ESTATE PLANNING - Estate Tax Basics
The Estate Tax
Federal estate taxes are imposed on the transfer of wealth at death. The calculation of the estate tax is based on the value of a decedent's "gross estate". The gross estate can be loosely defined as the value of all property in which the decedent had any interest at the time of his death (plus certain other statutorily mandated items).
Who is Subject to the Estate Tax?
The estate tax is imposed on the taxable estate of every decedent who is either a citizen or resident of the United States. The determination of the amount of estate tax due is, like most taxes, based on the computation of a taxable amount multiplied by a progressive tax rate. In all cases where estate tax is due, a Form 706, estate tax return, must be filed. The estate tax return must be filed within nine months after the decedent's death, although an extension of an additional six months is generally granted upon the filing of an application for extension.
Inclusions in the Gross Estate
Property interests included in the gross estate are usually valued at fair market value on the date of death. Some of the special rules regarding the inclusion of property in a decedent's gross estate are as follows:
- Property Owned Outright This is the simplest and most obvious category of items included in the gross estate. It comprises all property that a decedent owned individually and outright.
- Jointly-Held Property and the Estate Tax If joint property is held with rights of survivorship between husband and wife, then one-half of the value of such joint property is included in the gross estate of the first joint tenant to die and the other one-half is excluded from the gross estate. If joint property is held with right of survivorship between persons who are not husband and wife (such as parent-child or brother-sister), then the entire value of any joint property will be included in the estate of the first joint tenant to die, unless the estate can affirmatively prove that the surviving joint tenant supplied some, or all, of the money used to purchase the joint property.
- Life Insurance The proceeds of any life insurance on the decedent's life is included in his gross estate if: (i) the policy proceeds are payable directly or indirectly to the decedent's estate; or (ii) the decedent held any incident of ownership in the policy, such as the right to change the beneficiary, surrender or cancel the policy or borrow against the policy.
Marital Deduction Planning
Of the various estate tax deductions, clearly the most significant is the unlimited marital deduction which provides an estate tax deduction for property left to a surviving spouse. There are two basic prerequisites of the unlimited marital deduction:
- An Interest Must Pass to the Surviving Spouse. A marital bequest must be to a legally recognized spouse. A bequest to a divorced or deceased spouse will not warrant a marital deduction. The surviving spouse must also be a citizen of the United States.
- The Interest Must be a Deductible Property Interest. Mere passing of property from a decedent to a surviving spouse alone is not enough to warrant a deduction. An interest is deductible only to the extent such interest is included in determining the value of the gross estate. The reason for this rule is simple; if an item is not included in the gross estate, its passing should not qualify for a deduction.
