Question

Jack is single and he made his first taxable gift of $1,000,000 in 2008. Jack made additional gifts in 2009, at which time he gave $1,750,000 to each of his three children and an additional $1,000,000 to State University (a charity). The annual exclusion in 2009 was $13,000. Recently Jack has been in poor health and would like you to estimate his estate tax should he die this year. Jack estimates his taxable estate (after deductions) will be worth $5.4 million at his death. (Refer to Exhibit 25-1 and Exhibit 25-2.) (Enter your answers in dollars and not in millions of dollars.)

NOTE: There are many "proposed" solutions on here, none are correct. What is the ESTATE tax?

Answer 1

In the year 2008, Jack made taxable gift of $1,000,000.

In the year 2009, Jack made taxable gift of $1,750,000 to each of his three children and $1,000,000 for charity.

Taxable gift is $6,250,000 [($1,750,000 * 3) + $1,000,000] and annual exclusion is $39,000 ($13,000 *3).

Taxable gift	$6,250,000
(-) charitable institution	$1,000,000
	$5,250,000
(-) annual exclusion	$39,000
Gross taxable estate	$5,211,000
Cumulative taxable transfers	$11,611,000

The 2008 transfer was offest by Jack's unified credit ($1 million exemption equivalent) but only $2.5 million of the taxable transfer in 2009 was offest by the remaining unified credit. Hence, Jack made a $2.711 ($5.211 million - $2.5 million) taxable transfer in 2009 . The credit for prior taxable transfer is calculated using the current rate schedule as follows:

Tax on taxable transfers ($6.211 million)	$2,430,200
Less: unified credit ($3.5 million)	-1,345,800
Credit for current tax on prior taxable gifts	$1,084,400

The calculation of the estate tax proceeds as follows:

Tax on cumulative taxable transfer	$4,590,200
Less: credit for current tax on prior taxable gifts	-1,084,400
Tax on taxable estate	$3,505,800
Less: Unified credit ($5.25 million)	-2,045,800
Estate tax due	$1,460,000