©2015, College for Financial Planning, all rights reserved.

Session 5The Federal Estate Tax

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMEstate Planning

Session Details

5-2

Module 3

Chapter(s)

2

LOs 3-3 Analyze a situation to identify property interests included in and items deductible from the gross estate, and credits available to an estate.

3-5 Analyze a situation to calculate the federal estate tax.

Procedure to Determine Assets Included in Gross Estate

• Assets owned at death (some part of which can be transferred after death)o JTWROS propertyo Other ownership types

• Assets with a retained interesto Right to use or get incomeo Right to alter, amend, revoke,

or terminateo Right to get ownership

back (reversion)o Right to determine

beneficial enjoyment

5-3

Procedure to Determine Assets Included in Gross Estate continued

• Assets subject to three-year rule (action occurs within three years of death)o Give up incidents of ownership in LI where transferor is

insuredo Give up retained right (transfer sections)o Paid gift tax out of pocket on gifts made within 3 years

of death (gross up rule)

• General Powers of Appointment• QTIP property—property for which a QTIP

election has previously been made

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Question 1

Which one of the following is not an example of a retained interest that will cause the assets in question to be included in the transferor’s gross estate?a. The transferor places assets in an irrevocable trust

and retains the right to replace the bank that is named as trustee with another bank if he is dissatisfied.

b. The transferor places assets in an irrevocable trust and retains the right to receive the income from trust assets for the rest of his life.

c. The transferor places assets in a revocable trust and names himself as trustee and sole income beneficiary.

d. The transferor gives his child a remainder interest in his house, but retains a life estate for himself.

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Question 2

Which one of the following statements regarding the three-year inclusionary rule (IRC Section 2035) is not correct? a. It requires the decedent to take certain

actions within three years of death.b. The gross-up rule is part of this rule.c. Any insurance policy that a decedent

transfers within three years of death is subject to this rule.

d. A decedent who gives up the right to receive income from a trust he established within three years of his death will be affected by this rule.

5-6

• If by will substitute, DC’s spouse must be:o Named beneficiary (insurance, IRA,

etc.)o Named payee at death (P.O.D., T.O.D.)

• How is property titled? Will determine if property passes by probate or will substituteo JTWROS, TBEo TIC, CP

5-7

Determining if Asset is Entitled to Marital Deduction

Determining if Asset is Entitled to Marital Deduction continued

If by probate, will pass by will or intestacy• Valid will—given to DC’s spouse in several ways

o Specific bequesto Residuary clauseo Marital trust—an income interest in

• Power of appointment trust• Estate trust• QTIP trust with an election

• Intestacy lawso Total intestacy—does not pass by WS; no valid willo Partial intestacy—does not pass by WS; asset passed by

defective will because no residuary clause and asset passes to DC’s spouse

o Amount given to DC’s spouse depends on:• Does DC have any surviving descendants?• Are DC’s descendants also descendants of spouse?• Does spouse have descendants not descendants of DC?

5-8

Determining if Asset is Entitled to Marital Deduction continued

Is the property a non-terminable interest or

a deductible terminable interest?• Definition of terminable interest

o Transferor has given someone other than spouse an interest in the same property; and

o Spouse cannot control where the property will go after his/her interest ends or fails

• Examples of a terminable interest:o Spouse receives an income interest in trust for term

certaino Life estate w/o GPOA or QTIP election

5-9

Determining if Asset is Entitled to Marital Deductioncontinued

Is the property a non-terminable interest or a deductible terminable interest?• Exceptions to terminable interest rule (aka deductible

terminable interests):o Outright gift contingent on survival for 6 months or less

(ET only)o Life estate + GPOA or QTIP electiono Spouse is sole income beneficiary in CRAT/CRUTo QTIP with an election

• Examples of a non-terminable interest not in trust:o Outright transfer not subject to survival clauseo Life estate + GPOA or QTIP election

• Examples of non-terminable interests in trust:o Estate trusto General power of appointment trusto QTIP trust with an election

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Question 3

Which one of the following statements regarding the estate tax marital deduction is not correct? a. The property receiving the deduction must be

included in the deceased spouse’s gross estate. b. If property receives a marital deduction in the

estate of the first spouse to die, it will be subject to transfer taxation when the surviving spouse disposes of the property.

c. The deduction is elective for property placed in a power of appointment trust.

d. If the spouse is given a terminable interest in property as well as a general power of appointment over the same property, the decedent’s estate will be allowed to take a marital deduction.

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Determining if Asset is Entitled to Charitable Deduction

Prerequisites• Qualified charity

• Donation of cash or property

• Gratuitous completed transfer

• If partial interest, must be in approved form

• Asset must be in decedent’s gross estate

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Adjusted Taxable Gifts

• Added to the taxable estate to form the tax base

• Only the taxable portion of gifts made by the decedent since 1976 that are not required to be included in the decedent’s gross estate by the Transfer Sections, the Three-Year Rule, or owning property in JTWROS with a non-spouse

• Addition of these gifts is where the cumulative feature of the federal estatetax is accomplished

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Estate Tax Credits

Gift Taxes PayableOnly gift tax that would have been paid out of pocket by the decedent on taxable gifts made since 1976 using rates in effect in the year of death can be taken as a credit.

Applicable Credit AmountMaximum credit allowed in year of death is used with a few exceptions; amount is not reduced by any gift tax credit used by the decedent as those gifts are being taxed again either by including gifted property in the gross estate or by adding adjusted taxable gifts.

5-14

Life &Times of Jose O’Shea

Following is a complete listing of José O'Shea's gifts (all made on January 2 in

years shown):

4-15

• gave his wife a life estate (valued at $450,000) in a condominium (no QTIP election)

• transferred residence worth $1,000,000 into his and his 3 children's names as JTWROS

• transferred a $500,000 face value insurance policy on his life plus $50,000 in income-producing property to an ILIT

• José's wife is the income beneficiary (at the discretion of the trustee); José's three children are equal remaindermen

• no beneficiary has a Crummey power; replacement value of the policy was $70,000

The Death of Jose O’Shea

José O'Shea died January 1, 2015, survived by his wife and children. Make the following

assumptions:• date of death value of the residence held in

JTWROS with his three children was $1.7 million

• date of death value of José's sole assets (given equally to his children by his will) was $3.5 million

• The date of death value of José's share of remaining joint assets (all owned with his wife as JTWROS) was $500,000

5-16

The Death of Jose O’Sheacontinued

• José's valid funeral and administrative expenses, debts and liens, and casualty losses were $25,000 each

• José's will made no charitable bequests, and his estate paid $34,916 in state death taxes

• All funeral, administrative expenses, debts, and taxes are to be paid from the children's share

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The Death of Jose O’Sheacontinued

Compute José's gross estate:

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Sole property $3,500,000

Joint property 500,000

Residence 1,700,000

Life insurance 500,000

TOTAL $6,200,000

Estate Tax Calculation Worksheet

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(1) Decedent's total gross estate $6,200,000(2) Subtract deductions: ( )

(a) Funeral and administrative expenses ( 25,000 )(b) Debts of decedent, mortgages, and leins ( 25,000 )(c) Theft and casualty losses ( 25,000 )

Equals adjusted gross estate $6,125,000(d) Marital deduction ( 500,000 )(e) State death taxes paid ( 34,916 )(f) Charitable deduction ( 0 )

Equals taxable estate $5,590,084(3) Add adjusted taxable gifts $50,000-201040 + $439,000-2002000-2014 + 439 ,000 489,000

Equals tax base $6,079,084(4) Compute tentative tax using the transfer tax table:

(a) Lower bracket amount $1,000,000(b) Tax on lower bracket amount $345,800(c) Excess over bracket amount $5,079,084(d) Tax rate on excess 40 %(e) Tax on bracket excess amount $2,031,634

Equals total tentative tax $2,377,434(5) Subtract credits:

(a) Gift taxes payable on post-1976 gifts* ( 0 )(b) Applicable credit amount ( 2,117,800 )(c) Credit for taxes on pre-1977 gifts ( )(d) Foreign death tax credit ( )(e) Credit for tax on prior transfers ( )

Equals net estate tax due $259,634

Unified Federal Estate & Gift Tax Rates for 2014

5-20

©2015, College for Financial Planning, all rights reserved.

Session 5End of Slides

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMEstate Planning