Question

Roland had a taxable estate of $15.5 million when he died this year. Calculate the amount of estate tax due (if any) under the following alternatives.

a. Roland’s prior taxable gifts consist of a taxable gift of $1 million in 2005.

Estate tax due?

b. Roland’s prior taxable gifts consist of a taxable gift of $1.5 million in 2005.

Estate tax due?

c. Roland made a $1 million taxable gift in the year prior to his death.

Estate tax due?

Answer 1

a.) Estate tax due in 2005: $2.128,0 million

The exemption for gifts in 2005 is $1 million. Roland has no tax for adjusted taxable gifts associated with the 2005 transfer. Calculations are below:

Adjusted taxable gifts $1 million
Taxable estate $15.5 million
Cumulative taxable transfers $16.5 million
Tax on cumulative taxable transfers based on 40% tax rate $ 6.5458 million
Gift tax payable on adjusted taxable gifts − $0
Tax on taxable estate $ 6.5458 million
Applicable credit − $4.4178 million
Estimated estate tax due $ 2.1280 million


Note: Estate tax rate is 40% of the cumulative transfers in excess of the exemption ($16.5 million - $11.18 million = $5.32 million and $5.32 million x 40% = $2.128 million).

b. Estate tax due in 2005: $2.128 million

Since exemption in 2005 was only $1 million, Roland's estate would have tax payable on adjusted taxable gifts for the 2005 transfer. Tax credit for prior taxable gifts at the current rate and the applicable credit using the 2005 exemption equivalent at the current tax rate. The credit for prior taxable gifts ($200,000) would be calculated as follows:


Current tax on prior taxable transfers ($1.5 million) $ 545,800
Applicable credit under current rate
($1 million under the 2005 exemption equivalent) - 345,800
Credit for prior taxable gifts $ 200,000
The estate tax would be calculated as follows:
Adjusted taxable gifts $ 1,500,000
Taxable estate + 15,500,000
Cumulative taxable transfers $ 17,000,000
Tax on cumulative transfers $ 6,745,800
Credit for prior gifts at current rate - 200,000
Tentative tax $ 6,545,800
Applicable credit − 4,417,800
Estimated estate tax due $ 2,128,000

c. Estate tax due: $2,128,000

If Roland died within 3 years of the $1 million gift, the estate would be increased by the amount of any gift tax actually paid on the gift because the gift was made within three years of the decedent's death. However, if the gift did not exceed Roland's unused exemption equivalent, then no gift tax would be paid for the gift.