Chapter C13
The Estate Tax
Discussion Questions
C13-1 In general, items included in the gross estate are valued at their fair market values (FMVs) on
the date of death or alternate valuation date; that is, the amount upon which a willing buyer and a
willing seller would agree. Section 2032A allows a departure from the general FMV rule for farm
land meeting certain requirements. Such land is valued under a formula approach at less than its
FMV. Congress enacted this exception to reduce the probability that the heirs would have to sell the
land to pay estate taxes. Students might also mention that Sec. 2033A allows an exclusion of a
maximum of $675,500 for decedents dying in 1998 for an interest in a “family owned business.” pp.
C13-1, C13-5 through C13-9, and C13-30.
C13-2 For gift tax purposes, properties are valued at their FMVs as of the date of the gift. For estate
tax purposes, properties are valued at their FMVs at either the date of death or the alternate valuation
date, which is generally six months after date of death. pp. C13-5 through C13-8.
C13-3 For gift tax purposes, a life insurance policy is valued at its interpolated terminal reserve plus
the amount of any unexpired premiums. A term insurance policy's interpolated terminal reserve
value is zero. For estate tax purposes, a policy is valued at its $150,000 face value. p. C13-5.
C13-4 Shares traded on a stock exchange are valued at the average of their high and low selling
prices as of the applicable valuation date. The blockage rule allows a reduction from the average
value where the decedent owned a large block of shares that would be difficult to dispose of at one
time without using an underwriter and/or accepting a lower price. pp. C13-6 and C13-7.
C13-5 No, the executor may not use the alternate valuation date. It cannot be chosen unless it will
result in (1) a lower gross estate amount and (2) a smaller amount of estate tax payable. pp. C13-7
and C13-8.
C13-6 An advantage of electing the alternate valuation date is that the estate tax liability is lower; a
disadvantage is that the heirs receive the property at a lower basis. pp. C13-7 and C13-8.
C13-7 No, the stock is not included in the gross estate because the only properties included in the
gross estate under the transfers-within-three-years-of-death rule are those interests that would have
been included under Secs. 2036 through 2038 or Sec. 2042 if the decedent had not made the transfer.
Stock that has been gifted with no strings attached does not fall under any of these exceptions so it is
not included in the gross estate. It will be included in the estate tax base as part of the adjusted
taxable gifts if a taxable gift resulted from the transfer. Under the gross-up rule, the gross estate will
include the gift tax that is paid or payable on any gift that the decedent makes within three years of
death. p. C13-11.
C13-1
C13-8 The client would prefer that the other person purchase the policy with funds previously
accumulated. That way, the client will not potentially be affected by the transfers-within-three-yearsof-death rule. pp. C13-10 and C13-11.
C13-9 The "gross-up" rule requires gift taxes imposed on gifts made by the decedent within three
years of death to be included in the gross estate. The rule forecloses some of the opportunities that
formerly existed for reducing the gross estate and the estate taxes by making "deathbed" gifts. Gift
taxes on gifts made more than three years prior to death are excluded from the gross estate. p. C1311.
C13-10 The gross-up rule can apply where the decedent consented to gift splitting, and paid gift
taxes on gifts made by his or her spouse during the three-year period ending with the decedent's date
of death. p. C13-11.
C13-11 a.
The residence is included in her gross estate, but her estate receives a charitable
contribution deduction for the residence's entire value.
b.
The 18th century residence is not included in her gross estate because she retained no
enjoyment. pp. C13-11 through C13-13.
C13-12 The three retention periods that can cause Sec. 2036 to apply are: (1) the transferor's
lifetime, (2) a period that cannot be determined without reference to the transferor's death, and (3) a
period that in fact does not end before the transferor's death. p. C13-12.
C13-13 Sections 2035 through 2038 apply only if the decedent made a transfer of a property interest
specified in one of those Code sections for less than adequate consideration in money or money's
worth. pp. C13-10 through C13-13.
C13-14 If the joint tenants are not spouses, the consideration furnished test of Sec. 2040(a) applies.
Under this test, the gross estate includes the fraction of the value of the property that equals the
proportion of the consideration that the decedent furnished. If the joint tenants are spouses, under
Sec. 2040(b) one-half of the property's value is included in the decedent's estate regardless of how
much consideration he or she provided. pp. C13-15 and C13-16.
C13-15 Life insurance is included in the decedent's gross estate under Sec. 2042 if (1) the decedent
possessed incidents of ownership in the policy at the time of his/her death or (2) the policy proceeds
are payable to the executor or for the benefit of the estate. Even though the insurance may escape
being taxed under Sec. 2042, it can be included under Sec. 2035 if it was transferred by gift within
three years of death. pp. C13-15 and C13-16.
C13-16 The entire value of the property, in which the decedent previously gave away a remainder
interest but retained a life estate, will be included in the gross estate (Sec. 2036). There will be an
inclusion of reversionary interests, provided their value exceeds 5%, if the decedent previously gave
C13-2
away property but kept a reversionary interest therein (Sec. 2037). If, for example, the decedent
earlier purchased an asset and had it titled in the joint names of himself and a child, 100% of the
property's value will be included in the decedent's gross estate due to the consideration furnished test
(Sec. 2040). pp. C13-11 through C13-17.
C13-17 The property is not included in Pam's estate because Pam had only a special power of
appointment. p. C13-15.
C13-18 The statement is correct only for pre-October 22, 1942 general powers of appointment. A
post-October 21, 1942 general power of appointment is included regardless of whether it is
exercised. p. C13-15.
C13-19 The trust assets are fully included in the widow's gross estate if the executor made an
election to claim a marital deduction in Carlos's estate for the entire QTIP trust. If the executor made
a partial QTIP election, the pro rata portion of the trust for which the election was made is included
in the widow's gross estate. Otherwise, the trust assets are not included in her gross estate. p. C1317.
C13-20 Estate tax deductions are as follows: marital, charitable contribution, funeral and
administration expenses, debts, and casualty and theft losses. Gift tax deductions consist of only the
marital deduction and the charitable contribution deduction. pp. C13-18 and C13-19.
C13-21 Administration expenses may be deducted on either the estate tax return or the estate's
income tax return or some in each place. They should be deducted on the return where they will
produce the greatest tax savings. If the estate tax base exceeds $1,000,000, the tax savings will be
larger if the expenses are deducted on the estate tax return because the estate tax rates will be higher
than the top income tax bracket for trusts and estates. Debts of the decedent are deductible only on
the estate tax return. pp. C13-18 and C13-19.
C13-22 a.
There is no marital deduction for the life insurance (even though the spouse is the
beneficiary) because the policy is not included in the gross estate. The decedent had no incidents of
ownership.
b.
The trust is ineligible for the marital deduction because it is a nondeductible
terminable interest. The trust does not qualify as a QTIP trust because the spouse will lose the right
to the income in the event of remarriage. pp. C13-20 through C13-22.
C13-23 The five credits available for estate tax purposes and illustrations of each are as follows.
·
State death tax credit--the estate paid estate or inheritance taxes to the state.
·
Gift tax credit--prior to 1977 the decedent made a gift of a remainder interest in
property in which he kept a life estate and paid gift tax. The gifted property is in the
donor’s gross estate.
·
Previously taxed property credit--the decedent received property that was taxed in the
estate of a person who predeceased the decedent by not more than ten years.
C13-3
·
·
Foreign death tax credit--the decedent owned realty in a foreign country and paid
death taxes to that country.
Unified credit--$192,800 for 1987 - 1997 and $202,050 for 1998.
The only credit available for gift tax purposes is the unified credit. pp. C13-23 through C13-25.
C13-24 The tax policy reason for allowing installment payments of estate taxes attributable to
interests in closely held businesses is to reduce the likelihood that some or all of the business would
have to be sold to pay the estate taxes. pp. C13-28 and C13-29.
C13-25 The unlimited marital deduction causes the transfer tax results to be neutral. From an
income tax perspective, however, a transfer at death is preferable to an inter vivos transfer because a
step-up in basis occurs only for transfers at death. pp. C13-32 and C13-33.
C13-26 The advantage of freezing values by removing post-gift appreciation from the transfer tax
rolls will be most dramatic if Bala makes a gift of the life insurance policy (provided he survives the
transfer by more than three years). The next best items to transfer are the stock in the business with a
"bright" future, and the land in a "boom town" because these assets have a good potential for
appreciation. The cash is not expected to appreciate. With interest rates rising, the value of the bond
can be expected to decline. pp. C13-32 and C13-33.
C13-27 If Bala dies within three years of giving away the insurance policy, the policy will be
included in his gross estate. This result is no worse than if he had not made the transfer. The chance
for a step-up in basis for the stock and land will be lost if Bala makes gifts of these assets. If Bala
incurs a gift tax liability with respect to any transfer and dies within three years of the transfer, his
gross estate will be "grossed up" by the gift taxes. p. C13-34.
C13-28 Disposing of an amount equal to the exemption equivalent (applicable exclusion amount) to
persons other than one's spouse allows the decedent's estate to make full use of the unified credit and
prevents such property from being taxed in the surviving spouse's estate. p. C13-32.
C13-29 The estate tax return is due nine months after the date of death. Generally, the estate tax is
due at this time also. An extension of up to one year is available to pay the estate taxes. See Sec.
6161(a)(1). For reasonable cause the Secretary may give an extension of up to 10 years. See Sec.
6161(a)(2). Installment payments may be made automatically if a large enough portion of the estate
consists of an interest in a closely held business. See Sec. 6166. pp. C13-35 and C13-36.
C13-4
Issue Identification Problems
C13-30 ·
·
·
·
Does Henry make a gift when he purchases the land?
What portion of the land will be in Henry's gross estate? (Stated differently, will
using this form of ownership reduce his estate taxes?)
Are there any other estate tax implications?
What are the generation-skipping transfer tax implications?
At the time of purchase, Henry will make a gift to his grandson of half of the cost of the
land.
Because Henry provided all of the consideration, under the consideration-furnished test of
Sec. 2040 Henry's gross estate will include 100% of the date of death value of the land. This strategy
will not reduce his estate tax liability.
In addition, his estate tax base will include as an adjusted taxable gift the taxable gift made
upon the purchase of the land as joint tenancy property. The gift will be so large that gift taxes will
be owed; thus, if Henry dies within three years of acquiring the land, there will be gross-up under
Sec. 2035 for the gift taxes he paid. Such gift taxes will, fortunately, reduce his estate tax payable
regardless of how long he survives.
The grandchild is two generations younger than Henry and is a skip person. Generationskipping transfer taxes will be owed in addition to the gift and estate taxes. The amount of the
transfer exceeds the GSTT exemption amount of $1,000,000.
pp. C13-10, C13-11, C13-14, C13-15, C13-30 and C13-31.
C13-31 ·
Should Dave consider making a disclaimer? If so, of how much?
Unless Dave makes a disclaimer, Annie's estate will waste its exemption equivalent. Dave
should disclaim at least $625,000 to allow Annie's estate to make use of the full unified credit.
Because Dave is in poor health (and likely has a short life expectancy) and any additional
inclusion in his estate will be taxed at 55%, he should consider disclaiming some amount in excess
of $625,000 in order for some of the property to be taxed in Annie’s estate at rates below the 55%
marginal tax rate that will apply to his estate.
pp. C13-33 and C13-34.
C13-32 ·
In the alternative scenario, the issue is what martial deduction (if any) should be
claimed on the trust?
In the alternative scenario, the executor could elect to forego the marital deduction on all or
a portion of the QTIP trust. The QTIP trust is a more flexible arrangement because the executor can
affect the size of the marital deduction whereas with the outright bequest the amount of the marital
deduction will be altered only if Dave is willing to make a disclaimer.
C13-5
pp. C13-17, C13-20 through C13-25, and C13-32 and C13-33.
C13-33 ·
What deductions will Jeung's estate receive?
·
Where should the administrative expenses be deducted?
·
What is the amount of his taxable estate and estate tax base?
·
Has Jeung made any prior taxable gifts?
Jeung's estate will receive a $40,000 deduction for the debts, a $330,000 deduction for the
charitable contribution, and up to a $55,000 deduction for the administration expenses.
After deducting the debts and the charitable contribution, Jeung's taxable estate is $630,000
($1,000,000 - $370,000). Thus, at most, only $5,000 of the administrative expenses should be
deducted on the estate tax return, and the rest should be deducted on the estate's income tax return.
Jeung's taxable estate and estate tax base will be $625,000 (meaning no tax will be owed) if
$5,000 of administrative expenses are deducted on the estate tax return.
The facts do not indicate whether Jeung has made any taxable gifts. Bonus credit could be
given to students who spot that such information is missing and the implications of the missing
information. The above answers were prepared on the basis that no taxable gifts were made. If some
were made, however, a greater amount of administrative expenses should be deducted on the estate
tax return.
pp. C13-18 through C13-22, C13-24 and C13-25.
Problems
C13-34 a.
b.
c.
d.
1,000 x [0.50 x ($47 + $40)] = $43,500
$500,000
$27,230 + $1,325 = $28,555
$175,000
pp. C13-5 through C13-8.
C13-35 Gross estate and taxable estate (using alternate valuation date)
Tentative estate tax
Minus: Unified credit
Estate tax due
$2,500,000
$1,025,800
( 202,050)
$ 823,750
pp. C13-2, C13-3, C13-5, C13-7, and C13-8.
C13-36 a.
b.
Inclusion in gross estate under gross-up
rule ($267,800 tax on $800,000 gift $192,800 unified credit)
Adjusted taxable gifts ($810,000 - $10,000
annual exclusion)
C13-6
$ 75,000
$ 800,000
p. C13-11.
C13-37 a.
$400,000 because the gift was made within three years of death. pp. C13-10 and C1311.
b.
There is no inclusion in the gross estate because the property given away within three
years of dying was land instead of life insurance. pp. C13-10 and C13-11.
c.
There is no inclusion in the gross estate because the transfer arose more than three
years before death. pp. C13-10 and C13-11.
C13-38 The amount included in Jody's gross estate is just the gross-up amount of $153,000 because
the property would not have been included under Secs. 2036-2038 or Sec. 2042 had the property not
been transferred. The adjusted taxable gift amount is $1,000,000, the amount of the post-1976
taxable gifts, valued at date of gift values. pp. C13-10 and C13-11.
C13-39 The amount included in Kate's gross estate is the gross-up amount of $153,000 in taxes that
she paid. In no event would the transferred property be included in her gross estate because she is
not the actual transferor. Kate's adjusted taxable gift amount is $1,000,000, the amount of her post1976 taxable gifts (after considering gift splitting and the annual exclusion), valued at date of gift
values. pp. C13-10 and C13-11.
C13-40 a.
b.
c.
d.
e.
$560,000 (Sec. 2036 -- keeps economic benefits)
$85,000 (Sec. 2036 -- implied retention of right to live there)
$310,000 (Sec. 2036 -- keeps control)
None, because he kept no control over the trust.
$400,000 (Sec. 2038 -- revocable transfer)
pp. C13-10 through C13-13.
C13-41 a.
$26,364 [0.13182 (Table S, Age 50, Appendix H) x $200,000] because Latoya's
power to alter or amend the trust extends to only the remainder interest.
b.
None.
pp. C13-13 and C13-14.
C13-42 a.
Annuity purchased by Maria's father--No inclusion because Maria did not furnish
consideration. Annuity purchased by Maria's employer--$110,000 is included because the employer's
contributions are treated as Maria's.
b.
The non-employer annuity would now be included because Maria purchased it. The
amount includible is $45,000.
c.
$110,000 would still be included.
pp. C13-13 and C13-14.
C13-7
C13-43 a.
b.
c.
$300,000 (1.00 x $300,000)
0 (0.0 x $300,000)
$320,000, since Bart then owned the property outright.
pp. C13-14 and C13-15.
C13-44 $67,500 [($30,000/$40,000) x $90,000] because Gail provided three-fourths of the
consideration. pp. C13-14 and C13-15.
C13-45 a.
b.
c.
$100,000 (0.50 x $200,000) because of the 50% spousal rule.
$100,000 because the property passes to Mrs. Cobb.
$240,000 because he has become the owner in fee simple.
pp. C13-14 and C13-15.
C13-46 a.
No, because Tai has only a special power of appointment.
b.
Yes, because Tai has a general testamentary power of appointment.
c.
Yes, because Tai retained a life estate.
d.
No, because Tai did not exercise this pre-1942 general power of appointment.
e.
Yes, this is a post-1942 general power of appointment so it does not matter whether
Tai exercised it or not.
p. C13-15.
C13-47 Policy Number
123
757
848
414
Amount Included
$400,000 because Joy is the owner
225,000 because the estate is the beneficiary
-0175,000 because the policy was transferred
within three years of Joy's death
pp. C13-15 and C13-16.
C13-48 $225,000 net addition to the taxable estate because of policy No. 757. Policy No. 123
generates a $400,000 marital deduction and, thus, does not increase the taxable estate. Policy No.
414 generates a $175,000 marital deduction, so it does not increase the taxable estate either. pp.
C13-15, C13-16, and C13-20 through C13-22.
C13-49 Gross estate
Minus: Debts
Funeral expenses
Administration expenses
Adjusted gross estate
$3,400,000
( 500,000)
( 15,000)
( 50,000)
$2,835,000
C13-8
The charitable contribution deduction reduces the adjusted gross estate to arrive at the taxable estate.
Therefore it is not reflected in the above calculation. pp. C13-18 through C13-20.
C13-50 a.
With
100%
QTIP
Election
Adjusted gross estate
Minus: Charitable contribution deduction
Marital deduction
Taxable estate
$2,835,000
( 30,000)
(1,200,000)
$1,605,000
Without
Any QTIP
Election
$2,835,000
( 30,000)
( 800,000)
$2,005,000
Note: Other possibilities would be for a marital deduction to be claimed for some fraction of the
QTIP trust, whereupon in part b, such fraction would be in the survivor's gross estate along with the
stock and cash.
b.
With QTIP election: the stock and cash, plus the QTIP trust.
Without QTIP election: the stock and cash. pp. C13-20 through C13-22.
C13-51
With 100%
QTIP
Election
Without
Any QTIP
Election
Yuji's taxable estate
$1,605,000
$2,005,000
Yuji's tentative estate tax
Minus: Unified credit
Estate tax due
$ 603,050
( 202,050)
$ 401,000
$ 783,250
( 202,050)
$ 581,200
Wife's gross estate:a
Own property
Cash and stocks
QTIP trust
Gross and taxable estate
$ 360,000
960,000
480,000
$1,800,000
$ 360,000
960,000
-0$1,320,000
Wife's tentative estate tax
Minus: Unified credit
Estate tax due
$ 690,800
( 220,550)
$ 470,250
$ 478,400
( 220,550)
$ 257,850
$ 401,000
470,250
$ 871,250
$ 581,200
257,850
$ 839,050
Yuji's estate tax
Plus: Wife's estate tax
Total tax for the couple
C13-9
a
The value of each asset is increased by 20% from the basic facts.
Claiming a 100% marital deduction on the QTIP results in a higher overall tax; however, it
minimizes the taxes due upon Yuji's death. With the QTIP election, each spouse's estate is taxed at a
marginal rate of 45%. Without the QTIP election, Yuji's marginal rate is 49% and his wife's is 43%.
pp. C13-20 through C13-22.
C13-52 a.
Gross estate and taxable estate
$1,000,000
Plus: Adjusted taxable gifts
360,000
Estate tax base
$1,360,000
b.
The adjusted taxable gifts would be only $90,000 since the first gift was made before
January 1, 1977. The tax base would instead be $1,090,000. p. C13-23.
C13-53 a.
Gross estate
Minus: Deductions
Taxable estate
Plus: Adjusted taxable gifts
Estate tax base
$3,000,000
( 80,000)
$2,920,000
40,000
$2,960,000
The gift of the life insurance policy is not an adjusted taxable gift because the gift is included in the
gross estate (under the three-year rule). If the 1996 gift was Bess's first gift, the unified credit would
eliminate any gift tax liability.
b.
Her estate will deduct a unified credit of $202,050. The amount to subtract for the
credit is not reduced by any credit claims or for gift tax purposes. pp. C13-23 and C13-24.
C13-54 a.
The adjusted gross estate is $920,000 ($40,000 + $410,000 + $175,000 + $325,000 $30,000). The estate tax payable in installments is 35.326% ($325,000/$920,000) of the tax liability.
The first installment is due not later than February 1, 2004, five years after the due date for the estate
tax return.
b.
The adjusted gross estate is $2,510,000 ($40,000 + $2,000,000 + $175,000 +
$325,000 - $30,000).
The closely held business interest makes up only 12.95%
($325,000/$2,510,000) of the adjusted gross estate. Therefore, the estate is not eligible for the Sec.
6166 deferral. pp. C13-28, C13-29, and C13-34.
C13-55 The adjusted taxable estate (i.e., taxable estate minus $60,000) is $620,000 ($680,000 $60,000). The maximum credit for state death taxes is $17,200 [$10,000 + (0.04 x $180,000)],
which is less than the amount of state death taxes paid. The state death tax credit table can be found
in Appendix G. p. C13-24.
Comprehensive Problems
C13-56 a.
Checking account
Savings account
Stock--joint tenancy (non-spousal)
C13-10
$
100,000
430,000
25,000
b.
c.
d.
e.
f.
g.
Land--joint tenancy (spousal)
Residence
Life insurance
Trust under mother's will- general power of appointment
Gross-up on 1996 gift
Gross estate
Gross estate
Minus: Debts
Funeral and administration expenses
Adjusted gross estate
Adjusted gross estate
Minus: Charitable contribution deduction
Marital deduction:
Residence
QTIP trust
Joint tenancy land
Taxable estate
Adjusted taxable gifts
Taxable estate
Plus: Adjusted taxable gifts
Tax base
Tentative tax on estate tax base
Tentative tax on estate tax base
Minus: Unified credit
Post-1976 gift tax
State death tax credit
Federal estate tax payable
180,000
250,000
210,000
700,000
37,000a
$1,932,000
$1,932,000
( 60,000)
( 80,000)
$1,792,000
$1,792,000
( 47,000)
( 250,000)
( 250,000)
( 180,000)
$1,065,000
$ 700,000
$1,065,000
700,000
$1,765,000
$ 675,050
$ 675,050
( 202,050)
( 37,000)
( 36,840)b
$ 399,160
a
$229,800 taxes on 1996 gift - $192,800 1995 unified credit = $37,000
Adjusted taxable estate = $1,065,000 - $60,000 = $1,005,000. Credit = $27,600 + (0.056 x
$165,000) = $36,840.
b
C13-57 a.
The only difference in the gross estate is that the inclusion for the joint tenancy land is
$198,000 (0.55 x $360,000) instead of $180,000. Thus, the gross estate is valued at $1,950,000
[$1,932,000 + ($198,000 - $180,000)].
b.
Gross estate
$1,950,000
Minus: Debts
( 60,000)
Funeral expenses
( 15,000)
Adjusted gross estate
$1,875,000
c.
Adjusted gross estate
$1,875,000
Minus: Charitable contribution deduction
( 47,000)
Marital deduction--residence
( 250,000)
Taxable estate
$1,578,000
C13-11
d.
e.
f.
g.
The joint tenancy property does not pass to the spouse.
Adjusted taxable gifts
Taxable estate
Plus: Adjusted taxable gifts
Tax base
Tentative tax on estate tax base
Tentative tax on estate tax base
Minus: Unified credit
Post-1976 gift tax
State death tax credit
Estate tax payable
a
$ 700,000
$1,578,000
700,000
$2,278,000
$ 917,020
$ 917,020
( 202,050)
( 37,000)
( 69,392)a
$ 608,578
Adjusted taxable estate = $1,578,000 - $60,000 = $1,518,000. Credit = $38,800 + (0.064 x
$478,000) = $69,392.
Tax Form/Return Preparation Problems
C13-58 (See Instructor's Guide)
C13-59 (See Instructor's Guide)
Case Study Problems
C13-60 (See Instructor's Guide)
C13-61 (See Instructor's Guide)
Tax Research Problems
C13-62 (See Instructor's Guide)
C13-63 (See Instructor's Guide)
C13-64 (See Instructor's Guide)
Internet Problems
C13-65 (See Instructor's Guide)
C13-66 (See Instructor's Guide)
C13-12