CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Estate Planning
Session 14
Postmortem Calculations:
303, 6166, and 2032(a)
(special use)
©2015, College for Financial Planning, all rights reserved.
Session Details
Module
7
Chapter(s) 3
LOs
7-5
Identify the characteristics and purpose of a
given postmortem planning technique.
7-6
Analyze a situation to determine the eligibility
of an estate or its beneficiaries to use a given
postmortem planning technique.
7-7
Evaluate a situation to select the postmortem
planning techniques that are available and
advisable for an estate or its beneficiaries.
14-2
Section 6166—Installment Payment of Estate Tax
Purpose and Advantage of Election
• Allows delay in payment of estate and GSTT tax
attributable to a closely held business interest (CHBI) at
death
• Delay prevents having to liquidate business
• Payments can be made in up to 10 annual installments
• First payment of principal due not later than 5 years
after estate tax is due
• Interest before first principal and interest due annually
• PR may be required to post a bond
• Maximum tax payable in installments formula:
Net amount of tax after credits x
Value of closely held business interest
Adjusted gross estate
14-3
Section 6166—Installment Payment of Estate Tax
Prerequisites for Use
• Decedent must be U.S. citizen or resident alien
• Decedent must die with a CHBI that constitutes 20% or
more of the capital interest (partnership) or 20% or
more of the value of the voting stock (corporation)
• CHB defined as
o sole proprietorship
o partnership of 45 or fewer partners
o corporation of 45 or fewer shareholders
• CHB must be operative at death
• Estate must owe tax after the credit amount is applied
• CHBI value must exceed 35% of AGE
14-4
Section 6166—Installment Payment of Estate Tax
35% Requirement
• Passive assets of the CHB are not used for this purpose
• AGE is computed by deducting from GE
o funeral and administrative expenses, claims against the
estate, unpaid mortgages, or debt in respect of property
included in the gross estate (Section 2053) and
o theft or casualty losses to estate property not
compensated by insurance or otherwise (Section 2054)
• Requirement must be met both with and without including all
gifts subject to 3 year rule (except gross up) in GE
• Can combine two or more CHBI to meet requirement if more
than 20% of the value of each business is included in GE
14-5
Section 303 Stock Redemption
Purpose and Advantage of Election
• This Code section allows the estate of a decedent who
owned corporate stock, or the estate beneficiary who is
to receive such stock, to report money paid in a
redemption as capital gain rather than ordinary income
• The redemption is made to aid estate liquidity to pay
death taxes and funeral and administrative expenses
owed by the estate or the beneficiary
• Issuing corporation must have funds to make
redemption; key person policy on decedent
14-6
Section 303 Stock Redemption
Prerequisites
• Decedent’s estate must include stock of a corporation
(closely held)
• Redemption must be requested either by the estate or
an estate beneficiary to whom such stock is given, and
who has an obligation to pay death taxes, and/or
funeral and administrative expenses of the estate (limit)
• Note: 303 can be used even when no tax will be due
• Value of stock must exceed 35% of AGE
14-7
Section 303 Stock Redemption
35% Requirement
• AGE is computed by deducting from GE funeral and
administrative expenses, claims against the estate,
unpaid mortgages, or debt in respect of property
included in the gross estate (Section 2053)
• Requirement must be met after including all gifts made
within 3 years of death in GE
• Stock of two or more corporations can be combined to
meet requirement if 20% or more of the value of the
outstanding stock of each corporation is included in GE
14-8
Section 2032(a) Special Use
Purpose and Advantage of Election
• Allows real estate used in a closely held
business or farming operation to be valued at
current use rather than fair market value (FMV)
• Cannot reduce from FMV by more than inflation
indexed amount ($1,100,000 in 2015)
• Will reduce or eliminate estate tax for estate
• May prevent having to sell the business or farm
to pay tax
• Can use DOD or AVD
• Can use in conjunction with 6166
14-9
Section 2032(a) Special Use
Prerequisites
•
Estate must contain real property used in CHB or farm
•
Value at current use must be less than FMV
•
Estate must owe tax after application of credit amount and gift taxes payable credit
•
The decedent was a U.S. citizen or resident at death.
•
The real property is located in the United States.
•
The real property:
is passed to a qualified heir.
was being used for a qualified use by decedent or a family member at the time
of death, and for a total of 5 of the 8 years prior to death.
o
was owned by decedent or family members for 5 of the 8 years prior to death.
There was material participation by decedent or a family member in the operation of
the farm or business for a total of 5 of the 8 years prior to decedent’s death.
o
o
•
•
•
The 50% and 25% tests are met.
The required recapture agreement is signed and submitted by all heirs with interests
in the property.
14-10
Section 2032(a) Special Use
25% Test
• At least 25% of decedent’s gross estate as
adjusted (GEA)—GE after deducting secured
debts on all assets included in GE—must be
attributable to the value of the qualified real
estate (using FMV) minus only secured debt
against real estate
• GE must include the value of property
transferred by decedent during the 3-year
period ending on the date of the decedent’s
death
14-11
Section 2032(a) Special Use
50% Test
• At least 50% of decedent’s gross estate as adjusted
(GEA)—GE after deducting secured debts on all assets
included in GE—must be attributable to the value of
qualified real and personal property—including qualified
business property transferred within 3 years of death (if
such property continued in a qualified use until death)—
minus only secured debt of decedent against qualified
real estate and personal property
• GE must include value of property transferred by
decedent during 3-year period ending on the date of
decedent’s death
14-12
Postmortem Elections—Example
Until his death, your client, a U.S. citizen, had actively operated a ranch in
Colorado as a sole proprietor for the last 20 years. His gross estate is
$5.75 million, of which $1 million is the value of the ranch land and
$950,000 is the value of the ranch-related personal property. The ranch
real estate has a mortgage of $300,000, and the ranch personal property
is encumbered by a mortgage of $100,000. Unsecured debts and
administrative expenses of the estate are $200,000. The client’s total
estate is given to a son in your client’s will. The client had $1.5 million of
adjusted taxable gifts since 1976.
If the major objective is to ensure that the client's son can continue the
ranching operation, what is the most appropriate postmortem planning
technique?
a.
b.
c.
d.
a
a
a
a
QTIP election for all estate property
Section 303 redemption
Section 2032A special use valuation
Section 6166 installment payment of estate taxes
14-13
Postmortem Elections—Answer
•
•
SPECIAL USE:
•
Therefore, the client’s GEA is $5.35 million {$5.75 million minus $300,000
(farm real estate mortgage) and $100,000 (farm personal property
mortgage)}.
•
•
The calculation of the 25% (real estate) and 50% (real estate and
personal property) requirements are calculated against the Gross Estate as
Adjusted (GEA) as opposed to the Adjusted Gross Estate (AGE) used in the
percentage requirement calculation for Section 6166 (see below). The GEA
is simply the Gross Estate (GE) minus only secured debts against any
property included in the GE.
25% of this amount is $1,337,500
50% of this amount is $2,675,000
targets.
These numbers are the
•
The net amount of the farm real estate is $700,000 ($1,000,000 minus
$300,000 mortgage). Therefore the target ($1,337,500) is not met.
•
The net amount of the farm real estate and the farm personal property is
$1,550,000 ($1,000,000 + $950,000 minus $300,000 and $100,000).
Therefore, the target ($2,675,000) is not met.
14-14
Postmortem Elections—Answer
•
•
D is the correct answer.
•
The computations for special use valuation and Section 6166 installment payment of
estate tax follow.
•
•
SECTION 6166:
•
The value of the client’s business interest is $1,950,000 ($1,000,000 + $950,000).
Therefore the target is met.
•
Note that these facts do not include any prior taxable gifts within three years of
death, which would complicate both calculations.
A Section 303 stock redemption is not possible, as the business was conducted as a
sole proprietorship rather than a corporation. A QTIP election is not possible as
nothing is given to a spouse. The client’s estate would owe tax due to the adjusted
taxable gifts.
The calculation of the 35% requirement is calculated against the AGE. The AGE is
the GE minus all debts of the decedent, both secured and unsecured, and funeral
and administrative expenses, and theft and casualty losses. Therefore the client’s
AGE is $5,150,000 ($5.75 million minus $300,000, $100,000, and $200,000). 35%
of this figure is $1,802,500. The value of the decedent’s closely held business
interest must exceed this target to use installment payment of estate taxes
generated by the business interest.
14-15
Question 1
Carol owns 80% of IGU Corporation (one-half of the value of the
stock is attributable to real estate owned by IGU). Currently, the
value of Carol’s stock in IGU is 64% of her projected adjusted
gross estate. Carol is examining the implications of transferring
three-quarters of her IGU shares to her children from her current
marriage. Her will leaves specified property valued at 10% of her
estate to her husband and the remainder of her estate to her
children from her former marriage.
Which one of the following postmortem elections would not be
adversely affected due to the proposed transfer of the IGU shares
from Carol to her children from her current marriage?
a. a partial stock redemption under IRC Section 303
b. special use valuation
c. the alternate valuation date
d. deferral and installment payment of estate tax under IRC
Section 6166
14-16
Question 2
Which one of the following is a qualifying requirement for
Section 2032A special use valuation of real property used in
a business?
a. The business must be engaged in farming or ranching.
b. The family member-owner of the business must have
been a material participant in the business for at least 10
years prior to his or her death.
c. The value of the decedent’s business interest, minus
secured debts and unpaid mortgages on such property,
must equal 50% or more of the decedent’s gross estate
as adjusted for secured debts and unpaid mortgages on
all property included in the gross estate.
d. The real property used in the business must exceed 35%
of the adjusted gross estate.
14-17
Question 3
When Joe died in 2015, he was a widower with a gross estate of $5.5
million, which included a 50% partnership interest valued at $1.9 million.
The partnership owned real estate valued at $1.4 million. His adjusted
gross estate was $5.43 million. Joe’s will left $100,000 to a qualified
charity and the balance of his estate, including the business interest, to his
two nephews. They currently participate in the business and plan to hold
the business interest indefinitely. Joe made no taxable gifts during his
lifetime.
Given the facts stated above, which one of the following correctly states
why Joe’s estate cannot qualify to use the installment method of paying
the estate tax (Section 6166)?
a. His nephews are not considered qualified heirs.
b. His estate does not contain any closely held shares of stock.
c. The value of the business interests included in Joe’s gross estate is
not more than 35% of his adjusted gross estate.
d. His estate will not owe any estate taxes.
e. The closely held business does not have the prerequisite real estate
ownership.
14-18
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Estate Planning
Session 14
End of Slides
©2015, College for Financial Planning, all rights reserved.