Question

Tom Hruise was an entertainment executive who had a fatal accident on a film set. Tom’s will directed his executor to distribute his cash and stock to his wife, Kaffie, the real estate to his church, The First Church of Methodology, and the remainder of his assets were to be placed in trust for his three children. Tom’s estate consisted of the following: (Refer toExhibits 25-1 and Exhibit 25-2.)

a. Tom made a taxable gift of $6.20 million in 2011. Compute the estate tax for Tom’s estate.

Assets:
Personal assets	$	1,090,000
Cash and stock		25,100,000
Intangible assets (film rights)		77,000,000
Real estate		16,100,000
	$	119,290,000
Liabilities:
Mortgage	$	4,300,000
Other liabilities		5,200,000
	$	9,500,000

	Gross estate Debts Adjustable gross estate Marital deduction Charitable deduction Taxable estate Adjusted taxable gifts Cumulative taxable transfers Current tax rates % Tax on cumulative transfers Current tax on adjusted taxable gifts Tentative estate tax Unified credit Estate tax due

Answer 1

a) Calculaton of estate tax for Tom's estate (Amount in $)

1) Gross estate	119,290,000
2) Debts	(9,500,000)
3) Adjustable gross estate (1 - 2)	109,790,000
4) Marital deduction (distributed to wife)	(25,100,000)
5) Charitable deduction (distributed to church)	(16,100,000)
6) Taxable estate (3-4-5)	68,590,000
7) Adjusted taxable gifts	6,200,000
8) Cumulative taxable transfers (6+7)	74,790,000
9) Current tax rates	40	%
10) Tax on cumulative transfers	29,861,800
11) Current tax on adjusted taxable gifts	(480,000)
12) Tentative estate tax (10-11)	29,381,800
13) Unified credit (12-14)	(2,141,800)
14) Estate tax due	27,240,000

Therefore the Tom's estate tax due is $27,240,000.

Workings:-

i) The applicable exemption amount in 2011 is $5 million, so Tom would have paid 40% tax on amount of $1.2 million ($6.2 million - $5 million) of amount $480,000 ($1,200,000*40%). Therefore the current tax on adjusted taxable gifts is $480,000.

ii) Tax on cumulative transfers is calculated as follows:-

$345,800+($74,790,000 - $1,000,000)*40% = $345,800+($73,790,000*40%)

= $345,800+$29,516,000 = $29,861,800

iii) Tom's estate is taxed at the highest estate tax rate. Hence the estate tax due is 40% of the cumulative transfers in excess of the exemption equivalent and the previously taxed gift.

$74.79 million - $5.49 million - $1.20 million = $68.10 million

Estate tax due = $68.10 million*40% = $27.24 million

Therefore the estate tax due is $27,240,000.

Unified credit is the difference between Tentative estate tax and estate tax due ($29,381,800 - $27,240,000 = $2,141,800).

4) Exemption equivalent is $5.49 million for 2017 (Current year is assumed to be 2017).