Question

Mr. JS died on June 19 when the total FMV of his property was $13 million and his debts totaled $789,000. His executor paid $13,000 funeral expenses and $82,600 accounting and legal fees to settle the estate. Mr. JS bequeathed $500,000 to the First Lutheran Church of Milwaukee and $1 million to Western Wisconsin College. He bequeathed his art collection (FMV $2.4 million) to his wife and the residual of his estate to his three children. Assume the taxable year is 2017.

Compute Mr. JS’s taxable estate.

Compute the estate tax payable by Mr. JS’s executor if Mr. JS made no taxable gifts during his lifetime.

Compute the estate tax payable by Mr. JS’s executor if Mr. JS made a $1,500,000 taxable gift in 2011 but paid no gift tax because of his lifetime transfer tax exclusion.

Answer 1

1. Calculation of taxable estate of Mr.JS for the taxable year 2017:

• In order to calculate estate tax liability starting point is calculation of gross estate. This is the total value of everything you own at the time of your death.
• Then from the gross estate we have to subtract certain transactions from the gross total to arrive at the value of your net estate for tax purpose.

Step-1: Gross estate

• Gross estate is the FMV of his property at the time of death which is $13,00,000.

Step-2: Calculation of Taxable estate:

Particulars	Note No	Amount (in $)
Gross Estate		13000000
Less: Deductions
Debt	1	(789000)
Funeral Expenses	1	(13,000)
Accounting and legal fees to settle the estate (Administrative expenses)	1	(82,600)
Charitable Transfers (Bequeathed to First Lutheran church)	2	(5,00,000)
Bequeathed to Western Wisconsin College (Charitable reminder trust)	2	(1,00,000)
Bequeathed to his wife	3	(2,40,000)
Net estate		1,12,75,400
Federal estate tax exemption for 2017		(54,90,000)
Taxable estate		57,85,400

Note:

1. Deductible debts include mortgages, lines of credit, personal loans, and credit card debt that you owe at the time of your death. You can also include funeral expenses and medical bills as well as administrative expenses to settle your estate. Administrative expenses include attorney fees, accounting and appraisal fees, storage and shipping fees, insurances, and court fees.

2. Direct gifts and property set aside in a Charitable reminder trust or a charitable lead trust is eligible for deduction from net estate available after repayment of debts and expenses.

3. Outright transfer by right of survivorship and transfers made to a trust that qualifies for the unlimited martial deduction.

Step-3: Calculation of Mr.JS’S executor estate tax if Mr.JS made no taxable gifts during his lifetime:

Particulars	Amount (in $)
Net estate	1,12,75,400
Federal estate tax exemption for 2017	(54,90,000)
Taxable estate	57,85,400
Rate of tax	40%
Estate tax liability (5785400*40/100)	23,14,160

Step-4: Calculation of Mr.JS’S executor estate tax if Mr.JS made $1,500,000 taxable gifts during his lifetime:

Particulars	Amount (in $)
Net estate	1,12,75,400
Federal estate tax exemption for 2017 ($54,90,000-$14,87,000)	40,03,000
Taxable estate	72,72,400
Rate of tax	40%
Estate tax liability (72,72,400*40/100)	29,08,960

Note No:

1. Where any taxable gifts made during the lifetime that exceeds the annual exclusion from gift taxes $13,000 in 2011.then the available estate tax exemption will be reduced. The amount of reduction is equal to difference between the total exemption available less the value of lifetime gifts that exceeds the annual exclusion.so the basic exemption reduced by 14,87,000.(15,00,000-13,000).