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Chapter 15 Financial Planning Exercise 7 Calculation of estate taxes Use Worksheet 15.1. When Jackson Holmes died in 2018, he left an estate valued at $7,750,000. His trust directed distribution as follows: $21,000 to the local hospital, $170,000 to his alma mater, and the remainder to his three adult children. Death-related costs were $15,400 for funeral expenses, $35,000 paid to attorneys, $4,000 paid to accountants, and $30,000 paid to the trustee of his living trust. In addition, there were debts of $150,000. Use Worksheet 15.1 and Exhibit 15.5 and Exhibit 15.6 to calculate the federal estate tax due on Jackson's estate. Round your answer to nearest whole dollar. $ Name Line 1 2 3 4 5 6 7 8 9 10 11 12 Computation COMPUTING FEDERAL ESTATE TAX DUE Item Gross estate Subtract sum of: (a) Funeral expenses (b) Administrative expenses (c) Debts (d) Other expenses Total Result: Adjusted gross estate Subtract sum of: (a) Marital deduction (b) Charitable deduction Total Taxable estate Adjusted taxable gifts (post-1976) Estate tax base Result: Subtract: Result: Result: Add: Result: Compute: Subtract sum of: (a) Gift tax payable on post-1976 gifts (b) Unified tax credit Total Tentative tax on estate tax base Total death taxes State death-tax credit Federal estate tax due $ $ Date Amount Use Exhibit 15.7 to calculate the tentative tax. Use Exhibit 15.8 to determine the appropriate unified credit. Note that the tax amount shown on line 10 is the significant number, because most states are "pickup tax" states, meaning that the state simply collects the state death tax credit, a dollar-for-dollar credit. Use Exhibit 15.9 to calculate the state death tax credit. $ $ $ $ s ($ $ ($ $ vol Total Amount Exhibit 15.5 Federal Unified Transfer Tax Rates This unified rate schedule defines the amount of federal gift and estate taxes that estates of various sizes would have to pay: it incorporates the rates passed in the American Taxpayer Relief Act of 2012, signed into law on January 2, 2013. Estates and gifts under the exclusion amount pay no federal tax. The estate exclusion amount increased annually from $2,000,000 in 2006 to $11,180,000 in 2018. (see Exhibit 15.6). From 2009 to 2018, the top tax rates decreased from 45 percent to 40 percent. Tentative Tax + Percent Taxable Estate Value More Than $ 0 10,000 20,000 40,000 60,000 80,000 100,000 150,000 But Not More Than $ 10,000 20,000 250,000 500,000 750,000 1,000,000 Source: Internal Revenue Code, Section 2001. 40,000 60,000 80,000 100,000 150,000 250,000 500,000 750,000 1,000,000 Base Amount $0 1,800 3,800 8,200 13,000 18,200 23,800 38,800 70,800 155,800 248,300 345,800 20% 22 24 26 28 30 32 34 37 39 40 On Excess Over $ 10,000 20,000 40,000 60,000 80,000 100,000 150,000 250,000 500,000 750,000 1,000,000 Exhibit 15.6 Unified Credits and Applicable Exclusion Amounts for Estates and Gifts On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law. The major features of the Act were to make the estate tax rate 40 percent, to make the annual adjustment to the applicable exclusion amount permanent, and to make the portability of the unified transfer tax credit permanent. The Tax Cut and Jobs Act of 2017 increased the applicable exclusion amount to $11,180,000. This table shows the recent history of the unified credits and applicable exclusion amounts. Applicable Exclusion Amount-Estates $2,000,000 $3,500,000 Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Unified Tax Credit-Estates $780,800 $1,455,800 Estate tax repealed for 2010 $1,730,800 $1,772,800 $2,045,800 $2,081,800 Source: Internal Revenue Service $2,117,800 $2,125,800 $2,141,800 $4,417,800 $5,000,000 $5,120,000 $5,250,000 $5,340,000 $5,430,000 $5,340,000 $5,490,000 $11,180,000 Unified Tax Credit-Gifts $345,800 $345,800 $330,800 $1,730,800 $1,772,800 $2,045,800 $2,081,800 $2,117,800 $2,125,800 $2,141,800 $4,417,800 Applicable Exclusion Amount-Gifts $1,000,000 $1,000,000 $1,000,000 $5,000,000 $5,120,000 $5,250,000 $5,340,000 $5,430,000 $5,340,000 $5,490,000 $11,180,000 Chapter 15 Financial Planning Exercise 7 Calculation of estate taxes Use Worksheet 15.1. When Jackson Holmes died in 2018, he left an estate valued at $7,750,000. His trust directed distribution as follows: $21,000 to the local hospital, $170,000 to his alma mater, and the remainder to his three adult children. Death-related costs were $15,400 for funeral expenses, $35,000 paid to attorneys, $4,000 paid to accountants, and $30,000 paid to the trustee of his living trust. In addition, there were debts of $150,000. Use Worksheet 15.1 and Exhibit 15.5 and Exhibit 15.6 to calculate the federal estate tax due on Jackson's estate. Round your answer to nearest whole dollar. $ Name Line 1 2 3 4 5 6 7 8 9 10 11 12 Computation COMPUTING FEDERAL ESTATE TAX DUE Item Gross estate Subtract sum of: (a) Funeral expenses (b) Administrative expenses (c) Debts (d) Other expenses Total Result: Adjusted gross estate Subtract sum of: (a) Marital deduction (b) Charitable deduction Total Taxable estate Adjusted taxable gifts (post-1976) Estate tax base Result: Subtract: Result: Result: Add: Result: Compute: Subtract sum of: (a) Gift tax payable on post-1976 gifts (b) Unified tax credit Total Tentative tax on estate tax base Total death taxes State death-tax credit Federal estate tax due $ $ Date Amount Use Exhibit 15.7 to calculate the tentative tax. Use Exhibit 15.8 to determine the appropriate unified credit. Note that the tax amount shown on line 10 is the significant number, because most states are "pickup tax" states, meaning that the state simply collects the state death tax credit, a dollar-for-dollar credit. Use Exhibit 15.9 to calculate the state death tax credit. $ $ $ $ s ($ $ ($ $ vol Total Amount Exhibit 15.5 Federal Unified Transfer Tax Rates This unified rate schedule defines the amount of federal gift and estate taxes that estates of various sizes would have to pay: it incorporates the rates passed in the American Taxpayer Relief Act of 2012, signed into law on January 2, 2013. Estates and gifts under the exclusion amount pay no federal tax. The estate exclusion amount increased annually from $2,000,000 in 2006 to $11,180,000 in 2018. (see Exhibit 15.6). From 2009 to 2018, the top tax rates decreased from 45 percent to 40 percent. Tentative Tax + Percent Taxable Estate Value More Than $ 0 10,000 20,000 40,000 60,000 80,000 100,000 150,000 But Not More Than $ 10,000 20,000 250,000 500,000 750,000 1,000,000 Source: Internal Revenue Code, Section 2001. 40,000 60,000 80,000 100,000 150,000 250,000 500,000 750,000 1,000,000 Base Amount $0 1,800 3,800 8,200 13,000 18,200 23,800 38,800 70,800 155,800 248,300 345,800 20% 22 24 26 28 30 32 34 37 39 40 On Excess Over $ 10,000 20,000 40,000 60,000 80,000 100,000 150,000 250,000 500,000 750,000 1,000,000 Exhibit 15.6 Unified Credits and Applicable Exclusion Amounts for Estates and Gifts On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law. The major features of the Act were to make the estate tax rate 40 percent, to make the annual adjustment to the applicable exclusion amount permanent, and to make the portability of the unified transfer tax credit permanent. The Tax Cut and Jobs Act of 2017 increased the applicable exclusion amount to $11,180,000. This table shows the recent history of the unified credits and applicable exclusion amounts. Applicable Exclusion Amount-Estates $2,000,000 $3,500,000 Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Unified Tax Credit-Estates $780,800 $1,455,800 Estate tax repealed for 2010 $1,730,800 $1,772,800 $2,045,800 $2,081,800 Source: Internal Revenue Service $2,117,800 $2,125,800 $2,141,800 $4,417,800 $5,000,000 $5,120,000 $5,250,000 $5,340,000 $5,430,000 $5,340,000 $5,490,000 $11,180,000 Unified Tax Credit-Gifts $345,800 $345,800 $330,800 $1,730,800 $1,772,800 $2,045,800 $2,081,800 $2,117,800 $2,125,800 $2,141,800 $4,417,800 Applicable Exclusion Amount-Gifts $1,000,000 $1,000,000 $1,000,000 $5,000,000 $5,120,000 $5,250,000 $5,340,000 $5,430,000 $5,340,000 $5,490,000 $11,180,000