Question

R dies in 2016. R made taxable gifts during his lifetime in 1990, 1991, 1993, 1997, and 1999, but paid no Federal transfer taxes due to the unified transfer tax credit in effect in those years. What effect will these taxable gifts have on determining the following:

1. R’s Federal taxable estate?
2. The rates imposed on the Federal taxable state?

Answer 1

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.

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.

Estate tax, and by extension the taxable estate value, typically does not apply if an estate’s named beneficiary is a living spouse because spouses are eligible for an unlimited marital deduction. But when assets are passed on to a child, sibling or another beneficiary other than a spouse, taxable estate comes into play.

When determining the taxable portion of an estate, note that the following items can be deducted: funeral expenses paid out of the estate, debts owed by the deceased at the time of death and value of the assets passed on to the deceased's spouse. Deductible debts may include credit card debt, lines of credit, mortgages and personal loans. Administrative costs for settling an estate also count as deductions. The taxes imposed on the taxable portion of the estate are then paid out of the estate itself.

How much inheritance tax will you have to pay on a gift?

Years between gift and death	Tax paid
Fewer than 3	40pc
3 to 4	32pc
4 to 5	24pc
5 to 6	16pc
6 to 7	8pc
7 or more	0pc

To determine the total taxable estate, calculate the value of the estate’s total assets and subtract the deductible expenses.

Effect on R's taxable estate: the heir of R will be liable to pay the tax on such gifts after inheritance

Rate of tax: 0 % rate will be applied.