PA 221 – PROBATE ADMINISTRATION

FEDERAL TAXES THAT COULD BE IMPOSED ON SOMEONE’S ESTATE UPON THEIR DEATH

Unit 8: Taxation

What’s Due This Week?

1) Quiz #7

2) Discussion board (2 sets of questions)

3) Read Chapter 7 in our textbookRead: Chapter 8 in your textbook. Estate Tax and IRS Form 706: Read about

completing Federal Estate Tax Form 706 at the following links:

http://www.ehow.com/how_4900042_complete-federal-estate-tax-form.html

http://www.savewealth.com/taxforms/irs/

Probate Forms Assignment

Submit 4 completed probate forms based upon the information you included in Kingston’s Unit 6 will. 

Download the Probate Forms for the Unit 8 Project at http://www.texasprobate.com/forms/ Complete the following four forms:

Application for Probate of Will and Issuance of Letters Testamentary

Oath Proof of Death and Other Facts Order Admitting Will to Probate and Authorizing Letters

Testamentary

Decedent’s Estate

Property owned by a person at the time of death. When the estate is transferred to the heirs, the federal government may impose a tax on the right to transfer that property, i.e. the federal estate tax.

The tax is owed by the decedent’s estate and is paid by the estate prior to the transfer of the remaining property.

Heirs who receive money or property from an estate do not pay the estate tax, nor do they pay any income tax on the value of the inherited property.

Inheritance or Estate Tax

The taxation on assets received passed from a person who has died.  

Some states have their own inheritance taxes on top of Federal taxes.  These states include: Indiana, Iowa, Kentucky, Maryland, Nebraska,

New Jersey, Oklahoma, Pennsylvania, and Tennessee. 

Estates Subject to Federal Estate Tax

Amount of estate tax is based upon the value of the estate at the time of death. Federal law allows a certain amount of property to be transferred at death without any tax obligation. The amount that can be transferred to others without tax is known as the unified tax credit. 

This amount has changed over time, and is subject to future change. in the federal estate tax law and plan accordingly.

Unified Credit – When Someone Dies Matters In 2011, federal law allowed a decedent to transfer

up to $5 million of property to others without tax. In 2012, that amount is $5,120,000 which reflects an

increase for inflation. For 2013 and beyond, who knows? Congress will

take action which cannot be predicted with certainty. Some experts predict that the federal estate tax may be

entirely repealed by the current Congress. Others predict Congress will take action to continue

increasing the amount which can be transferred tax-free via a continuation of an inflation-indexing strategy.

Estimated Estates Subject to Federal Estate Tax Data gathered by nonpartisan Tax Policy Center

(TPC), a joint venture of the Urban Institute and Brookings Institution. www.taxpolicycenter.org

2011: Estates valued at $5 million + could potentially owe estate tax for deaths occurring in that year.

For deaths occurring in 2011, Tax Policy Center estimated only 1 in 800 would result in a taxable estate and 99.9 percent of deaths trigger no estate tax.

TPC Estimates

8,600 individuals dying in 2011 will leave estates with a gross value of over $5 million which triggered the requirement to file a federal estate tax return.

However, after allowing for deductions and credits, only an estimated 3,270 estates will owe any tax.

TPC: Small Farms & Businesses

Less than 50 small farms and businesses – estates with farm and business assets making up at least half of gross estate and totaling $5 million or less – will pay any estate tax in 2011.

Such estates represent just 1.2 percent of all taxable estate tax returns.

Small farms and businesses will pay under $10 million in estate tax for deaths occurring in 2011, less than one tenth of 1 percent point of the total revenue the tax will collect.

Calculating Inheritance Taxes

The estate tax is determined by looking at the “entire estate” that is left after a person's death.  

The inheritance tax is also a part of the overall gift tax regulations, i.e. the inheritance tax cannot be avoided by gifting properly before death, as similar tax consequences will be required.  

The Gross Estate

The gross estate determines how much property and assets will be subject to tax and consists of all property owned by the decedent at the time of his or her death.  The gross estate includes:

A. Property or assets the decedent transferred up to 3 years prior to their death. B. Annuities in the descendant's name.C. The value of jointly owned property, with special rules for property co-owned by a spouse. 

Property Valuation for Federal Estate Tax Calculations

Property included in the gross estate is valued at its fair market value (FMV) as of the decedent’s date of death.

For certain types of property, a qualified appraisal may be necessary to determine the appropriate value.

In unusual cases, an alternate valuation date within six months after death may be used – typically, where property values have declined after the date of death.

Property Valuation

Under certain conditions, land used in farming or other closely-held (family) business may be valued at what is called a special use value which may be lower than FMV. Purpose: to provide an additional tax break for family

farming operations intended to be transferred from one generation to the next.

Use value is based on dividing the five-year average local cash rental rate by a federal land bank interest rate.

Special Use Value

Electing special use value: 1. The land must have been used as a farm for 5

years during the 8-year period ending with the decedent’s death and

2.The decedent or a member of the decedent’s family must have materially participated in the farm business. 

Key Factors: Material Participation

Physical Work / Participation in Mgmt. Decisions A. Decedent or decedent’s family member must have been a

full-time employee of the farm operation. B. Land must pass to a qualified heir, generally the spouse or

a lineal descendant or ascendant. All or portion of federal estate tax benefits obtained under

special use valuation provision must be repaid if property is sold to:

Nonfamily member or Ceases to be used for farming within 10 years following

death

Deductions Allowed from Estate Tax

Once the value of the gross estate is determined, numerous deductions can be made before the tax rate is applied.  The following are some deductions that will be made:

A. Estate administration expenses and funeral expenses. 

B. Qualifying charitable donations. C. Property left to a surviving spouse. D. Property left in a qualified domestic trust.

How is Federal Estate Tax Calculated?

Executor of estate must file a federal estate tax return within 9 months of person’s death if person’s gross estate exceeds the exempt amount ($5,120,000 in 2012).

Estate tax is applied to decedent’s gross estate, which generally includes all of the decedent’s assets, financial (stocks, bonds and mutual funds) and real (homes, land and other tangible property).

Also includes decedent’s share of jointly owned assets and life insurance proceeds from policies owned by the decedent.

Federal Inheritance Tax Exemption

For 2011, all estates with gross estate values of less than $5 Million are exempt from the estate tax.  

Estates that are over the $5 Million mark are taxed at 35%, but only for the amount over $5 Million.  

After Gross Estate is Valued

Deductions are subtracted to arrive at net taxable estate.

Federal estate tax law allows an unlimited deduction for transfers to a surviving spouse and to charity.

Other deductions are allowed for debts, funeral expenses, legal and administrative fees, and state inheritance taxes paid. 

Gross Estate - Allowable Deductions = Net Taxable Estate

Once the amount of the net taxable estate is determined, the applicable credit exempts a large portion of the estate.

Any remaining value of the estate over (2012) $5,120,000 faces a tax rate of 35 percent.

State Specific Inheritance Taxes

The federal inheritance tax does not affect most estates since most estates fall under the $5 Million exemption. However, some states impose an estate tax.  

State estate taxes vary greatly, so it is important that you look into your specific state’s laws before making estate planning decisions.  

Some states mirror the federal exemption, however many states with their own inheritance taxes will impose taxes even if no federal taxes will be imposed.  

State Inheritance Tax Rates

Connecticut : (over $2mill:7.2~12.0%)(Gift Tax 12%) Indiana : 20%  Iowa : 15%  Kentucky : 16%  Maryland : 10%  Nebraska : 18%  New Jersey : 16%  Pennsylvania : 15%  Tennessee : 9.5% (Gift Tax 16%) 

 

Calculator Examples*

Estate Tax Calculator -- What Will You Owe? See, e.g.: A. http://www.smartmoney.com/calculator/estate-

planning/estate-tax-calculator-1304463115650/ B. http://www.calculator.net/estate-tax-

calculator.html

*Not Intended as Legal Advice

Calculating Federal Estate Tax

1. Value of gross estate minus allowable deductions. 2. Add value of taxable gifts made after 1976. Estate & gift tax rate based on cumulative transfers.

3. See next slide for tax tables/unified rate schedule for applicable tax rate; apply unified estate & gift tax rates. 

4. Subtract gift taxes paid on taxable gifts made after 1976.  Melissa O'Rourke , Evaluating Your Estate Plan: Federal Estate Taxes:

http://www.extension.iastate.edu/agdm/wholefarm/html/c4-24.html

6. Subtract allowable unified credit and other allowable credits. Result: amount = estate’s net federal estate tax owed.

When Must the Federal Estate Tax Return be filed and the Tax Paid?

If the value of a decedent’s gross estate is large enough to trigger the filing of a Federal Estate Tax return, the IRS Form 706 - Estate Tax Return is due nine (9) months after the date of death.

Extensions of various lengths, available to file the return or to pay the tax, are available if good cause can be shown.

Interest accrues on estate tax payable.

Extensions for Filing IRS Form 706

Penalties may be assessed against estate if federal estate tax is not paid when due & extensions are not obtained.

One-year extension based on good cause shown; or Five-year deferral or 10-year installment payments for closely-held

businesses where decedent’s interest in closely-held business exceeds 35 percent of decedent’s gross estate. Penalties may be imposed for undervaluing estate property

or for fraud. In extreme cases, criminal penalties, fines or imprisonment

may be imposed.