Estate Tax

<div class="Section1"><br /> <br /> No interest in a qualified tuition program is includable in the estate of any individual for purposes of the estate tax, with two exceptions: (1) distributions made to the estate of the beneficiary upon the beneficiary&rsquo;s death; and (2) if such a donor dies before the end of a five-year gift tax proration period (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="902">902</a>), the gross estate of the donor will include the portion of contributions allocable to periods after the death of the donor.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="902">902</a> for the gift tax treatment and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="687">687</a> for the income tax treatment of qualified tuition programs.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 529(c)(4).<br /> <br /> </div></div><br />

Under IRC Section 2054, losses incurred during the period of administration from fire, storm, or other casualty, or from theft, are deductible to the extent not compensated by insurance or otherwise. Therefore, post-death events, such as destruction to estate assets from a storm, generate an estate tax deduction that can offset the date-of-death value of the property destroyed or damaged.

<div class="Section1"><br /> <br /> A deduction is available for federal estate tax purposes for estate, inheritance, legacy, or succession taxes (i.e., death taxes) paid to any state or the District of Columbia with respect to the estate of the decedent.<a href="#_ftn1" name="_ftnref1">¹</a> The deduction is available for tax years beginning in 2005 and thereafter. A credit for state death taxes (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="861">861</a>) was available before 2005.<br /> <br /> The deduction is available only for state death taxes actually paid and claimed as a deduction before the later of (1) four years after the filing of the federal estate tax return; (2) 60 days after a decision of the Tax Court with respect to a timely filed petition for redetermination of a deficiency; or (3) with respect to a timely filed claim for refund or credit of the federal estate tax, the later of (a) 60 days of the mailing of a notice of disallowance by the IRS, (b) 60 days after the decision of any court of competent jurisdiction on such claim, or (c) two years after the taxpayer files a notice of waiver of disallowance.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2058, as added by EGTRRA 2001.<br /> <br /> </div></div><br />

<div class="Section1">A foreign death tax credit is provided for United States citizens and residents. The credit applies to property which is subject to both federal and foreign death taxes.<a href="#_ftn1" name="_ftnref1">¹</a> However, if there is a treaty with the foreign country levying a tax for which a credit is allowable, the executor may elect whether to rely on the IRC credit provisions or the treaty provisions.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.    IRC § 2014.<br /> <br /> </div>

<div class="Section1"><br /> <br /> IRC Section 2037 requires inclusion in the gross estate of any interest in property transferred by the decedent if both of the following conditions are met:<br /> <p style="padding-left: 40px;">(1)     Possession or enjoyment of the property can, through ownership of the transferred interest, be obtained only by surviving the decedent; and</p><br /> <p style="padding-left: 40px;">(2)     The decedent has retained a reversionary interest in the property which, immediately before his death, exceeded 5 percent of the value of the property.</p><br /> A simple example would be a transfer to an irrevocable living trust under the following terms: income to grantor’s wife for her life; property to revert to grantor if living at wife’s death and if not, property to their daughter.<br /> <br /> Assuming that the grantor predeceases his wife and daughter, the value of the daughter’s interest – the value of the property less the wife’s life interest – is includable in the grantor’s gross estate. Obviously, the daughter had to survive the grantor in order to receive the property. And in all probability, the grantor’s reversionary interest, valued immediately before death, exceeded 5 percent of the value of the property.<br /> <br /> The term “reversionary interest” means any possibility that the <em>property</em> may return to the donor or to his estate, and any possibility that the property may become subject to a power of disposition by him. The term does not, however, include a possibility that the income alone may return to the donor or his estate. Thus, retention of a secondary life estate would not constitute a reversionary interest (although it would cause inclusion under IRC Section 2036). Also, the term “reversionary interest” does not include a mere expectancy by the decedent that upon the death of the transferee he (or his estate) may reacquire the property under the will of the transferee or under state inheritance laws.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.    Treas. Reg. § 20.2037-1(c)(2).<br /> <br /> </div>

<div class="Section1">A credit is allowed for federal gift tax paid on property transferred by the decedent during life but included in the gross estate, <em>but only as to gifts made on or before December&nbsp;31, 1976</em>.<a href="#_ftn1" name="_ftnref1">¹</a> The credit cannot exceed an amount which bears the same ratio to the estate tax imposed (after deducting the unified credit and the credit for state death taxes) as the value of the gift(s) (at time of gift or at time of death, whichever is lower) bears to the value of the gross estate minus charitable and marital deductions allowed.<a href="#_ftn2" name="_ftnref2">²</a> In the case of (pre-1977) &ldquo;split gifts&rdquo; made by the decedent and his consenting spouse (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="905">905</a>), the gift taxes paid with respect to both halves of the gift are eligible for the credit.<a href="#_ftn3" name="_ftnref3">³</a><div class="Section1"><br /> <br /> The gift tax credit cannot be taken with respect to gifts made after December&nbsp;31, 1976. However, in the computation of the estate tax, an adjustment is made for federal gift tax paid on post-1976 gifts not included in the donor-decedent&rsquo;s gross estate (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="821">821</a>).<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2012(e).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2012(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 2012(c).<br /> <br /> </div></div><br />

<div class="Section1">Whether or not a return is required depends on the size of the gross estate (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="824">824</a>), and possibly also on what kinds of gifts were made by the decedent during life. Generally, a return must be filed if the gross estate of a decedent who is a U.S. citizen or resident exceeds the estate tax unified credit equivalent ($5,000,000 for 2012-2017 and $10,000,000 for 2018-2025, as adjusted annually for inflation, the amount is $11.18 million in 2018, $11.4 million in 2019, $11.58 million in 2020, $11.7 million in 2021, $12.06 million in 2022, $12.92 million in 2023, $13.61 million in 2024 and $13.99 million in 2025).<a href="#_ftn1" name="_ftnref1">¹</a> However, the exemption amount is reduced by the amount of <em>taxable</em> gifts (the value of the property given after subtracting allowable exclusions and deductions &ndash; see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="892">892</a>) made by the decedent after December&nbsp;31, 1976, except gifts includable in the gross estate. Also, if the decedent made any gifts after September&nbsp;8, 1976 and before January&nbsp;1, 1977, the above amounts are further reduced by any amount allowed as a specific gift tax exemption (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="914">914</a>) with respect to such gifts.<a href="#_ftn2" name="_ftnref2">²</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp; Rev. Proc. 2013-35, 2013-47 IRB 537, Rev. Proc. 2018-18, Rev. Proc. 2018-57, Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2023-34, Rev. Proc. 2024-40.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp; IRC &sect; 6018(a).<br /> <br /> </div></div><br />

IRC Section 2039 deals with annuities or other payments receivable by any beneficiary under any form of contract or agreement by reason of surviving the decedent. Subsections (a) and (b) of that section state the circumstances under which such an annuity or payment is includable in the decedent’s gross estate. Thus, IRC Section 2039 applies to death and survivor benefits under annuity contracts and under optional settlements of living proceeds from life insurance policies and endowment contracts.<br /> <br /> Exclusions under various provisions of IRC Section 2039 may apply to employee annuities which are part of qualified pension and profit sharing plans; to employee annuities payable under nonqualified deferred compensation plans, including death benefit only plans; to certain tax sheltered annuity plans; and to individual retirement savings plans.

IRC Section 2042 deals specifically with the includability of life insurance proceeds in the gross estate of the <em>insured</em>. The proceeds are includable in the insured’s gross estate under IRC Section 2042 if they are as follows:<br /> <p style="padding-left: 40px;">(1)     Receivable by or for the benefit of insured’s estate; or</p><br /> <p style="padding-left: 40px;">(2)     Receivable by a beneficiary other than the insured’s estate <em>and</em> the insured possessed at his death any of the incidents of ownership in the policy (whether exercisable by the insured alone or only in conjunction with another person).</p><br /> <br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Generally, the dispute arises as to whether the decedent held any “incidents of ownership” in the policy. A decedent may have an incident of ownership if he has the power to change the beneficial ownership in the policy regarding its proceeds. To help remove the insurance proceeds from the insured’s estate, it may be desirable to acquire the policy in the name of an irrevocable life insurance trust or “ILIT”.<br /> <br /> <hr /><br /> <br /> &nbsp;

<div class="Section1">The IRC Section 6166 election terminates and the whole of the unpaid portion of the tax payable in installments becomes due and is payable upon notice and demand from the district director if (1) any portion of the business interest is distributed, sold, exchanged, or otherwise disposed of, or money and other property attributable to such an interest is withdrawn from the business, and (2) the aggregate of such distributions, sales, exchanges, or other dispositions and withdrawals equals or exceeds 50 percent of the value of such interest.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> A sale of business assets by the estate to satisfy unpaid mortgages encumbering the business property is not considered a disposition for purposes of the IRC Section 6166 election; however, to the extent proceeds from such a sale exceed the amount used to satisfy the mortgages, the transaction is considered a disposition.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Distributions in redemption of stock under IRC Section 303 (distributions in redemption of stock held by a decedent at death in an amount not in excess of death taxes and settlement costs under special income tax rules that treat the redemption as a capital transaction rather than as a dividend) are not counted as withdrawals or as disposals of decedent’s interest in the business if an amount equal to any such distribution is paid in estate tax on or before the due date of the first installment of tax due after the distribution, or, if earlier, within one year after the distribution. However, an IRC Section 303 redemption does reduce the value of the business (as of the applicable valuation date) by the amount redeemed, for purposes of determining whether other withdrawals, distributions, sales, exchanges, or disposals meet the applicable 50 percent test.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.    IRC § 6166(g)(1)(A).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.    Let. Rul. 8441029.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.    IRC § 6166(g)(1)(B).<br /> <br /> </div>