TAXES > Estates (706)

Estate Tax

The federal estate tax is imposed on the transfer of an individual's property at death and on other transfers considered to be the equivalent of transfers at death. The tax is imposed on the "taxable estate," which is the value of the total property transferred or considered transferred at death (the "gross estate"), reduced by various deductions. The tax is computed under a unified rate schedule under which lifetime taxable gifts and transfers at death are taxed on a cumulative basis. In determining the tax on estates of decedents who at death were citizens or residents of the U.S., the entire estate is considered.

Computation of estate tax

First, compute a tentative tax under the unified rate schedule at on the total of: (1) the amount of the taxable estate, and (2) the total amount of taxable gifts made by the decedent after 1976 that aren't includible in the decedent's gross estate. Increase this tentative tax by an amount equal to 5% of so much of the amount (with respect to which the tentative tax is computed) as exceeds $10,000,000, but doesn't exceed the amount at which the average tax rate is 55%. Then reduce this amount by the amount of gift tax payable on the decedent's post-1976 gifts to get the gross estate tax payable (before credits). The net estate tax payable is the gross estate tax minus the unified credit, and allowable credits for state death taxes, gift taxes on pre-1977 gifts, estate taxes on earlier transfers and foreign death taxes.

Computing the taxable estate

To get the taxable estate, deduct the following from the gross estate:

1) Funeral expenses
2) Administration expenses, such as executors' and administrators' commissions, attorneys', accountants' and appraisers' fees, and court costs
3) Claims against the estate, including property taxes accrued before the decedent's death, unpaid income and gift taxes, and medical expenses of the decedent paid by his estate after his death (to the extent not claimed as an income tax deduction)
4) Transfers in satisfaction of claims by the decedent's former spouse
5) Indebtedness on property if the total value of the property is included in the gross estate
6) Casualty and theft losses
7) Transfers to charitable and similar organizations
8) Transfers to surviving spouse (marital deduction)
9) Adjusted value of the qualified family-owned business interests of the decedent

For an item to be deductible as a debt, claim, or expense it must also be allowable by the jurisdiction under which the estate is being administered. If, at the time of filing the estate tax return, the exact amount of a deductible debt, claim or expense isn't known, an estimated amount may be used if that amount is ascertainable with reasonable certainty and it can be shown the item will be paid.

Income v. estate tax deduction

Many estate administration expenses can qualify as an estate tax deduction on the estate tax return and as an income tax deduction, or an offset against the sales price of property in determining gain or loss, on the estate's income tax return. But the estate is entitled to an income tax deduction or offset only if an estate tax deduction for the item is waived.

Deductions for charitable bequests

Deductions are allowed (on Form 706) for the value of property included in the gross estate and transferred by decedent during life or by will to or for the use of the U.S., any state, political subdivision thereof, or the District of Columbia, and to various types of charitable organizations including foreign ones. Strict requirements apply where the charitable bequest is of an income interest or a remainder interest.

Return requirements - Form 706

An executor must file estate tax return Form 706 if the decedent's gross estate at death exceeds the amount effectively exempted by unified credit ($625,000 for estates of individuals who died in 1998 and gradually rising to $1 million in 2006). This dollar amount is reduced by certain gifts made by the decedent. The estate tax return must be filed within nine months after the date of death. Extensions of up to six months may be granted (on Form 4768) if good cause is shown. They can be longer if the executor is abroad. The estate tax must be paid at the time for filing the return. Filing extensions do not extend the time for payment, but extensions of time to pay can be granted (on Form 4768) for reasonable cause. Special extensions (elected on Form 706) are available where a future interest is included in the estate or where the estate consists largely of a closely-held business. The estate tax on distributions made from qualified domestic trusts (QDOTs,), before the surviving spouse's death is due on April 15th of the year following the calendar year the taxable event occurs.

Gift Tax

The gift tax is imposed on the transfer of money or other property by gift. The gift tax is integrated with the estate tax under a "unified" rate schedule and credit into a single tax on transfers during life and at death. The tax is imposed on the transfer, not on the property transferred. It applies even though the property transferred may be exempt from income or other taxes. Gifts made by a person who, in a tax year, makes no gift of a present interest with a value of over $10,000 (in 1998 and 1999) to any one person, and who makes no gifts of future interests, aren't subject to tax and no gift tax return need be filed. The gift tax must be paid by the person (donor) who makes the gift. It applies only to donors who are individuals but a gift by a corporation may be treated as a gift by its shareholders. If the donor fails to pay the tax when due, the donee is also liable for the tax to the extent of the value of his gift. These rules apply to a U.S. citizen or resident no matter where the gift property (tangible or intangible) is situated. A nonresident who is not a U.S. citizen is subject to gift tax only if the gift property is real estate or tangible personal property and is situated in the U.S. at the time of the gift. A nonresident generally is not subject to tax on a gift of intangible property. However, an expatriate gift tax is imposed on the transfer of intangible property by a donor who lost his U.S. citizenship within 10 years of the transfer unless the loss didn't have a principal purpose of avoiding gift or other taxes. The expatriation tax also applies to certain long-term U.S. residents who terminate their U.S. residency.

What is a gift?

All transactions whereby property or property rights are gratuitously bestowed upon another are gifts. A gift isn't complete (i.e., taxable), until the donor parts with dominion or control over the transferred property or property interest. He must be left without power to change the disposition of the property either for his own benefit or for that of others. There is no gift tax on a transfer to a political organization. The first $10,000 in 1998 and 1999 of gifts of a present interest made by a donor to each donee in each calendar year is excluded from the amount of the donor's taxable gifts. The first $100,000 of gifts made by a donor to a spouse who is not a U.S. citizen is excluded. No annual exclusion is allowed for gifts of future interests, e.g. reversions or remainders. A "Crummey" power (in general, a trust beneficiary's noncumulative right to withdraw a specified amount of trust principal within a limited period) makes a transfer to the trust a gift of a present interest. A transfer for the benefit of a minor is not considered a gift of a future interest if the property and its income: (1) may be expended by or for the benefit of the minor before he reaches 21, and (2) any balance not so expended will pass to the minor when he reaches 21, or if he dies before 21 will go either to his estate or as he may appoint under a general power of appointment. Gifts to minors made through custodians designated under Uniform Acts for gifts or transfers to minors qualify for the annual exclusion.

Gift tax returns - Form 709 or Form 709-A

Any individual who makes gifts to any one donee during a calendar year which aren't fully excluded under the $10,000 annual exclusion must file a gift tax return (Form 709 or Form 709-A). A return must be filed even if no tax is payable. But no return is required to report a qualified transfer for educational or medical costs, most charitable transfers, or a transfer that qualifies for the marital deduction, except that a return must be filed to make a QTIP election. The return is due on April 15th of the year following the year the gifts were made. A different rule applies if the donor has died. An extension for filing the income tax return automatically extends the time for filing the gift tax return for the same calendar year. Or the donor may ask (in a letter to IRS) for a separate extension of time to file the gift tax return.

  © 2012 TaxPro Financial Network Inc.

TaxPro Financial Network Inc.
PO Box 1291
Yorktown Heights, NY 10598-8291

Phone (914) 962-1900
Fax (914) 992-7800