Question

Harold and Maude were married and lived in a common-law state. Maude died in 2018 with a taxable estate of $25.20 million and left it all to Harold. Maude's executor filed a timely estate tax return claiming the marital deduction for the property left to Harold including a valid portability election. Harold died this year, leaving the entire $25.20 million to their three children.(Refer to Exhibit 25−1 and Exhibit 25−2.) Calculate how much estate tax is due from Harold's estate under the following two alternatives. a. Assume that neither Harold nor Maude had made any taxable gifts prior to this year. b. Assume that Haroid and Maude each made a $1 million taxable gift in 2011 and offset the gift tax at that time with the applicable credit.

Answer 1

In alternative a, if Harold and Maude made no taxable gifts, Harold's estate would owe $5.4 million in estate tax. In alternative b, if Harold and Maude made $1 million taxable gifts in 2011, Harold's estate would owe $9.68 million in estate tax.

Step-by-step explanation:

To calculate the estate tax due from Harold's estate, we need to consider two alternatives.

Alternative a:

If neither Harold nor Maude made any taxable gifts prior to this year, Harold's estate would owe estate tax based on the current estate tax exemption. In 2021, the estate tax exemption is $11.7 million per individual. Since Harold received the entire $25.2 million from Maude's estate, his taxable estate would be $25.2 million minus $11.7 million, which equals $13.5 million. The estate tax rate on this amount for 2021 is 40%, which means that Harold's estate would owe $5.4 million in estate tax.

Alternative b:

If Harold and Maude each made a $1 million taxable gift in 2011 and offset the gift tax with the applicable credit, their taxable estate would be reduced by the amount of the gift tax paid. Assuming the gift tax rate in 2011 was 35%, they would have paid $1 million multiplied by 0.35, which equals $350,000 in gift tax. Therefore, their taxable estate for estate tax purposes would be reduced by $1 million, resulting in a taxable estate of $24.2 million. Applying the estate tax rate of 40% to this amount would result in estate tax due of $9.68 million.

Answer 2

Under the first scenario, no estate tax is due from Harold's estate, while under the second scenario, the estate tax due from Harold's estate would be $2,800,000.

Step-by-step explanation:

Under the assumption that neither Harold nor Maude made any taxable gifts before this year, no estate tax would be due from Harold's estate. This is because Harold inherited Maude's estate through the marital deduction, which allows for the transfer of unlimited assets between spouses tax-free. Therefore, Harold's estate would not be subject to any estate tax.

Under the assumption that Harold and Maude each made a $1 million taxable gift in 2011 and offset the gift tax at that time with the applicable credit, the estate tax due from Harold's estate would be $2,800,000. This is because the taxable gift would use a portion of the estate tax exemption, leaving $24.20 million subject to the estate tax. The estate tax rate for this amount is 40%, resulting in a tax liability of $9,680,000. However, since Harold's estate can claim the portability election and use Maude's unused exemption, the taxable estate is reduced to $24.20 million, resulting in a tax liability of $2,800,000.