TIMELINE OF EVENTS Beth R. Tyler, Edward Fleisher, Jessica Sampson

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1 The Federal Estate Tax Return: Dealing with Portability and other Preparation Pointers Philadelphia Bar Association s Probate & Trust Section s Tax Committee May 21, 213 Robert M. Maxwell, Esq. Direct: Director of Estate Tax, Managing Director Facsimilie: The Glenmede Trust Company, N.A. robert.maxwell@glenmede.com 1. Filing the Federal Estate Tax Return a. Extension of Time to Pay b. Extension of Time to File 2. Lifetime gifts and Form 76 a. Duty of executor to inquire as to prior gifts b. Line 4 Worksheet-Adjusted taxable gifts c. Line 7 Worksheet-Total gift tax paid or payable 3. Gallenstein a. Full basis step up of house b. Capital gains when the surviving spouse sells the house. 4. State Death Tax Deduction a. What is deductible? 5. Deceased Spousal Unused Exclusion (DSUE) [Portability] a. Portability for the decedent with a Surviving Spouse i. To which estates does portability apply? ii. How do you elect portability? iii. How do you opt out? b. How do you calculate the amount that is portable? i. What impact of prior gifts? c. Complete and properly prepared Return i. Estimating with the special rule of Treas. Reg T(a)(7)(ii) 6. The Surviving Spouse and the Deceased Spousal Unused Exclusion a. When can the surviving spouse use the DSUE? b. When does the DSUE end? i. last deceased spouse ii. Remarriage, or remarriage and divorce by surviving spouse c. Gift Tax Return of Surviving Spouse d. Federal Estate Tax Return of Surviving Spouse 7. Prior Transfer Credit 1

2 TIMELINE OF EVENTS Beth R. Tyler, Edward Fleisher, Jessica Sampson 12/31/1969 Beth R. Tyler marries Edward Fleisher 1/1/1972 Beth and Edward buy 23 Lowry s Lane, Rosemont, PA -Beth pays all consideration -House titled as tenants-by-the-entireties 2/2/22 Beth gives $1,511, to Michelle Jackson (her sister) -Annual gift tax exclusion is $11, -Gift tax due when lifetime taxable gifts exceed $1,, 4/15/22 Beth files a 22 Gift Tax Return -Pays $21, of Gift Tax 1/5/212 Beth dies -Surviving spouse: Edward Fleisher -Executor: Edward Fleisher -Federal Estate Tax Return due 1/5/212 extended to 4/5/213 -PA Inheritance Tax Return due 1/5/212 extended to 4/5/213 - Gross estate plus adjusted taxable gifts are less than $5,12, Federal filing requirement. -Federal Estate Tax Return filed for portability. $2,659,148 is the Deceased Spousal Unused Exclusion (DSUE) portable to Edward Fleisher for gift and estate tax purposes. 5/2/212 Edward Fleisher marries Jessica Sampson 6/14/212 Edward gives $2,13, to Bubbles Barton (his daughter) -Annual gift tax exclusion is $13, 8/21/212 Jessica Sampson dies 2/2/213 Edward Fleisher dies -Federal Estate Tax Return due 5/21/213 -PA Inheritance Tax Return due 5/21/213 -Federal Estate Tax Return due 11/2/213 -PA Inheritance Tax Return due 11/2/213 2

3 I. THE FEDERAL ESTATE TA RETURN-GENERAL FILING INFORMATION A. WHICH ESTATES MUST FILE A RETURN 1. Gross estate requirement The executor must file a federal estate tax return if the gross estate, plus adjusted taxable gifts and specific exemption is more than the amount shown below: a) 211 deaths-$5,, b) 212 deaths-$5,12, c) 213 deaths-$5,25, (top rate increases to 4%) 2. Portability election The executor must a file a federal estate tax return (regardless of the size of the gross estate), if the executor wants to elect to permit the decedent s surviving spouse to use the decedent s unused exclusion amount. a) The 212 Tax Relief Act (passed January 1, 213) made the portability provisions permanent. (Under the 21 Tax Relief Act, the portability provisions only applied to 211 and 212 decedents.). 3. Unified Credit Against Estate Tax a) A credit of the applicable credit amount shall be allowed to the estate of every decedent against the federal estate tax. I.R.C. 21(a) b) The applicable credit amount is the amount of the tentative tax which would be determined on the applicable exclusion amount. I.R.C. 21(c)(1) c) The applicable exclusion amount is the sum of: (1) The basic exclusion amount ($5,, for 211 deaths; $5,12, for 212 deaths, $5,25, for 213 deaths), AND (2) In the case of a surviving spouse, the deceased spousal unused exclusion amount. I.R.C. 21(c)(2) (3) The deceased spousal unused exclusion amount is the lesser of: (a) The basic exclusion amount ($5,, for 211 deaths; $5,12, for 212 deaths; $5,25, for 213 deaths), OR 3

4 (b) The excess of: (i) The applicable exclusion amount of the last such deceased spouse of such surviving spouse, over (ii) The amount with respect to which the tentative tax is determined on the estate of such deceased spouse. I.R.C. 21(c)(4) d) Prior Gift Tax Paid-For purposes of the Deceased Spousal Unused Exclusion Amount calculation, the amount of adjusted taxable gifts is reduced by the amount of gifts on which gift tax was paid. Treas. Reg T(c)(2) 4. Portability Election a) A deceased spousal unused exclusion amount [ DSUE ] may only be taken into account by a surviving spouse if the executor of the deceased spouse: (1) Timely files (including extensions) a federal estate tax return on which the amount is computed; and (2) Makes an election on the federal estate tax return. I.R.C. 21(c)(5)(A) b) The election is irrevocable. I.R.C. 21(c)(5)(A) (1) A portability election can be superseded by a subsequently filed return, provided that return is filed by the due date of the return. Treas. Reg T(a)(4) c) Deemed election Upon timely filing of a complete and properlyprepared estate tax return, the executor will have elected portability of the DSUE amount unless the executor chooses not to elect portability. Treas. Reg T(a)(2) d) Ways to not make the Portability Election (1) 211 Federal Estate Tax Form (a) Statement-Attach a statement to the return indicating that the estate is not making the election under 21(c)(5); Treas. Reg T(a)(3)(i) 4

5 (b) Write No Election under Section 21(c)(5) across the top of the first page of the federal estate tax return. Instructions for Form 76 (Rev. August 211), p. 13 (c) Do not file a Federal Estate Tax Return (Treas. Reg T(a)(3)(ii) (2) 212 Federal Estate Tax Return (a) See Part 6, Section A. Portability Election e) Complete and Properly-Prepared Requirement (1) A return is complete and properly-prepared if prepared in accordance with the form instructions and the Internal Revenue Code and Regulations. Treas. Reg T(a)(7)(i) (a) Exceptions to reporting requirements where return is being filed for portability election only: (i) For bequests, devises or transfers which are deductible under I.R.C. 256 or 256A (marital deduction property) or I.R.C. 255(a) (charitable deduction property), an executor does not have to report the value for such property and will only need to report: (a) (b) (c) A description of the property; Ownership; The beneficiary; and (d) All information necessary to establish the right of the estate to the estate tax deduction. Treas. Reg T(a)(7)(ii)(A) (ii) Statement required This exception only applies if executor uses due diligence to estimate the fair market value of the estate and attaches a statement indicating that the gross estate is his or her best estimate rounded to the nearest $25,. Treas. Reg T(a)(7)(ii)(B) 5

6 (a) The 212 Form 76 and Instructions provide: f) Computation required for portability election (i) Check box 11 on page 1 if you are estimating the value of assets that qualify for the marital and charitable deductions; (ii) List those assets on the corresponding Federal Estate Tax Schedule without a value; (iii) Using the Table of Estimated Values on page 16 of the Instructions, enter the total value of estimated assets on Part 5, lines 1 and 23 of the Recapitulation on page 3 of Form 76. (1) Transitional Rule (211 Deaths) A complete and properly-prepared estate tax return will be deemed to include the computation of the DSUE amount. Treas. Reg T(b)(2) (2) 212 Form 76 has a calculation of the DSUE amount (See part 6) g) Computing the DSUE Amount (1) In general, the DSUE is the lesser of: (a) The basic exclusion for the year of death of the decedent ($5,, for 211 deaths; $5,12, for 212 deaths; $5,25, for 213 deaths); or (b) The excess of (i) The decedent s applicable exclusion amount; over 6

7 h) Use of DSUE by surviving spouse (ii) The sum of the amount of the taxable estate and the amount of the adjusted taxable gifts of the decedent, which is the amount on which the tentative tax on the decedent s estate is determined. Treas. Reg T(c)(1) (1) The DSUE of the last deceased spouse can be used by the surviving spouse for transfers made after the decedents death (for gifts and on the surviving spouse s federal estate tax return) provided the portability election is made. Treas. Reg T(c) and Treas. Reg T(d) (2) If a surviving spouse makes a taxable gift, the DSUE is applied first before the surviving spouse s own basic exclusion amount. Treas. Reg T(b). (3) The term last deceased spouse means the most recently deceased individual who, at that individual s death after December 31, 21, was married to the surviving spouse. Treas. Reg T(d)(5) (4) If the surviving spouse remarries, or remarries and then gets divorced, the identity of the last deceased spouse remains unchanged for gifts made by the surviving spouse, or on the surviving spouse s federal estate tax return. Treas. Reg T(a)(3); Treas. Reg T(a)(3). (5) With multiple deceased spouses, the special rule is that the DSUE amount available is the DSUE of the surviving spouse s last deceased spouse and the DSUE amount of each other deceased spouse that was applied to taxable gifts made by the surviving spouse. Treas. Reg T(b) and Treas. Reg T(c) 7

8 B. WHEN TO FILE A FEDERAL ESTATE TA RETURN 1. The Federal Estate Tax Return is due within nine months of the decedent s death. I.R.C. 675(a) 2. Extensions in general a) File Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes 3. Extension of Time to File Form 76 (I.R.C. 681) a) An automatic 6-month extension is allowed if you file form 4768 and check the box. 4. Extension of Time to Pay (Section 6161) a) Extension may not exceed 12 months. b) Attach a written statement showing why it is impossible or impractical to pay the full amount of the tax. (1) Examples of reasonable cause from Treas. Reg (a) Assets needed to pay the tax are located in several jurisdictions and not immediately subject to control of executor. (b) Estate is substantially comprised of rights to receive future payments such as annuities, receivables or royalties. (c) Estate consists of a claim which cannot be collected without litigation. c) Even in an estate where you estimate no federal estate tax will be due, request an extension to pay in case you decide to pay estate tax when the final return is completed. 5. Reasons to extend a federal estate tax return. a) Executor is missing information on assets or deductions. b) Executor is missing a valuation of an asset. c) A substantial asset is listed for sale (such as a house). 8

9 d) The decedent is survived by a spouse there is an opportunity for significant estate planning if the surviving spouse does not live out the extension period. Consider the health of the surviving spouse and the nature of the surviving spouse s assets. e) Does decedent s estate contain a trust or other asset for which a Qualified Terminable Interest Property Election can be made? II. ASSETS REPORTABLE ON THE FEDERAL ESTATE TA RETURN A. REAL ESTATE 1. In General a) The gross estate of a citizen or resident of the United States includes the value of all real property owned by the decedent at the time of his or her death whether it passed directly to heirs or devisees, or came into control of the executor or administrator. Treas. Reg b) Valuation of Real Estate (1) Sales Price If the property is sold after death, value the property at the sales price if it is an arms length transaction. Attach a copy of the settlement sheet as an exhibit to the Return. (a) Expenses of sale of real estate--consider deducting the selling expenses (brokerage fees, etc.) as administration expenses on the federal estate tax return if the sale was necessary for the settlement of the estate. Treas. Reg (d)(2) If the real estate passes by operation of law or specific bequest to a beneficiary, the selling expenses should be the responsibility of the beneficiary and not deductible on the Federal Estate Tax Return. (2) Appraised value If the property is not sold, or is specifically devised to an individual, obtain an appraisal of the property to attach as an exhibit to the return. c) Protective refund claim If property is likely to be sold after the return is filed, consider filing a Protective Refund Claim using Form 843. If the property sells for less than the appraised value on the return, a refund may be appropriate. 2. Schedule A Real estate interests held by the decedent 9

10 a) Schedule A Items include: (1) Land, improvements and fixtures held solely in the name of the decedent. (2) Condominium interests (3) The decedent s tenants in common interest in real property. (4) Real property that the decedent contracted to purchase before his or her death. (Deduct any unpaid purchase monies on Schedule K as a debt). b) Discounts If the decedent owned an undivided fractional interest in property, the appraiser may give a discount attributable to the lower price a willing buyer would pay to purchase a fractional interest in real estate. See Estate of Bonner Sr. v. U.S., 84 F3d 196 (5 th Cir. June 4, 1996) in which the court held that the estate was entitled to a discount of fractional interest discount in real estate and a boat. 3. Schedule E Jointly held real estate a) Property held by husband as wife as tenants by the entireties property, or joint tenants with rights of survivorship is considered a qualified joint interest under I.R.C. 24(b)(2) b) The full value of such property is listed on Schedule E, Part 1. c) Only one half of the full value of the property is included in the decedent s gross estate. I.R.C. 242(b)(1) (1) Subsequent sale of real estate by surviving spouse: The basis of the real estate will only receive one-half step up in basis. (a) EAMPLE: Husband and wife buy real estate in 198 for $3,. Husband dies and the date of death value of the entire property is $45,. Surviving spouse s basis in real estate is $15, (one-half of original purchase price) plus $225, (one-half entitled to step up in basis due to death). Total basis is $24,. If the spouse later sells the property for $6,, the spouse s gain is $36, ($6, selling price less basis of $24,). 1

11 (i) An individual can exclude $25, of gain from sale of principal residence under I.R.C. 121(b)(1) if certain requirements are met. (ii) Husband and wife can exclude $5, of gain from sale of principal residence under I.R.C. 121(b)(2) if certain requirements are met. (iii) Surviving spouse can exclude $5, of gain if house is sold within two years of death of first spouse and certain requirements are met. I.R.C. 121(b)(4) d) ECEPTION: Step up in basis/gallenstein Rule If husband and wife bought real estate prior to 1977 as entireties or survivorship property, and one spouse contributed all consideration to the property, a step up of the entire value of the real estate may be allowed when the contributing spouse dies. See Gallenstein v. U.S., 975 F2d 286 (6 th Cir. 9/16/1992) 4. Real Estate held in Partnerships, or Sole Proprietorships a) Report as part of the value of the partnership or proprietorship on Schedule F. 5. Real Estate held in Trusts a) Report as part of the Trust valuation if the Trust is reportable on Schedule G. b) If the real estate is held in a trust over which the Decedent had a power of appointment, report on Schedule H. B. STOCKS AND BONDS 1. In general 2. Publicly traded stocks and bonds: a) For publicly traded stocks and bonds, the fair market value is the mean between the highest and lowest selling prices quoted on the valuation date. Treas. Reg (1) For stocks provide (a) Number of shares; 11

12 (b) (c) (d) Whether common or preferred; Issue; Par value where needed for identification; (e) Price per share the price per share is the mean value of the high and low on the date of death; (f) Exact name of corporation; (g) Principal exchange upon which sold if listed on an exchange; and (h) Nine-digit CUSIP number; (2) Dividends: List dividends that have not been collected at death and are payable to the decedent or the estate because the decedent was a stockholder of record on the date of death. b) For bonds provide: (1) Quantity and denomination; (2) Name of obligor; (3) Date of maturity; (4) Interest rate; (5) Interest due date; (6) Principal exchange, if listed on an exchange, and (7) Nine-digit CUSIP number. (8) Interest: Include accrued to date of death. 3. For closely held stock, attach the following to the return: a) Copies of complete financial and other data used to determine value, including balance sheets and statements of the net earnings or operating results and dividends paid for each of the 5 years immediately before the valuation date. (Tax returns). b) Valuation from appraiser or methodology used to calculate value. 4. Reporting of stocks and bonds 12

13 a) If stocks and bonds are held in the decedent s name alone, report on Schedule B. b) If stocks and bonds are held as tenants by the entireties or with rights of survivorship by husband and wife, report on Schedule E, Part 1 Qualified Joint Interests Interest held by the Decedent and His or Her spouse as the Only Joint Tenants. c) If stocks and bonds are held jointly with someone other than a surviving spouse, report on Schedule E, Part 2 All Other Joint Interests. d) If stocks and bonds are held in a partnership, report as part of the partnership valuation on Schedule F. e) If stocks and bonds are held as part of a trust, report as part of the trust valuation on Schedule F (Other Miscellaneous Property), Schedule G (Transfers During Decedent s life), or Schedule H (Power of Appointment). f) If stocks and bonds are held in a Payable on Death Account or a Transfer on Death Account or form, list on Schedule G. g) If stocks and bonds are held as part of an Individual Retirement Account, report as part of the IRA valuation on Schedule I-Annuities. C. MORTGAGES, NOTES, AND CASH 1. Mortgages payable to the decedent at the time of death: a) For mortgages and notes, provide the following: (1) Face value, (2) Unpaid balance, (3) Date of mortgage or note, (4) Name of maker, (5) Property mortgaged, (6) Date of maturity, (7) Interest rate, and (8) Interest date. 13

14 b) For contracts by the decedent to sell land report: (1) Name of purchaser, (2) Contract date, (3) Property description, (4) Sale price, (5) Initial payment, (6) Amounts of installment payment, (7) Unpaid balance of principal, and (8) Interest rate. c) For miscellaneous cash items, report: (1) Insurance refunds, (2) Subscription refunds, (3) Cash, coins. d) For bank and money market accounts, report: (1) Name and address of each financial organization, (2) Amount in each account, (3) Account number, (4) Nature of account checking, savings, time deposit, etc., and (5) Unpaid interest accrued from date of last interest payment to the date of death. (6) Bank date of death letters attach bank date of death balance letters to return as an exhibit. (7) Jointly held accounts held between decedent and nonspouse 14

15 (a) The full value of jointly owned property held with anyone other than the spouse must be included on Schedule E, Part 2. All Other Joint Interests, unless: (i) the executor can show that a part of the property originally belonged to the other tenant and was never received by the decedent for less than adequate and full consideration, or (ii) unless the executor can demonstrate that any of the property was acquired with consideration originally belonging to the surviving joint tenant. I.R.C. 24(a) (b) Note Question 1 on Part 4, Page 3 of Form 76: Did the decedent at the time of death own any property as a joint tenant with right of survivorship in which (a) one or more of the other joint tenants was someone other than the decedent s spouse, and (b) less than the full value of the property is included on the return as part of the gross estate? D. LIFE INSURANCE REPORTABLE ON SCHEDULE D: 1. Proceeds of life insurance in which the decedent had any incidents of ownership whether payable to the estate or other beneficiaries are included on Schedule D. I.R.C Incidents of ownership a) The right of the insured or estate to its economic benefits; b) The power to change the beneficiary; c) The power to surrender or cancel the policy; d) The power to assign the policy or revoke an assignment; e) The power to pledge the policy for a loan; f) The power to obtain form the insurer a loan against the surrender value of the policy; and g) A reversionary interest if the value of the reversionary interest was more than 5% of the value of the policy. 15

16 3. Describe the policy by listing: a) The name of the insurance company, and b) The number of the policy. 4. Report the proceeds paid in one lump sum and attach Form 712 obtained from the insurance company. 5. Life Insurance on the Decedent s life which decedent had no incidents of ownership should be listed FOR INFORMATION ONLY on Schedule D. Examples would be life insurance owned by a Life Insurance Trust or a Business. a) Note question 9a on Part 4, Page 2 of Form 76: Was there any insurance on the decedent s life that is not included on the return as part of the gross estate? 6. Life Insurance owned by the Decedent on others should be listed on Schedule F. a) Form 712 should be attached to the return. b) Note question 9b on Part 4, Page 2 of Form 76: Did the decedent own any insurance on the life of another that is not included in the gross estate? E. MISCELLANEOUS PROPERTY REPORTABLE ON SCHEDULE F 1. Business interests and partnerships a) Provide statement of assets and liabilities for the valuation date and for the 5 years before the valuation date. b) Attach statements of net earnings for the same 5 years (tax returns of partnership, Limited Liability Company, or S corporation). c) Provide EIN (Employer Identification Number) of entity. d) Provide valuation of entity. e) Note question 11a on Part 4, Page 3 of Form 76: Did the decedent, at the time of death, own any interest in a partnership (for example, a family limited partnership), an unincorporated business, or a limited liability company; or own any stock in an inactive or closely held corporation? 16

17 f) VALUATION DISCOUNTS FOR BUSINESSES OR PARTNERSHIPS: (1) Note question 11b on Part 4, Page 3 of Form 76: If Yes was the value of any interest owned (from above-see 1a) discounted on this estate tax return? If Yes, the instructions require that the executor attach a statement that identifies the business entity on Schedule F and the discounts taken. (2) Possible discounts (a) (b) Lack of control Lack of marketability 2. Insurance on the life of another (attach Form 712 showing the value) 3. If decedent was a surviving spouse, they may have been the beneficiary of a qualified terminable interest property (QTIP) trust established by the first spouse to die. The value of the trust assets is reportable on Schedule F. I.R.C. 244 Property 4. Rights 5. Royalties 6. Leaseholds 7. Judgments 8. Reversionary or remainder interests 9. Household goods and personal effects, including wearing apparel a) For assets specifically bequeathed to individuals: (1) Report sale value if sold at an arms length transaction (at auction or for appraised value). (2) Report appraised value if not sold. b) For assets that are left to residue of the estate: 1. Livestock (1) Report sale value net of auctioneer or sale commissions or deduct selling expenses as administrative expenses. 17

18 11. Farm machinery 12. Automobiles. F. TRANSFERS DURING THE DECEDENT S LIFE Schedule G 1. Gift taxes paid by the decedent or the estate on gifts made by the decedent or the decedent s spouse within 3 years of death are included in the gross estate. I.R.C. 235(b) 2. Transfers made within 3 years of death that would have been included under I.R.C. 236, 237, 238, or I.R.C. 242 had the decedent retained the interest in the property are included in the gross estate. I.R.C. 235(a). a) Example: Where the decedent transfers ownership of a life insurance policy to another within three years of death, the policy proceeds are included in the decedent s estate because the proceeds would have been included in decedent s estate under I.R.C. 242 had the decedent retained ownership of the policy. 3. Transfers by the decedent in which the decedent retained an interest in the property are included in the gross estate. I.R.C. 236 a) If the decedent transferred property to a trust and retained an income, annuity or unitrust interest in the trust for decedent s life, or for a period that does not end before decedent s death, the value of the trust is included in the gross estate. I.R.C. 236(a) 4. Transfers taking effect at death are included in the decedent s gross estate. I.R.C Revocable transfers are included in the decedent s gross estate. I.R.C a) If the decedent had to right to change, alter, amend, revoke or terminate the enjoyment of the property, the property is included in the decedent s gross estate. b) A Revocable Trust or Totten Trust are revocable transfers included in the decedent s gross estate under I.R.C G. POWERS OF APPOINTMENT SCHEDULE H 1. A general power of appointment is included in the decedent s gross estate. I.R.C

19 a) A general power of appointment is a power held by the decedent exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate. I.R.C. 241(b) b) The right to withdraw the greater of five percent or $5, from a trust is a general power which is included in the decedent s estate to the extent the power was not exercised by the decedent. I.R.C. 241(b) H. ANNUITIES SCHEDULE I 1. Annuities, pension plans, individual retirement arrangements, purchased commercial annuities and private annuities owned by the decedent are included in the decedent s gross estate. I.R.C. 239 a) The annuity or payment must be receivable by the beneficiary following the death of the decedent. b) The annuity is under a contract or agreement entered into after March 3, c) The annuity was payable to the decedent, for the decedent s life or for a period that did not end before the decedent s death. III. FEDERAL ESTATE TA DEDUCTIONS A. In General For federal estate tax purposes, the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts 1. For funeral expenses, 2. For administration expenses, 3. For claims against the estate, and 4. For unpaid mortgages on, or any indebtedness in respect of, property where the value of the decedent s interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, as are allowable under the laws of the jurisdiction, whether within or without the united states, under which the estate is being administered. B. FUNERAL EPENSES SCHEDULE J 1. Funeral expenses are only deductible on Form

20 2. Funeral expenses that (a) are actually expended, (b) are properly allowable out of property subject to claims (probate assets), and (c) satisfy the requirements of Treas. Reg (c) are deductible on Form 76. Treas. Reg Funeral expenses should be reduced by reimbursements such as Social Security or Veterans Administration benefits. 4. Examples of expenses: a) Casket b) Tombstone, monument, mausoleum, burial lot, vault and future care c) Undertaker s Fee d) Flowers provided by the estate e) Food for mourners f) Clothing purchased for burial g) Cost of transportation of the person bringing the body to the place of burial. Treas. Reg h) Transportation of one person to and from the burial site for stone setting i) Obituary cost j) Printing and mailing acknowledgment cards k) Honoraria for rabbi, minister, organist, cantor, etc. C. ADMINISTRATION EPENSES SCHEDULE J 1. In General a) Treas. Reg (a) provides that the deduction for administration expenses is limited to such expenses as are actually and necessarily incurred in the administration of the decedent s estate; that is, in the collection of assets, payment of debts, and distribution of property to the persons entitled to it. Expenditures not essential to the proper settlement of the estate, but incurred for the individual benefit of the heirs may not be taken as deductions. 2

21 b) Estate Tax versus Income Tax Deduction (1) Administrative expenses under I.R.C. 253 or 254 can be claimed either as (i) deductions from the decedent s gross estate for federal estate tax purposes under I.R.C. 253, or (ii) as deductions in computing the taxable income of the estate or as an offset against the sales price of property in determining gain or loss. I.R.C. 642(g) Administrative expenses cannot be taken on both returns. (2) An estate may claim the administration expenses as income tax deductions if it files, in duplicate, a statement with the Internal Revenue Service waiving its right to claim them as estate tax deductions. Treas. Reg (g)-1 (3) Exception to Disallowance of Double Deductions: Taxes, interest, business expenses, and other items accrued at date of death are deductible from the gross estate under I.R.C. 253(a)(3) as claims against the estate are also deductible from gross income under I.R.C. 692(b) as deductions in respect of a decedent for income tax purposes. Treas. Reg (g)-2 (4) Portability Administrative expenses deducted on the federal estate tax return will increase the amount of the deceased spousal unused exclusion amount that can shield a surviving spouse s estate from estate tax, but the deductions cannot then be used as income tax deductions on the fiduciary income tax return of the estate. c) Protective Claim for Refund Treas. Reg (d)(5)(i) (1) A protective claim for refund may be filed to preserve the estate s right to claim a refund by reason of claims or expenses that are not paid or do not otherwise meet the section 253 deductibility requirements. Treas. Reg (d)(5)(1) (a) Rev. Proc (1/14/11) sets forth the procedure for a 253 Protective Claim for Refund (i) Time period for filing: The later of 3 years of return filing, or 2 years from tax payment. (ii) Requirements of claim: Set forth grounds and facts for refund under penalties of Perjury. 21

22 (iii) How to File 253 Protective Claim for Refund : (a) For deaths on or after January 1, 212: Schedule PC or Form 843 (iv) Notification for Consideration The executor must notify the IRS that the issue is resolved for the IRS to consider the Protective Claim for Refund.: (a) For deaths on or after January 1, 212: Supplemental Form 76, or Form 843 (b) See Schedule PC attached to 212 Form 76 Protective Claim for Refund. d) TYPES OF ADMINISTRATION EPENSES (1) Executor s Commisions Under Treas. Reg (b)(1), a deduction is allowed for commissions in accordance with the usually accepted standards and practice of allowing such an amount in estates of similar size and character in the jurisdiction in which the estate is being administered. (2) Attorney s Fees Under Treas. Reg (c)(1) attorney fees may not exceed a reasonable remuneration for the services rendered, taking into account the size and character of the estate, the law and practice in the jurisdiction in which the estate is being administered, and the skill and expertise of the attorney. (3) A deduction is allowed for attorney and executor fees not paid at the time of filing of the return provided the amount is ascertainable with reasonable certainty and will be paid. Treas. Reg (d)(4) (4) Miscellaneous administration expenses include: (a) (b) (c) (d) Court costs, Probate fees, Surrogate s fees, Accountants fees 22

23 (e) Appraisers fees (f) Expenses to preserve and distribute estate assets including storing property of the estate. (g) Expenses of sale of property such as real estate or personal property if the sale is necessary to pay the decedent s debts, expenses of administration, or taxes, to preserve the estate, or to effect distribution. Treas. Reg (d)(2) D. DEBTS OF DECEDENT AND MORTGAGES AND LIENS SCHEDULE K 1. Personal liabilities imposed by law, or arising out of contracts or torts, which exist at the time of decedent s death which are bona fide enforceable claims that are actually paid by the estate, or are unpaid but are ascertainable are listed on Schedule K. Treas. Reg Unpaid income taxes are allowable debts under Treas. Reg (f) 3. Unpaid gift taxes are allowable debts under Treas. Reg (d) 4. Medical care expenses paid by the estate within one year beginning with the day after death can be taken as I.R.C. 253 federal estate tax deductions, or as I.R.C. 213(c) income tax deductions on the Decedent s final income tax return, but not both. a) In order to take the income tax deduction, a statement must be filed with the income tax return that the amount has not been allowed as a I.R.C. 253 deduction and waiving the right to having the deduction be allowed as an estate tax deduction. I.R.C. 213(c)(2) b) 7.5% adjusted gross income limit An estate tax deduction is not allowed for that portion of medical expenses disallowed by the 7.5% AGI income tax limitation. Rev. Rul , , CB An unpaid charitable pledge may be deductible on the federal estate tax return under Treas. Reg if: a) The liability was contracted bona fide and for adequate and full consideration in cash or its equivalent, or b) It would be allowed as a charitable deduction under I.R.C

24 6. Property taxes are not deductible unless accrued before the decedent s death. Treas. Reg (b) E. MORTGAGES AND LIENS SCHEDULE K 1. Unpaid mortgages, including interest which accrued to decedent s death are deductions listed on Schedule K. Treas. Reg F. NET LOSSES DURING ADMINSTRATION SCHEDULE L 1. A deduction is allowed on Schedule L for losses due to casualties occurring during the settlement of the decedent s estate including losses from fires, storms, shipwrecks and theft. I.R.C The deduction may be made, in the alternative, on the estate s fiduciary income tax return if the estate has waived its right to take a deduction for such loss. I.R.C. 642(g) 3. Amounts recovered by insurance reduce the deduction. Treas. Reg G. EPENSES INCURRED IN ADMINISTERING PROPERTY NOT SUBJECT TO CLAIMS SCHEDULE L 1. Expenses incurred in administering property in a decedent s gross estate, but not subject to claims may be allowed as deductions. Treas. Reg Examples of such expenses include: a) Expenses incurred in administering a Revocable Trust established by the decedent during his or her lifetime such as attorney and trustee fees. b) Expenses and costs incurred in connection with the collection, valuation and distribution of non-probate assets. H. BEQUESTS, ETC. TO A SURVIVING SPOUSE SCHEDULE M 1. A marital deduction is allowed for any property interest which passes to the surviving spouse, but only to the extent that the interest is included in the gross estate. I.R.C. 256(a) 2. The value of the marital deduction is reduced by any estate, succession, legacy, or inheritance taxes paid out of such property. I.R.C. 256(b)(4) 3. Items passing to surviving spouse outright or by operation of law: 24

25 a) Bequests and devises I.R.C. 256(c)(1) b) Items inherited by surviving spouse I.R.C. 256(c)(2) c) Dower or curtesy interests I.R.C. 256(c)(3) d) Interest transferred to spouse at any time I.R.C. 253(c)(4) e) Jointly held property with right of survivorship. 256(c)(5) f) Property over which decedent had power of appointment or which was appointed to spouse, or passes to spouse in default of appointment I.R.C. 256(c)(6) 4. Trusts for which the marital deduction may be allowed a) Life estate with power of appointment in surviving spouse If the surviving spouse (a) is the only beneficiary during his or her life, (b) receives all income for life, and (c) has a general power of appointment, the trust will qualify for the marital deduction under I.R.C. 256(b)(5) b) Charitable remainder trusts where spouse is only lifetime beneficiary (1) Marital Deduction: allowed for spouse s interest. I.R.C. 256(b)(8) (2) Charitable Deduction: allowed for charitable remainder. 255 c) QTIP (Qualified Terminable Interest Property) Trusts I.R.C. 256(b)(7) (1) Requirements: (a) Property must pass from decedent; (b) Surviving spouse must have a qualifying income interest for life : (i) Surviving spouse must be entitled to all income and be the only beneficiary during his or her lifetime. (ii) QTIP election made on the Federal Estate Tax Return. I.R.C. 256(b)(7)(B) 25

26 I. CHARITABLE, PUBLIC, AND SIMILAR GIFTS AND BEQUESTS SCHEDULE O 1. I.R.C. 255 allows for a deduction from the gross estate of the amount of all bequests, legacies, devises, or transfers to the following entities: a) The United States, any State, any political division of a state, or the District of Columbia for exclusively public purposes. b) Religious, charitable, scientific, literary, or educational corporations or associations. c) Trusts or trustees, or fraternal societies for religious, charitable, scientific, literary, or educational purposes, or for prevention of cruelty to children or animals. d) Veterans organizations. 2. Charitable Remainder Trusts Under I.R.C. 255(e)(2)(A), no charitable deduction is allowed for a remainder interest which will pass to charity unless the interest is in the form of a: a) A charitable remainder annuity trust b) A charitable remainder trust I.R.C. 664 c) A pooled income fund is in the form of a charitable remainder a charitable remainder interest unless I.R.C. 642(c)(5) 3. Payment of death taxes The amount of the charitable deduction is reduced by any estate, succession, legacy, or inheritance taxes required to be paid out of the bequest by the terms of the will or local law. I.R.C. 255(c) 26

27 IV. DEDUCTION FOR STATE DEATH TAES I.R.C. 258 for Decedents dying after January 1, 25 A. I.R.C. 258(a) Allowance of deduction. For purposes of the tax imposed by section 21 (Federal Estate Tax), the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of any estate, inheritance, legacy, or succession taxes actually paid to any State or the District of Columbia, in respect of any property included in the gross estate (not including any such taxes paid with respect to the estate of a person other than the decedent). B. Actually paid Requirement 1. The state death taxes must be actually paid within the Period of Limitations. I.R.C. 258(b) 2. Pennsylvania s 5% discount on inheritance tax paid within three months of death is not actually paid. C. In respect of any property included in the gross estate 1. The deduction should not be allowed for items subject to Pennsylvania inheritance tax that are not included in the federal gross estate: a) Gifts within one year of death A gift made within one year of death is subject to Pennsylvania Inheritance Tax, but may not be included in the federal gross estate. b) Sole use trusts At the death of the first spouse to die, the Executor can defer the Pennsylvania inheritance tax on a sole use trust for the surviving spouse s benefit until the death of the surviving spouse. When the surviving spouse dies, the trust may not be included in the surviving spouse s federal gross estate depending upon the terms of the trust, and the elections made by the executors of the first spouse to die. D. IRS Form 76 for Report state death tax deduction on page 1, line 3b 2. File with return: a) Certificate from state showing: (1) Total amount of tax imposed; (2) Amount of discount allowed; 27

28 (3) Amount of penalties and interest imposed or charged; (4) Total amount actually paid in cash; and (5) Date of payment. V. GIFT TA RETURNS FILED BY THE DECEDENT A. Calculation of Federal Estate Tax Impact of Taxable Gifts 1. The federal estate tax is calculated by calculating a tentative tax and then applying various credits. a) The tentative tax is calculated on the sum of the taxable estate and adjusted taxable gifts over the aggregate amount of tax which would have been payable under chapter 12 with respect to gifts made by the decedent after December 31, 1976 as if the tax rate in effect at the decedent s death is used to calculate the gift tax and credit against such tax [ Total gift tax paid or payable with respect to gifts made by the decedent after December 31, 1976 ]. I.R.C. 21(b) b) The taxable estate is the gross estate on page 1, line 1, less total allowable deductions on line 2, less the State death tax deduction on line 3b. c) Adjusted taxable gifts are calculated using Worksheet TG Taxable Gift Reconciliation. d) The Total gift tax paid or payable with respect to gifts made by the decedent after December 31, 1976 is calculated using the Line 7 Worksheet. B. Copies of all gift tax returns filed by the Decedent must be filed with the 76. The executor will need copies of all gift tax returns to complete the Line 4 and Line 7 Worksheets. C. Adjusted taxable gifts Line 4 of page 1 of the return. 1. Worksheet TG Taxable Gift Reconciliation a) The executor needs copies of all of the decedent s gift tax returns (Forms 79) to complete Worksheet TG Taxable Gifts Reconciliation. b) If any Gift Tax Returns were audited by the IRS, the executor should use amounts that were finally determined as a result of the audit. 28

29 c) The executor must make reasonable effort as to the existence of any gifts in excess of the annual exclusion made by the decedent for which no Forms 79 were filed (Instructions for Form 76 (Rev. August 212), page 6). Any unreported gifts should be listed in column b of Worksheet TG. (1) Reasonable Effort (a) Review statements for banks, trusts and other accounts from which decedent could have made gifts. (b) Review cancelled checks and bank statements. (c) Keep copies of such records in case Federal Estate Tax Return is audited as auditor may review the statements for gifts. (2) Annual gift tax exclusion amounts: (a) (b) (c) (d) (e) $3, per donee $1, per donee $11, per donee $12, per donee 29 to $13, per donee D. Line 7 Worksheet 1. The executor must carefully follow the instructions of the Line 7 Worksheet. 2. Line 7 is NOT simply the total of all gift tax paid by the decedent during his or her lifetime. 3. The Line 7 worksheet forces the executor to recalculate the gift tax as if the tax rate in effect at the decedent s death is used to calculate the gift tax and credit against such tax. I.R.C. 21(g) E. Example Emma Alden Form 76 29

30 1. In 1996, Emma Alden made a cash gift of $2,12, to her son, Edward Alden. The annual gift tax exclusion for 1996 was $12,. Emma filed 1996 Form 79 reporting a taxable gift of $2,, ($2,12, less the annual gift tax exclusion of $12,) and paid gift tax of $588,. 2. Line 4 Worksheet -- $2,, of adjusted taxable gifts are added to Line 4, page Line 7 Worksheet Even though Emma paid $588, of gift tax when she made the 1996 gift, the Line 7 Worksheet only allows $49, on line 7 Total gift tax paid or payable with respect to gifts made by the decedent after December 31, VI. PRIOR TRANSFER CREDIT SCHEDULE Q A. A credit against the federal estate tax is allowed for the amount of federal estate tax paid with respect to the transfer of property to the decedent by or from a person ( transferor ) who died within 1 years before, or within 2 years after the decedent s death. I.R.C. 213 B. There is no requirement that the property be identified in the estate of the transferee or that it exist on the date of the transferee s death. C. The transfer of the property must have been subjected to federal estate tax in the estate of the transferor. D. Where the transferor predeceased the transferee, the credit is reduced by the time elapsed between dates of death: 1. 1% credit if time elapsed is less than 2 years. 2. 8% credit if time is between 2 years, and less than 4 years. 3. 6% credit if time is between 4 years, and less than 6 years. 4. 4% credit if time is between 6 years, and less than 8 years. 5. 2% credit if time is between 8 years and 1 years. 6. No credit if greater than 1 years. E. Carefully complete the Schedule Q Worksheet using numbers from the Federal Estate Tax Return of the Transferor. 3

31 Form 79 United States Gift (and Generation-Skipping Transfer) Tax Return (Section 619 of the Internal Revenue Code) (For gifts made during calendar year 22) Department of the Treasury Internal Revenue Service See separate instructions. 1 Donor s first name and middle initial 2 Donor s last name Part 1 General Information Attach check or money order here. 3 Donor s social security number Beth Tyler OMB No Address (number, street, and apartment number) 5 Legal residence (domicile) (county and state) 23 Lowry's Lane Delaware County, PA 6 City, state, and ZIP code 7 Citizenship Rosemont, PA If the donor died during the year, check here and enter date of death,. 9 If you received an extension of time to file this Form 79, check here and attach the Form 4868, 2688, 235, or extension letter 1 Enter the total number of donees listed on Schedule A count each person only once. 1 11a 11b Have you (the donor) previously filed a Form 79 (or 79-A) for any other year? If the answer is "No," do not complete line 11b If the answer to line 11a is "Yes," has your address changed since you last filed Form 79 (or 79-A)? 12 Gifts by husband or wife to third parties. Do you consent to have the gifts (including generation-skipping transfers) made by you and by your spouse to third parties during the calendar year considered as made one-half by each of you? (See instructions.) (If the answer is Yes, the following information must be furnished and your spouse must sign the consent shown below. If the answer is No, skip lines and go to Schedule A.) 13 Name of consenting spouse 14 SSN 15 Were you married to one another during the entire calendar year? (see instructions) 16 If the answer to 15 is No, check whether married divorced or widowed, and give date (see instructions) 17 Will a gift tax return for this calendar year be filed by your spouse? 18 Consent of Spouse I consent to have the gifts (and generation-skipping transfers) made by me and by my spouse to third parties during the calendar year considered as made one-half by each of us. We are both aware of the joint and several liability for tax created by the execution of this consent. Consenting spouse s signature Date 1 Enter the amount from Schedule A, Part 3, line Enter the amount from Schedule B, line Total taxable gifts (add lines 1 and 2) 3 4 Tax computed on amount on line 3 (see Table for Computing Tax in separate instructions) 4 5 Tax computed on amount on line 2 (see Table for Computing Tax in separate instructions) 5 6 Balance (subtract line 5 from line 4) 6 7 Maximum unified credit (nonresident aliens, see instructions) 7 8 Enter the unified credit against tax allowable for all prior periods (from Sch. B, line 1, col. C) 8 9 Balance (subtract line 8 from line 7) 9 1 Enter 2% (.2) of the amount allowed as a specific exemption for gifts made after September 8, 1976, and before January 1, 1977 (see instructions) 1 11 Balance (subtract line 1 from line 9) Unified credit (enter the smaller of line 6 or line 11) Credit for foreign gift taxes (see instructions) 13 Part 2 Tax Computation 14 Total credits (add lines 12 and 13) 15 Balance (subtract line 14 from line 6) (do not enter less than zero) 16 Generation-skipping transfer taxes (from Schedule C, Part 3, col. H, Total) 17 Total tax (add lines 15 and 16) 18 Gift and generation-skipping transfer taxes prepaid with extension of time to file 19 If line 18 is less than line 17, enter balance due (see instructions) 2 If line 18 is greater than line 17, enter amount to be refunded 2 Sign Here Yes No 1,5, 1,5, 555,8 555,8 345,8 345,8 Under penalties of perjury, I declare that I have examined this return, including any accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than donor) is based on all information of which preparer has any knowledge. Signature of donor Preparer s signature Paid Preparer s Firm s name (or Use Only yours if self-employed), address, and ZIP code Phone no. ( ) For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 12 of the separate instructions for this form. Cat. No M 31 USA Date Date 22 Check if self-employed 345,8 345,8 345,8 21, 21, 21, Form 79 (22)

32 Form 79 (22) SCHEDULE A Computation of Taxable Gifts (Including Transfers in Trust) A Does the value of any item listed on Schedule A reflect any valuation discount? If the answer is Yes, see instructions Yes No B Check here if you elect under section 529(c)(2)(B) to treat any transfers made this year to a qualified state tuition program as made ratably over a 5-year period beginning this year. See instructions. Attach explanation. Part 1 Gifts Subject Only to Gift Tax. Gifts less political organization, medical, and educational exclusions see instructions A Item number 1 B Donee s name and address Relationship to donor (if any) Description of gift If the gift was made by means of a trust, enter trust s EIN and attach a description or copy of the trust instrument (see instructions) If the gift was of securities, give CUSIP number C Donor s adjusted basis of gift D Date of gift E Value at date of gift Page 2 Michelle Jackson (sister) 1,511, 2/2/22 1,511, 1 Sometimeland Ranch Simi, California Cash gift Total of Part 1 (add amounts from Part 1, column E) Part 2 Gifts That are Direct Skips and are Subject to Both Gift Tax and Generation-Skipping Transfer Tax. You must list the gifts in chronological order. Gifts less political organization, medical, and educational exclusions see instructions. (Also list here direct skips that are subject only to the GST tax at this time as the result of the termination of an estate tax inclusion period. See instructions.) 1,511,. A Item number B Donee s name and address Relationship to donor (if any) Description of gift If the gift was made by means of a trust, enter trust s EIN and attach a description or copy of the trust instrument (see instructions) If the gift was of securities, give CUSIP number C Donor s adjusted basis of gift D Date of gift E Value at date of gift 1 Total of Part 2 (add amounts from Part 2, column E) Part 3 Taxable Gift Reconciliation 1 Total value of gifts of donor (add totals from column E of Parts 1 and 2) 1 2 One-half of items attributable to spouse (see instructions) 2 3 Balance (subtract line 2 from line 1) 3 4 Gifts of spouse to be included (from Schedule A, Part 3, line 2 of spouse s return see instructions) 4 If any of the gifts included on this line are also subject to the generation-skipping transfer tax, check here and enter those gifts also on Schedule C, Part 1. 5 Total gifts (add lines 3 and 4) 5 6 Total annual exclusions for gifts listed on Schedule A (including line 4, above) (see instructions) 6 7 Total included amount of gifts (subtract line 6 from line 5) 7 Deductions (see instructions) 8 Gifts of interests to spouse for which a marital deduction will be claimed, based on items of Schedule A 8 9 Exclusions attributable to gifts on line Marital deduction subtract line 9 from line Charitable deduction, based on items less exclusions Total deductions add lines 1 and Subtract line 12 from line Generation-skipping transfer taxes payable with this Form 79 (from Schedule C, Part 3, col. H, Total) Taxable gifts (add lines 13 and 14). Enter here and on line 1 of the Tax Computation on page 1 15 (If more space is needed, attach additional sheets of same size.) 1,511, 1,511, 1,511, 11, 1,5, 1,5, Form 79 (22) 32