Definition
Federal Estate and Gift Tax refers to a tax imposed by the federal government on the value of property and assets transferred from a deceased person (decedent) to their beneficiaries, and on certain lifetime gifts exceeding specified thresholds. The tax is calculated based on the total value of the decedent’s estate and any applicable lifetime gifts.
Detailed Steps for Computation:
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Determining the Gross Estate:
This involves adding the values of all assets owned by the decedent at the time of death such as:
- Property owned outright by the decedent.
- Lifetime transfers where the decedent retained control or income.
- Lifetime transfers that depend on the recipient outliving the decedent.
- Transfers where the decedent retained the right to revoke, amend, or alter the gift.
- Annuities purchased by the decedent, payable for the lifetimes of the annuitant and the named survivor.
- Jointly held property that transfers to a survivor on the decedent’s death.
- Life insurance policies where the decedent retained incidents of ownership or policies payable to the decedent’s estate.
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Subtracting Allowable Deductions:
From the gross estate, allowable deductions are subtracted. These can include:
- Bequests to charities.
- Bequests to the surviving spouse.
- Funeral expenses.
- Administrative expenses.
This results in the Taxable Estate.
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Adding Adjustable Taxable Gifts:
Adjustable taxable gifts made during the decedent’s lifetime are added to the taxable estate to arrive at the computational tax base.
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Applying the Appropriate Tax Rate:
The applicable federal estate tax rate is applied to the computational tax base to determine the tentative federal estate tax. Certain credits may reduce this tentative tax.
Examples
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Decedent Leaves Property to Heirs:
If a decedent leaves $5 million worth of property to their heirs and has allowable deductions totaling $1 million, the taxable estate is $4 million. If there were $500,000 of taxable lifetime gifts, the computational tax base would be $4.5 million.
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Annuities and Life Insurance:
A decedent who purchased an annuity payable to a surviving spouse and held a life insurance policy payable to their estate would include both within the gross estate valuation.
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Charitable Bequests:
A decedent who leaves $2 million to a charity and the remaining estate valued at $6 million to their heirs subtracts the $2 million charitable bequest from the gross estate, resulting in a $4 million taxable estate.
Frequently Asked Questions (FAQs)
What is the federal estate tax exemption amount?
The exemption amount varies by year and is indexed for inflation. For recent years, it has been around $11.7 million per individual. Amounts above this threshold are subject to estate tax.
What property is included in a decedent’s gross estate?
The gross estate includes all property owned at death, certain lifetime transfers with retained interests, jointly held property, life insurance policies, and more.
Are bequests to spouses tax-deductible?
Yes, bequests to a surviving spouse are typically deductible due to the unlimited marital deduction.
Can the federal estate tax be minimized?
Yes, careful estate planning and the use of trusts, lifetime gifts, and other strategies can help minimize estate tax liability.
Is there a state estate tax?
Some states impose their own estate or inheritance taxes, which are separate from the federal estate tax.
- Decedent: The person who has died, whose estate is being administered.
- Gross Estate: The total value of all property and assets that are considered part of a decedent’s estate.
- Taxable Estate: The value of the gross estate minus allowable deductions.
- Annuitant: The individual who receives payments from an annuity.
- Lifetime Transfers: Gifts or transfers made during an individual’s life.
Online References
Suggested Books for Further Studies
- “The Complete Book of Wills, Estates & Trusts” by Alexander A. Bove Jr. Esq.
- “Estate Planning Basics” by Denis Clifford
- “J.K. Lasser’s Small Business Taxes 2023: Your Complete Guide to a Better Bottom Line” by Barbara Weltman
Fundamentals of Federal Estate and Gift Tax: Tax Law Basics Quiz
### Does the federal estate tax apply to life insurance policies the decedent owned?
- [x] Yes, if the decedent retained incidents of ownership.
- [ ] No, life insurance policies are always excluded from estate tax.
- [ ] Only if the policy is payable to a non-family member.
- [ ] Only if the death benefit exceeds a certain amount.
> **Explanation:** Life insurance policies in which the decedent retained incidents of ownership or that are payable to the decedent's estate are included in the gross estate for tax purposes.
### What is deducted from the gross estate to calculate the taxable estate?
- [ ] Taxable income
- [x] Allowable deductions such as charitable bequests and funeral expenses
- [ ] Annual gift tax exemptions
- [ ] Business expenses
> **Explanation:** Allowable deductions such as charitable bequests, bequests to the surviving spouse, funeral expenses, and administrative expenses are subtracted from the gross estate to determine the taxable estate.
### How is the gross estate value determined?
- [ ] By calculating the depreciated value of all assets
- [ ] By subtracting all outstanding debts
- [x] By adding the values of all assets owned by the decedent at the time of death
- [ ] By using the net household worth
> **Explanation:** The gross estate value is determined by adding the values of all assets owned by the decedent at the time of death, including property, insurance owned, annuities, and certain lifetime transfers.
### Which transfers are included in the gross estate?
- [ ] Only transfers made to immediate family members
- [ ] Transfers made five years before death only
- [x] Transfers where the decedent retained control or income rights
- [ ] Transfers of joint property only
> **Explanation:** Transfers where the decedent retained income or control over the income, as well as retained rights to amend or revoke the gift, are included in the gross estate.
### What is the computational tax base?
- [ ] The gross estate minus administrative fees
- [ ] The total sum of all gifts ever given by the decedent
- [x] The taxable estate plus adjustable taxable gifts
- [ ] The gross estate minus any outstanding debts
> **Explanation:** The computational tax base is achieved by adding adjustable taxable gifts to the taxable estate.
### Are bequests to a surviving spouse subject to federal estate tax?
- [x] No, due to the unlimited marital deduction.
- [ ] Yes, they are subject to the same rates.
- [ ] Only up to a certain amount.
- [ ] Only if the spouse has not remarried.
> **Explanation:** Bequests to a surviving spouse are not subject to federal estate tax because of the unlimited marital deduction.
### What property is excluded from the gross estate?
- [ ] Property with a sentimental value.
- [ ] Non-income generating assets.
- [ ] Property held in trust for others.
- [x] Accrued but unpaid salaries.
> **Explanation:** Accrued but unpaid salaries at the time of the death are generally not included in the gross estate.
### Can lifetime gifts be included in the estate tax calculation?
- [x] Yes, certain lifetime gifts are included.
- [ ] No, gifts are always excluded.
- [ ] Only if they are below the annual exclusion amount.
- [ ] Only if given within the last year of life.
> **Explanation:** Certain lifetime gifts, especially those where the decedent retained some control or income rights, are included in the estate tax calculation.
### What happens if the decedent held property jointly with right of survivorship?
- [ ] The property is excluded from the estate.
- [x] The decedent's interest in the property is included in the gross estate.
- [ ] The entire property's value is included.
- [ ] Only a fraction of the property's value is included based on contribution.
> **Explanation:** The decedent's interest in jointly held property with right of survivorship is included in the gross estate.
### How is the tentative federal estate tax finalized?
- [ ] By multiplying the computational base by the tax credit ratio.
- [ ] By subtracting annual gift exemptions.
- [ ] By dividing the gross estate by the number of heirs.
- [x] By applying the applicable tax rate to the computational base and adjusting with credits.
> **Explanation:** The tentative federal estate tax is finalized by applying the applicable tax rate to the computational base, and then adjusting for any credits available under the tax code.
Thank you for exploring the complex world of federal estate and gift tax with us. May this knowledge empower you in your estate planning and financial decision-making!
