Question

a) Describe how you arrive at each of the following to determine the tax which will be owed at someone’s death for estate tax purposes: (1) gross estate; (2) adjusted gross estate; (3) taxable estate; (4) tentative tax base; and (5) tentative tax. Give an explanation of what you do at each stage.

Answer 1

Gross Estate

Gross estate is the total dollar value of an individual’s property and assets at the time of their death. The gross estate figure does not reflect liabilities such as debt owed and taxes. When those charges are deducted, the sum figure represents the net value of individual’s estate.

BREAKING DOWN Gross Estate

Gross estate is typically calculated by the executor of the estate. An executor is a person appointed to administer the estate of a deceased person. The executor's primary responsibility is to fulfill the directives and wishes of the deceased.

An executor of the deceased’s estate can only be appointed if they are specifically named on a legally recognized last will and testament. Otherwise, the duties of an executor will be handled by a court-appointed administrator.

The estate executor assesses and calculates the amount of assets that the deceased owned. The types of assets considered in the estate calculation include stocks, bonds, other investments,

real estate and other personal property such as cars, buildings and collectibles. The gross estate figure is typically established for federal income tax purposes.

Adjusted Gross Estate:

Adjusted gross estate refers to total value of a decedent’s property after deducting expenses such as :

1.administration expenses,

2.funeral expenses,

3.creditor’s claims, and

4.casualty losses.

The value of the adjusted gross estate is used in computing the federal estate tax. Adjusted gross estate is also the amount decedent intended to pass to the marital trust

Taxable Estate:

A taxable estate is the total value of a deceased person's assets that are subject to taxation.

The net assets subject to taxation equal the person’s total assets minus liabilities and minus the prescribed tax-deductible portion of assets left behind by the deceased.

BREAKING DOWN Taxable Estate

A person’s taxable estate includes investment holdings such as stocks and bonds, as well as real estate and property such as cars, buildings and collectibles. The taxable estate becomes relevant when an heir inherits the person’s assets and must pay estate taxes on those assets. The heir will only owe estate taxes on the taxable estate, so it is important for the heir to know what portion of the estate qualifies as taxable.

Tentative Tax Basis

Under U.S. federal tax law, the tax basis of an asset is generally its cost basis. Determining such cost may require allocations where multiple assets are acquired together. Tax basis may be reduced by allowances for depreciation.

Such reduced basis is referred to as the adjusted tax basis. Adjusted tax basis is used in determining gain or loss from disposition of the asset. Tax basis may be relevant in other tax computations.[1]

Tax basis of a member's interest in a partnership and other flow-through entity is generally increased by the members share of income and reduced by the share of loss. The tax basis of property acquired by gift is generally the basis of the person making the gift.

Tax basis in property received from corporations or partnerships may be the corporation's or partnership's basis in some cases.