I need short answer for the questions in the fileChapter 6
Estate Tax
Estate Planning, Spring 2020
What is the federal estate tax?
• When a citizen or resident of the United States dies, an estate tax is
imposed on the decedent’s transfer of property to his heirs or
• The estate tax applies to all transfers at death of property owned by
the decedent or property over which the decedent had a sufficient
interest to require the inclusion in the gross estate that exceed certain
• The estate tax is coordinated with the gift tax by including taxable
gifts in the estate tax calculation.
What is the federal estate tax?
• The manner in which property is transferred is generally irrelevant to
the calculation of estate tax provided that the decedent’s property is
being transferred at death.
• For U.S. citizens and residents, estate tax is imposed on worldwide
• Non-U.S. Citizens who are also non-residents pay estate tax on only
on the assets located in the U.S.
Status of Decedent
• U.S. Citizen
• Non-U.S. Citizen who is a “resident”
• Needs to be “domiciled in the U.S.” with no present intention of leaving
• Facts and Circumstances Test (see next slide)
• Non-U.S. Citizen who is a “non-resident”
• If you fail the domicile provisions or the Facts and Circumstances test, you will be a
• Totally possible to be a resident for income tax purposes, but not for estate
and gift tax purposes!
• It is possible that two or more countries will consider the same person a
domiciliary, and/or that certain assets may be subject to estate or gift tax in
more than one country.
Facts and Circumstances Test
• Statement of intent (in visa applications, tax returns, will, etc.)
• Length of US residence
• Green card status
• Style of living in the US and abroad
• Ties to former country
• Country of citizenship
• Location of business interests
• Places where club and church affiliations, voting registration, and
driver licenses are maintained
The Gross Estate
• The decedent’s gross estate is defined as the fair market value of all
interests owned by the decedent at the time of death.
• Unfortunately, the decedent’s gross estate may also include certain
property interests the decedent transferred during his lifetime, 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.
Sections to Know

2033 – Property owned at death

2034 – Dower and curtesy interests

2035 – Gift tax paid within 3 years of death and gifts made within 3 years of death under 2036,
2037, 2038, and 2042

2036 – Transfers with a retained life interest

2037 – Transfers with a reversionary interest
Sections to Know cont.

2038 – Revocable transfers

2039 – Annuities

2040 – Jointly owned property

2041 – Powers of appointment

2042 – Proceeds of life insurance

2044 – QTIP property
Property Owned by the Decedent
Section 2033 of IRC (26 U.S.C. § 2033)
• All property in which the decedent had an interest at death (essentially the probate estate)
• Examples: cash, stocks, bonds, retirement accounts, autos, clothes, etc.
• Rental income accrued before death
• Cash surrender value of a life insurance policy owned on the life of another
• State income tax refunds
• Medical insurance reimbursements
• Awards for pain and suffering (but not wrongful death)
• See Exhibit 6.4 on page 179.
Dower & Curtsey: Section 2034
• Dower – Originally the right of the wife to receive a life estate
between 1/3 and 1/2 of the land owned by the husband at the
husband’s death if one or more child was born. Now more in line
with curtesy (life estate in land)
• Curtesy – Husband’s right to receive a life estate in land owned by the
wife at the wife’s death if one or more child was born
Gifts Made Within Three Years of Death
• Any gift tax paid on gifts made within three years of death
 Not the actual amount of the gifts
• Gifts given within the last three years if the gift was a:
 2036 – Transfer with a life estate
 2037 – Transfer taking effect at death
 2038 – Revocable transfer
 2042 – Transfer of life insurance on the life of the decedent
• Premiums paid on a policy not owned are not included
Transfers with a Retained Interest: Section
• Property transferred where the decedent retained an interest
Express or implied understanding
Retained interest for life (see example 6.6.)
Retained interest for period not ascertainable without reference to death (see
example 6.7)
Reserved for period that does not end before death (see example 6.8)
Transfers Taking Effect at Death: Section 2037
• Property transferred where:
Possession of enjoyment requires the beneficiary to survive the decedent
Decedent has retained a reversionary interest
 A reversionary interest is any interest that includes a possibility that the property
transferred by the decedent may return to his estate, or that the property transferred may
become subject to a power of disposition by him (power of appointment).
Value of reversionary interest is > 5% then not included.
• Moment immediately before death…no alternate valuation available
Revocable Transfers: Section 2038
• A decedent’s gross estate includes the fair market value at the date of
the decedent’s death of any interest in property transferred by the
decedent IF the enjoyment of the interest was subject, at the date of
death, to any change through the exercise of a power by the
decedent to alter, amend, revoke, or terminate the gift, or if the
decedent relinquished these powers in contemplation of death
• Revocable Living Trusts
• Section 2038 does not apply to: (1) transfers for full consideration; (2)
if the decedent’s power could only be exercised with consent of all
parties having an interest and if power adds no rights to parties under
local law; or (3) to a power held solely by a person other than the
Annuities: Section 2039
• Straight single life annuity: 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.
• Survivorship annuity: an annuity which is paid to one person during their
life, and then at their death, to another.
• 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.
• Gross Estate Inclusion = (Value of annuity at decedent’s death x (decedent’s cost
basis/total annuity cost basis)
Joint Interests: Section 2040
• Section 2040 requires the inclusion of the following in the decedent’s
gross estate:
• Property held by the decedent as JTWROS
• Property held by the decedent and spouse as tenants by the entirety
• A deposit of money, or a bond, or other instrument owned by the decedent,
but held in the name of the decedent and any other person, which is payable
to either the decedent or a survivor.
• If the property was acquired through gift, devise, or descent, the
decedent’s fractional share is included in the estate.
• In all other cases, you apply the actual contribution rule for valuation
(doesn’t apply to spouses).
Powers of Appointment
• A decedent’s gross estate includes the value of property over which the
decedent possessed certain powers of appointment. See Ch. 3.
• Only GENERAL powers of appointment held by the decedent are includible
in the gross estate.
• Limited (sometimes called special) powers of appointment are not.
• A general power of appointment is one that allows the holder to appoint
the property to the holder, the holder’s estate, to the holder’s creditors, or
to the creditor’s of the holder’s estate.
• If it’s not general, it’s limited.
• Five and Five Power: if the right to exercise is limited to the greater of
$5,000 or five percent of the value of the property, and the power lapses,
then the power of appointment will not be included in the gross estate.
Life Insurance Proceeds: Section 2042
• The death benefit proceeds will be included on a policy on the
decedent’s life if the proceeds were receivable by the decedent’s
estate OR the decedent retained any incidents of ownership.
• The value of a split-dollar life insurance policy will be included where
the insured possessed an incident of ownership in the policy even
though the proceeds may be payable to a third party (usually an
Life Insurance Proceeds: Section 2042 cont.
• Usually, it’s the full death benefit which is included in the gross
• If the proceeds of the life insurance policy are payable to the beneficiary as an
annuity for the beneficiary’s life (or term of years), the amount includable in
the decedent’s gross estate is the value of the available lump-sum payment at
the decedent’s death. If there is no lump sum available, then the amount
used by the insurance company to determine the annuity payment.
• If the policy is subject to the beneficiary’s obligation to pay taxes, debts, or
other charges enforceable against the estate, then the amount of the
proceeds required for the payment are includible in the gross estate.
Life Insurance Proceeds: Section 2042 cont.
• What are incidents of ownership?
• An incident of ownership is the right of the insured to enjoy any of the
economic benefits of the policy.
• Ex: right to change beneficiary, surrender or cancel the policy, assign the policy, revoke
an assignment, or pledge the policy for the loan.
• If the decedent possessed incidents of ownership on a policy on his
life, but made a gift of the policy within three years of his death, then
the proceeds would be included in his gross estate.
• A decedent must also include in his estate the value of rights in a life
insurance policy on the life of another person.
Valuation of Assets at Death
• Either fair market value at date of death or fair market value at the
alternate valuation date.
• The alternate valuation date is provided to give relief to a decedent
who happened to die on a date where his gross estate had a high
value due to temporary market conditions.
• Under this election, all assets are valued at the date six months after the
decedent’s death or on the asset’s date of disposition if it should occur earlier
that the six-month date
Alternate Valuation Date Summary
• To qualify fort he alternate valuation date:
• The total value of the gross estate must decline after the date of death AND
the total estate tax must be less than the estate tax calculated using the date
of death values.
• Valuation if alternate valuation is properly elected:
• All assets will be valued at the alternate valuation date
• Except:
• Assets distributed or sold after the death but before the alternate valuation date, which are
valued at the date of distribution or sale.
• Wasting assets must be valued at date of death.
• Ex: annuitized annuities, patents, royalties, installment notes, lease income, value of
reversionary interest.
Closely Held Businesses
 Valuation discounts
• Minority discount
• A minority interest is any interest that is not a controlling interest. Minority interest
owners cannot manage the business or compel its sale or liquidation.
• Lack of marketability discount
• Interest in a closely held business and partnership interests are more difficult to sell
than interests in more marketable assets such as publicly traded stock.
• Blockage discount
• A discount may be available because a large block of stock is often less marketable
than smaller amounts of stock. The actual amount of the discount would be based on
the decrease in the realizable price below the current market price of the stock
• Key person discount
• Discount is based on the economic reality that the value of a closely held business
may be tied to a person. The discount may be reduced by the value of the key person
life insurance proceeds payable to the business on the death of the key person.
Financial Securities
• For securities, you take the high and low trade for the day and
average them to obtain the value.
• Any accrued, but unpaid interest, is added to the value of the
• Accrued dividends require you to look at the dividend payment dates.
See next slide.
Securities Not Traded on the Valuation Date
• If the stock is not traded on the decedent’s date of death, the value of
the stock according to the IRS regulations should be:
Dividend Payment Dates (see exhibit 6.6)
• Dividend declaration date
• The date the company declares a dividend payment.
• Ex-dividend date
• Usually two days before the record date. The day before the ex-dividend date is the
last day the stock can be purchased in order to receive the dividend payment.
Investors who purchase stock on the ex-dividend date or after will not receive the
dividend payment. Instead, the seller of those shares will receive the dividend.
• Record date
• The date of record is the date the company determines who owns the company
stock for the purposes of receiving the dividend.
• Payment date
• The date on which the dividend will actually be paid.
Deductions from the Gross Estate
To determine the adjusted gross estate, certain deductions are taken from the gross
estate in recognition that the total value of the gross estate will not be transferred
due to the presence of these costs.
• Funeral expenses
• Last medical expenses
• Administration expenses
• Debts
• Losses during administration
Deductions to Determine the Taxable Estate
• The taxable is the adjusted gross estate less the unlimited charitable
and marital deductions. The total of all post-1976 gifts are added to
the taxable estate to determine the tentative tax base.
• Unlimited charitable deduction
• Unlimited marital deduction
• State death tax deduction
Determining the Tentative Tax
• Tentative tax base is the sum of the taxable estate plus the post-1976
taxable gifts.
• Tentative tax is the total transfer taxes, estate and gift, on all property
transferred by the decedent during his life and at his death.
• The tentative tax is then reduced by the total gift tax paid during the
individual’s life, or on payable 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 abse.
Estate Formula
• Adjusted Gross Estate
• Less Marital Deduction – discussed in Chapter 10
• Less Charitable Deduction – discussed in Chapter 9
• Equals Taxable Estate
• Plus Post ‘76 Gifts – added back to gross up
• Equals Tentative Tax Base
Credits from the Tentative Tax
• Applicable estate tax credit
• The credit for tax on prior transfers
• The foreign death tax credit
• Exemption Portability among spouses (see slides)

Applicable Estate Tax Credit

$2,125,800 for 2016

$2,141,800 for 2017

$4,417,800 for 2018

$4,505,800 for 2019

$4,577,800 for 2020

Prior Transfer Credit
 Credit for estate taxes paid within the last 10 years
 See credit schedule
 Foreign Death Taxes Credit – tax paid on property outside the U.S.
• The DSUE is the lesser of:
• The basic exclusion amount OR
• The excess of the applicable exclusion amount of the last such deceased
spouse of such surviving spouse or the amount of the exemption previously
used on the estate tax return of such spouse.
• DSUE only applies to the last deceased spouse’s unused exemption
amount. If a surviving spouse remarries, and dies prior to the new
spouse, any exemption from the first deceased spouse will be lost.
Foreign Death Tax Credit
• A credit is allowed against the calculation of the federal estate tax for
any estate, inheritance, legacy, or succession taxes paid to a foreign
country. The credit is only allowed for foreign death taxes paid:
1. With respect to property situated within the country in which the tax is
2. With respect to the property included in the decedent’s gross estate; and
3. On behalf of a decedent who was a citizen or resident of the U.S. at the
time of death.
Estate Tax Liability
• Estate tax is paid by the executor or the administrator
• If there is no executor or administrator, then the person in receipt of
the property must pay
• If the executor distributes to heirs before paying tax, then the
executor may be personally liable
• Executor must timely file Form 706 and elect to transfer any unusual
estate tax credit exclusive to surviving spouse.
Paying and Reporting Taxes
• Return
 Form 706 is due 9 months after death
 Extension to file (but not to pay) can be granted for an additional 6 months
• Penalties
 Failure to file – 5% per month up to 25%
 Failure to pay – 0.5% per month up to 25%
 Failure to file is reduced by failure to pay
Adjusted Taxable Basis to Heirs
• The basis to an heir/ legatee for assets received = FMV at death or
the alternate valuation date if properly elected. Called a “step up” in
• Except:
Gifts that revert back to the original owner that were transferred one year
before death (no step up—takes the decedent’s basis)
 Survivor’s basis is determined by adding the value of the property included in the
decedent’s gross estate to his original adjusted basis.
IRD assets (IRAs, qualified plans, etc.)
• Holding period = long term for all non IRD assets
• Basis must now be reported by the executor to IRS and to heirs
Problem 1
• Dusty gives his daughter, Amelia, his lake house in Horseshoe Bay. The
fair market value of the gift is $4,000,000. No gift tax was paid. Dusty
dies within two years of making the gift.
• Is the gift of the lake house includable in his gross estate?
• What if Dusty continued to use it every weekend?
Problem 2
• Santa owns 850 shares in North Pole, Inc. His partner, Rudolph, owns
150 shares in North Pole, Inc. There are no other shareholders.
• Rudolph cannot run this operation without Santa. Santa dies from
exhaustion on December 26, 2018.
• On Santa’s estate tax return, what would we want to consider when
valuing his shares?
Problem 3
• Lindsey is married to Bartlet. At Lindsey’s death, she left all of her $30
million dollar estate to the National Parks Foundation. She made
$11.58 million dollars worth of gifts in 2020. She made no taxable
gifts in previous years.
• Calculate Lindsey’s estate tax obligation!
Problem 4
• Junie has a taxable estate of $14 million.
• She made $10 million dollars worth of taxable gifts since 1976.
• What is Junie’s tentative tax base?
*Tentative tax would be calculated on the tentative tax base.
Problem 5
Gretchin died on October 13, 2019. All of her assets have steadily
declined in value because the market conditions at her date of death
were temporarily high. Gretchin’s assets were valued at $13 million at
her date of death. On January 1, 2020, we estimate the value of such
assets to be approximately $12 million.
What should Gretchin’s executor contemplate electing on her estate tax
Problem 6
Michael established a revocable living trust during his life to hold his
$15 million in assets. He retained the right to amend or revoke his
At Michael’s death, what portion of the assets will be includable in his
gross estate?
Problem 7
Nancy received 100 shares of stock at her uncle’s death. At the date
death, each share traded at a high of $300.00 and a low of $250.00.
When her uncle purchased the stock in 1985, he purchased it for
$60.00 per share.
What is Nancy’s basis in the stock?
Nancy sold the stock three years after she received it for $400.00
for share? What is the realized gain?

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