also accrue (as discussed below). Some examples follow that illustrate cases involving reasonable cause for granting an extension of time to pay.

Answer 54

The **failure-to-file penalty is** 5% per month up to a maximum penalty of 25 percent. If the failure-to-file is determined to be fraudulent, the penalty is increased to 15% per month up to a maximum of 75%. The **failure-to-pay penalty is **0.5% per month up to a maximum penalty of 25%. If, in one month, **both the failure-to-file penalty and the failure-to-pay penalty apply,** the failure-to-file penalty is reduced by the failure-to-pay penalty. For purposes of this calculation, any fraction of a month counts as a full month - The reduction of failure to file does not eliminate the need to also pay the failure to pay penalty. Watch if it asks for both penalties.

Answer 55

Generally when an heir receives property from a decedent: - the adjusted basis for income tax purposes of such property is the property's FMV as reported on the decedent's estate tax return. The holding period of property acquired from a decedent is always deemed to be **long-term** (i.e., held for the required long-term holding period. - This provision applies regardless of **whether the property is disposed of at a gain or loss** and regardless of decedent's holding period.

Answer 56

If an heir receives property from a decedent that was acquired by the decedent through a gift from the same heir **within one year of the decedent's death**, the heir/donor **takes the decedent's basis** (which will be the donor's basis). - The heir/donor does **not receive a step-to fair market value** in the adjusted basis of the property.

Answer 57

A decedent's share of property owned joint tenancy with rights of survivorship will pass to the surviving property owners. After the decedent's death, the **survivor determines his basis** in the property by: - **adding the value of the property included in the decedent's gross estate (Step to FMV) to his (the survivor's) original adjusted basis.**

Answer 58

Community property does not have an automatic right of survivorship at the death of one spouse and at the death of a decedent who owns community property with his spouse, only **one-half** of the FMV of the property is included in the decedent's gross estate. An heir who receives a decedent's one-half of community property will receive the one-half interest **with an adjusted basis equal to the FMV at the decedent's date of death** or the alternate valuation date, whichever is used on the decedent's estate tax return. The surviving spouse's one-half interest in community property will also receive **a step-to fair market value at the decedent's date of death even though it was not included in the decedent's gross estate.** This special treatment which gives a step-to fair market value adjusted basis to both halves of the property interest at the death of one spouse is **only applicable to community property.** Community property receives an adjustment in adjusted basis to the fair market value on both spouses' shares at the death of the first spouse.

Lesson 2 of Estate Planning: Gift and Estate Taxes Flashcards

(90 cards)