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This program calculates the federal estate tax that is payable when part or all of the federal estate tax is payable out of a fund that otherwise qualifies for a federal estate tax charitable deduction and reduces that deduction, resulting in an interrelated (or circular) estate tax calculation.
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Wills (and revocable trusts) are sometimes written so that the federal estate tax (and state death taxes, if any) are paid out of a fund that would otherwise qualify for a charitable deduction. This usually happens because there are gifts to friends and family members that result in federal estate tax, all or part of the residue of the estate is paid to charity, and the residue of the estate must pay the federal estate tax. The charitable deduction is based on what the charity actually receives, after all taxes are paid, so the charitable deduction is reduced by the federal estate tax that is payable on the value of the noncharitable interests in the estate.
The noncharitable interests that generate estate tax might be cash gifts of specific amounts to family members, or they might be a fractional shares of the residue, or they might be annuity or unitrust interests payable from a charitable remainder trust that produces a charitable deduction for only a fraction of the value of the residue passing into the trust.
For example, a person might have made taxable gifts during lifetime that have used up all (or most) of the applicable exclusion amount, and might then die with a will leaving additional gifts of specific amounts (or specific property) to various family members and the rest of the estate in a charitable remainder trust that pays an annuity to the decedent's children for the rest of their lives. Depending on the ages of the children and the amount of the annuity, the charitable deduction might be a relatively small fraction of the value of the residue of the estate. The estate tax will be based on the total value of the estate less the present value of the charitable remainder, and the estate tax will reduce the residue of the estate and the amount passing into the charitable remainder trust.
Because the federal estate tax both reduces the charitable deduction and is itself not deductible, the calculations of the charitable deduction and federal estate tax become "interrelated " or circular. The federal estate tax reduces the charitable deduction, which increases the estate tax payable, which further reduces the charitable deduction, which further increases the federal estate tax, and so forth. Fortunately, the numbers will "converge" on a result that then does not change with repeated calculations.
Once the federal estate tax liability is known, it is relatively easy to prove the correctness of the calculation by using the estate tax liability to calculate the charitable deduction, and then using the charitable deduction to calculate the federal estate tax. If the resulting federal estate tax is the same as the initial federal estate tax, then the results are correct.
The program takes the amounts of lifetime gifts, the gross estate, the deductions other than the charitable deduction, the amounts of any noncharitable and charitable gifts of fixed amounts, and the percentage of the residue that qualifies for the charitable deduction and calculates the federal estate tax payable, then recalculates the charitable deduction as reduced by the federal estate tax, then recalculates the federal estate tax, then recalculates the charitable deduction, and so forth, continuing the cycle of calculations until the results have converged on a result that remains the same each time the calculations are made.
- Year of Death: Enter the year the decedent died so that the program can apply the applicable tax rates, exemptions, and other rules. Valid inputs are years 2000 through 2100.
- Gross Estate: Enter the amount of the gross estate for federal estate tax purposes including both estate assets and assets passing outside of the estate that are nevertheless included in the gross estate.
- Deductions: Enter the total amount of all debts, administrative expenses, and other deductions other than the charitable deduction and the deduction (if any) for state death taxes.
- Adj. Taxable Gifts (After '76): Enter the amount of any taxable gifts made previously. If there are no prior Adjusted Taxable Gifts, the tentative tax base will be equal to the Taxable Estate. The software does not handle gifts between 9/8/1976 and 1/1/1977 that used the specific exemption.
- Unified Credit Used by Gifts: Enter the amount of unified credit used by prior gifts. If there are no prior gifts, then no unified credit has been used. Click the computer icon next to this field to calculate the maximum unified credit used by prior gifts.
- Other Credits: Enter the amount of any foreign tax credit, credit for property previously taxed, or other credit other than the unified credit and any credit for state death taxes.
- State Death Tax: Enter the amount of any state death tax that might be payable.
- Fixed Noncharitable Bequest: Enter the total amount of any bequests of a fixed amount (i.e., not based on the value of the residue of the estate) that might be payable out of the gross estate to persons other than charities.
- Fixed Charitable Bequest: Enter the total amount of any bequests of a fixed amount (i.e., not based on the value of the residue of the estate) that qualify for a charitable deduction.
- Percent of Residue to Charity: Enter the percentage of the remainder of the estate (after payment of deductions, fixed bequests, and taxes) that will qualify for a charitable deduction. If all or part of the remainder is payable to a charitable remainder trust or charitable lead trust, the percentage will be based on the actuarial factor for the present value of the charitable interest in the trust.
- Estate Tax Calculations: In 2010, the user can select the 35% rate or No Estate Tax.
- Spousal Unused Exclusion: Enter the amount of any "deceased spousal unused exclusion amount" to which the decedent/donor is entitled by reason of the death of a spouse after 2010 whose estate tax return did not use up the full unified credit exclusion amount. Click on the computer icon to the left of the entry field to calculate the maximum exclusion amount for the year of the spouse's death, taking into account the inflation rate entered for the exclusion.
- Inflation Rate for Exclusion: Enter the rate of inflation to be applied to increase the unified credit exclusion amount in future years.
The program will calculate the federal estate tax and, if a credit for state death taxes is available for the year of death, a state death tax equal to that credit.
Along with the total federal and state taxes, the program will show the following additional results:
- Residuary Estate: The net amount of the gross estate remaining after payment fo deductions, the fixed amounts of any charitable and noncharitable bequests, any state death tax, and the federal estate tax.
- Charitable Residue: The portion of the value of the residue that qualifies for a charitable deduction.
- Total Value Passing to Charity: The charitable residue plus any fixed charitable bequest.
- Noncharitable Residue: The portion of the value of the residue that does not qualify for a charitable deduction and is therefore taxable.
- Total Noncharitable Value: The noncharitable residue plus any fixed noncharitable bequest. This represents the net value,, after taxes, that passes to noncharitable beneficiaries.