Taxation Paper 2

(c) If the executor of a decedent’s estate elects the alternate valuation date and none of the assets have been sold or distributed, the estate assets must be included in the decedent’s gross estate at their FMV as of six months after the decedent’s death.

(d) The requirement is to determine the amount of a decedent’s taxable estate that is effectively tax-free if the maximum basic exclusion amount is taken for 2013. The maximum estate tax credit is the equivalent of an exemption of $5,000,000 and effectively permits $5,000,000 of taxable estate to be free of tax.

(d) The requirement is to determine which of the credits may be offset against the gross estate tax in determining the net estate tax of a US citizen for 2013. In computing the net estate tax of a US citizen, the gross estate tax may be offset by the applicable tax credit, and credits for foreign death taxes, and prior transfer taxes. For 2013, the applicable tax credit is equivalent to an exemption of the first $5,000,000 of taxable gifts or taxable estate from the unified transfer tax. Only adjusted taxable gifts made after 1976 are added back to a donor’s taxable estate in arriving at the tax base for the application of the federal estate tax at death. To the extent these taxable gifts exceeded the exemption equivalent of the applicable credit and required the payment of a gift tax during the donor’s lifetime, such tax is then subtracted from a donor’s tentative estate tax at death in arriving at the gross estate tax. Thus, although post-1976 gift taxes reduce the net estate tax, they are not subtracted as a tax credit from the gross estate tax.

(a) The requirement is to determine the correct statement with regard to the gross estate of the first spouse to die when property is owned by them as tenants by the entirety or as joint tenants with right of survivorship. Under the general rule for joint tenancies, 100% of the value of jointly held property is included in a deceased tenant’s gross estate except to the extent that the surviving tenants can prove that they contributed to the cost of the property. However, under a special rule applicable to spouses who own property as tenants by the entirety or as joint tenants with right of survivorship, the gross estate of the first spouse to die automatically includes 50% of the value of the jointly held property, regardless of which spouse furnished the original consideration for the purchase of the property.

(d) The requirement is to determine the amount of insurance proceeds included in Burr’s gross estate with regard to a policy on Burr’s life purchased by Adam in connection with a ’buy-sell’ agreement funded by a cross-purchase insurance arrangement. The gross estate of a decedent includes the proceeds of life insurance on the decedent’s life if (1) the insurance proceeds are payable to the estate, (2) the proceeds are payable to another for the benefit of the estate, or (3) the decedent possessed an incident of ownership in the policy. An ’incident of ownership’ not only means ownership of the policy in a legal sense, but also includes the power to change beneficiaries, to revoke an assignment, to pledge the policy for a loan, or to surrender or cancel the policy. Here, since the policy owned by Adam on Burr’s life was not payable to or for the benefit of Burr’s estate, and Burr had no incident of ownership in the policy, the full amount of insurance proceeds would be excluded from Burr’s gross estate.

(d) The requirement is to determine the amount includible as Wald’s gross estate for federal estate tax purposes. If an executor does not elect the alternate valuation date, all property in which the decedent possessed an ownership interest at time of death is included in the decedent’s gross estate at its fair market value at date of death. If property was held in joint tenancy and was acquired by purchase by other than spouses, the property’s total fair market value will be included in the decedent’s gross estate except to the extent that the surviving tenant can prove that he/she contributed toward the purchase. Since Wald purchased the land with his own funds, the land’s total fair market value ($3,800,000) must be included in Wald’s gross estate together with Wald’s personal effects and jewelry ($1,750,000), resulting in a gross estate of $5,550,000.

(d) The requirement is to determine the item that is deductible from a decedent’s gross estate. Unpaid income taxes on income received by the decedent before death would be a liability of the estate and would be deductible from the gross estate. Foreign death taxes, income tax paid on income earned and received after the decedent’s death, and federal estate taxes are not deductible in computing a decedent’s taxable estate. Note that although foreign death taxes are not deductible in computing a decedent’s taxable estate, a limited tax credit is allowed for foreign death taxes in computing the net estate tax payable.

(a) The requirement is to determine whether federal estate tax returns must be filed for the estates of Eng and Lew. For a decedent dying during 2013, a federal estate tax return (Form 706) must be filed if the decedent’s gross estate exceeds $5,000,000. If a decedent made taxable lifetime gifts such that the decedent’s applicable transfer tax credit was used to offset the gift tax, the ($5,000,000) exemption amount must be reduced by the amount of taxable lifetime gifts to determine whether a return is required to be filed. Since Lew made no lifetime gifts and the value of Lew’s gross estate was only $4,800,000, no federal estate tax return is required to be filed for Lew’s estate. In Eng’s case, the $5,000,000 exemption is reduced by Eng’s $400,000 of taxable lifetime gifts to $4,600,000. However, since Eng’s gross estate totaled only $3,600,000, no federal estate tax return is required to be filed for Eng’s estate.

(d) The requirement is to determine the correct statement regarding the use of the alternate valuation date in computing the federal estate tax. An executor of an estate can elect to use the alternate valuation date (the date six months after the decedent’s death) to value the assets included in a decedent’s gross estate only if its use decreases both the value of the gross estate and the amount of estate tax liability. Answer (a) is incorrect because the alternate valuation date cannot be used if its use increases the value of the gross estate. Answer (b) is incorrect because the use of the alternate valuation date is an irrevocable election. Answer (c) is incorrect because the alternate valuation date is only used to value an estate’s assets, not its liabilities.

(c) The requirement is to determine when the proceeds of life insurance payable to the estate’s executor, as the estate’s representative, are includible in the decedent’s gross estate. The proceeds of life insurance on the decedent’s life are always included in the decedent’s gross estate if (1) they are receivable by the estate, (2) the decedent possessed any incident of ownership in the policy, or (3) they are receivable by another (e.g., the estate’s executor) for the benefit of the estate.