c.
Estimate the amount of estate tax due if Hank were to die within three years of
transferring the insurance policy.
At the time of his death, Hank estimates he will
have a probate estate of $10 million to be divided in equal shares between his two
children.
a.
Total 2006 gift of life insurance policy
$
50,000
2006 annual exclusions
($12,000 per donee)
-
24,000
Current taxable gifts
$
26,000
Prior taxable gifts
+ 1,500,000
Cumulative gifts
$ 1,526,000
Tax on cumulative gifts
$
567,500
less Current tax on prior taxable gifts
-
555,800
Tax on current taxable gifts
$
11,700
Unified credit in 2005
$
345,800
less Unified credit used previously
-
345,800
Unused unified credit
-
0
Gift tax due in 2006
$
11,700
b.
Adjusted taxable gifts
$
1,526,000
Taxable estate
+ 10,000,000
Cumulative taxable transfers
$
11,526,000
Tax on cumulative transfers
$ 5,067,500
Gift taxes paid
in 2005-06
($555,800-$345,800 + $11,700)
-
221,700
Tax on taxable estate
$ 4,845,800
Unified credit in 2010
-
1,455,800
Estimated estate tax due
$
3,390,000
c.
Adjusted taxable gifts
$
1,500,000
Life insurance policy
+
400,000
Gift tax paid in 2006
+
11,700
Taxable estate
+ 10,000,000
Cumulative taxable transfers
$
11,911,700
Tax on cumulative transfers
$ 5,241,065
Gift taxes paid
in 2005 & 2006
-
221,700
Tax on taxable estate
$ 5,019,365
Unified credit in 2010
-
1,455,800
Estimated estate tax due in 2010
$
3,563,565
14-19
Chapter 14 - Transfer Taxes and Wealth Planning
64.
Jack made his first taxable gift of $1,000,000 in 1997, at which time the unified credit was
$192,800.
Jack made no further gifts until 2005, at which time he gave $250,000 each to
his three children and an additional $100,000 to State University (a charity).
The annual
exclusion in 2005 was $11,000.
Recently Jack has been in poor health and would like you
to estimate his estate tax should he die this year.
He estimates his taxable estate (after
deductions) will be worth $5.4 million at his death.
Assume Jack is single and has paid the
proper amounts of tax in past years.
The solution proceeds in three steps with the calculation of the gift taxes in 1997 and 2005
followed by the calculation of the estate tax in 2010.
1997:
Jack made his first taxable gift of $1,000,000 in 1997 at which time the unified
credit was $192,800.
If Jack had not previously made any taxable gifts, the cumulative tax
would be $345,800, and after application of the unified credit, Jack would owe a gift tax of
$153,000 calculated as follows:
Current taxable gift (after exclusion)
$ 1,000,000
Prior taxable gifts
0
Cumulative taxable gifts
$ 1,000,000
Tax on cumulative gifts
$ 345,800
Current tax on prior taxable gifts
-
0
Tax on current taxable gifts
$ 345,800
Unified credit in 1997
$ 192,800
Unified credit used previously
-
0
Unused unified credit
- 192,800
Gift tax due in 1997
$ 153,000
2005:
Jack calculates his gift tax as follows:
14-20
Chapter 14 - Transfer Taxes and Wealth Planning
Total gifts
$ 850,000
Annual exclusion
($11,000 per donee in 2005)
-
44,000
Charitable deduction
($100K - $11K exclusion)
-
89,000
-
133,000
Current taxable gifts
$
717,000
Prior taxable gifts
1,000,000
Cumulative taxable gifts
$ 1,717,000
Tax on cumulative gifts
$ 653,450
Current tax on prior taxable gifts
- 345,800
Tax on current taxable gifts
$ 307,650
Unified credit in 2005
$ 345,800
Unified credit used previously
- 192,800
Unused unified credit
- 153,000
Gift tax due in 2005
$ 154,650
2010:
After paying gift taxes of $153,000 in 1997 and $154,650 in 2005, Jack estimates
that his taxable estate (after deductions) will be worth $5.4 million in 2010.
An estimate of
the estate tax for 2010 is calculated as follows:
Adjusted taxable gifts
$ 1,717,000
Taxable estate
+ 5,400,000
