Estate Taxation
FIN 445 – Financial Management IV
Saturday June 6th, 2015
Instructor Mr. Alan K. Jones
Introduction
Establishing, a good estate plan results in properly transferring property to rightful heirs, protecting inheritances, reducing estate taxes, avoiding probate, appointing right persons in the event of incapacity, and providing stability and financial peace of mind to our loved ones (Parke, n.d.). Usually, we have to pay the estate tax when property is transferred to us upon a decedent’s death, and the amount due in taxes is determined by the fair market value of that property (O'Rourke, 2014). The steps involved in calculating federal estate taxes are; determining the gross estate, finding the adjusted gross estate, calculating the taxable estate, computing the estate tax base, and subtracting gift taxes and unified tax credit (Gitman, Joehnk, & Billingsley, 2014).
The Estate Tax
The government levies estate tax when the value of the estate exceeds the exclusion limit (Estate Tax, n.d.). In order to clarify the calculation of federal taxes due on an estate, we will analyze the situation of Russell Hypes’ estate (Gitman, Joehnk, & Billingsley, 2014). “Russell died in 2012, unmarried, left an estate valued at $7,850,000, made a trust directing the distribution of his estate as follows; $20,000 to the local hospital, $160,000 to his alma mater, and the remainder to his three adult children.” (Gitman, Joehnk, & Billingsley, 2014) “Death-related costs and expenses were $16,800 for funeral expenses, $40,000 paid to attorneys, $5,000 paid to accountants, $30,000 paid to the trustee of his living trust, and in addition there were debts of $125,000.” (Gitman, Joehnk, & Billingsley, 2014) Upon his death, federal estate taxes are levied on the transfer of assets, once federal estate taxes are computed and certain credits are allowed, the resulting amount is payable in full, generally within nine months of the decedent’s death (Gitman, Joehnk, & Billingsley, 2014).
Russell Hypes’ Estate Tax Due
The worksheet below shows how federal estate tax due on Russell’s estate has been calculated (Gitman, Joehnk, & Billingsley, 2014).
“Computing Federal Estate Tax Due”
“Name: Estate of Russell Hypes”
“Date: “
6-Jun
Line
Computation
Item
Amount
Total Amount
“1
b) “Use Exhibit 15.8—the appropriate unified credit for 2012 is $ 1,772,800.” (Gitman, Joehnk, & Billingsley, 2014) First, we have to insert the gross estate amount and deduct funeral expenses, administrative expenses (attorney fees, accountant fees, and payment to the trustee), and debts, in order to calculate the adjusted gross estate. The amount of the adjusted gross estate of Russell Hype is $ 7,633,200, as he is unmarried marital deduction does not apply. However, he has contributed to charitable organization such as the local hospital and his Alma Mater at a total sum of $ 180,000 (Gitman, Joehnk, & Billingsley, 2014). This amount is deducted from his adjusted gross estate and now we have a taxable estate of $ 7,453,200, now we can calculate the tentative tax which amounts to $ 3,234,740,
