Overview

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Calculates the projected impact of federal estate taxes on estates subject to future taxation due to the combined effects of capital growth and inflation. It determines the total death taxes (state tax assumed to be equal to the federal credit)and the estate remaining after the survivor dies. Thorough estate planning requires consideration not only of an estate's current value, but also its expected future value when taxes will actually be paid.

In this article:

• Background
• Getting Started
• Entering Data
• Results

Background

This illustration estimates the burden of federal and state death taxes at the death of the second-to- die of a couple. It is an important calculation for planning an estate and providing sufficient cash to meet tax and other needs.

The unlimited marital deduction, for those who qualify, postpones federal estate taxes (and in some cases indirectly postpones state death taxes) until the death of the survivor of a married couple. Thanks to the "portability" of the estate exclusion amount that was introduced as part of the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010, a surviving spouse can inherit the deceased spouse's unused exclusion amount as well as the deceased spouse's estate without necessarily increasing the estate tax payable upon the death of the survivor.

Unfortunately, although there may be more flexibility while the surviving spouse lives, at his or her death, the "2nd Death Wallop" occurs. At this point, the federal and state death taxes are imposed on what often is a much larger estate than anticipated. Many executors (and especially those where the family business or some other relatively non-liquid asset comprised the bulk of the wealth) are shocked and dismayed at the large amount of cash that must be raised to pay federal and state taxes as well as administrative costs.

There are numerous solutions to a "liquidity need" (cash must be raised to pay federal and state death taxes as well as legal and accounting fees and probate costs within nine months of death) problem.

Most estate planners utilize life insurance in one form or another to create the cash to satisfy that need. Survivorship ("2nd to Die") coverage is one approach. Here two lives are insured but payment is made only when the second death occurs. In some cases, the premiums are lower then if two individual policies are used. Medical underwriting standards may be eased somewhat for survivorship coverage due to the fact that the insurer will not have to pay until the second death occurs. Some authorities also claim that if a split dollar plan is used, the "P.S. 58 cost" will be significantly lower than if individual policies are used. Insuring the younger healthier spouse or both spouses is an alternative.

Regardless of which policy arrangement is selected, the concept of creating cash at the second death of two individuals is a sound estate planning technique. It should not ignore the importance of adequate planning for the inevitable (and sometimes surprisingly high) costs at the death of the first spouse to die.

Getting Started

Some couples qualify for the unlimited marital deduction which postpones federal estate taxes (and in some cases indirectly postpones state death taxes) until the survivor of a married couple dies.

When the survivor dies, the estate is subject to federal and state taxes. Unfortunately, the estate is often much larger than expected. Therefore, executors often do not anticipate the large amount of cash needed to pay the federal and state taxes and administrative costs. This is especially true in cases where the family business or some other relatively non-liquid asset comprises the bulk of the wealth.

This cash problem can be resolved in various ways. Most estate planners use life insurance, such as survivorship coverage, to produce the cash needed. Survivorship coverage insures two lives, but payment is made only after the second death occurs. Sometimes, the premiums are lower than if two individual policies are purchased. Alternatively, some couples choose to insure only the younger, healthier spouse. Regardless of the insurance policy chosen, sensible estate planning includes the purchase of a policy that will produce cash upon the death of the survivor of a married couple.

Recent changes in estate tax law have resulted in higher exclusion amounts and other changes affecting estate tax calculations. The estate tax calculations take into account the changes in rates and credits provided by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the American Taxpayer Relief Act of 2012, and the Tax Cuts & Jobs Act of 2017.

If a spouse's age is entered, then the federal estate tax is calculated with two exclusion amounts (i.e., with an deceased spousal unused exclusion amount equal to the base exclusion amount for the projected future year),as allowed by the unified credit "portability" that was introduced by the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010.

Entering Data

1. Current Year:  Enter the current calendar year.
   
   
2. Current Tentative Tax Base:  Enter the tentative tax base or taxable estate. This calculation assumes the Taxable Estate and Tentative Tax Base are equal. This is generally true unless there are Adjusted Taxable Gifts.
   
   
3. Expected Growth Rate of Estate:  Enter the rate at which the estate is expected to grow.
   
   
4. Client's Age at End of Current Year:  Enter the age of the client at the end of the current calendar year.
   
   
5. Spouse's Age at End of Current Year:  Enter the age of the client's spouse at the end of the current calendar year. If client does not have a spouse, enter 0.
   
   
6. Number of Years of Growth:  If Use Life Expectancy is checked, the program will calculate the joint life expectancy (or single life expectancy if ‘0' has been entered for Spouse's Age) and display that life expectancy as the Number of Years of Growth. If Use Life Expectancy is not checked, then enter the number of years that the estate should grow before the estate tax is calculated.
   
   
7. Estate Tax Calculations:  In 2010, the user can select the 35% rate or No Estate Tax.
   
   
8. Use Life Expectancy: Select this check box to use the single or joint life expectancy as the Number of Years of Growth, or unselect this check box to manually enter a different value for Number of Years of Growth.
   
   
9. State:  Select the state for which the state death tax should be calculated. Click the plus symbol to the left of the state selection to set a default state for this screen and the Estate Tax Computation screen.
   
   
10. Recipient Class:  This field will appear if a state has an inheritance tax with different rates for different classes of beneficiaries. Classes are defined differently by each state, so click on the "+" button to see the possible classes for the selected state, and then select the class receiving the estate and click on "Save" to enter the number of the class in the field to the right.
    
    
11. Ret. Plans Excluded:  This input will appear when you select a state that excludes retirement plans from the taxable estate for the inheritance tax calculation.
    
    
12. Insurance Excluded:  This input will appear when you select a state that excludes insurance proceeds from the taxable estate for the inheritance tax calculation.
    
    
13. Inflation Rate for Exclusion:  Enter the rate of inflation to be applied to increase the unified credit exclusion amount in future years.
    
    
14. Calculate State Death Tax:  When this box is checked, the program will calculate the state death tax and (for years after 2004) deduct that tax from the federal taxable estate. Uncheck this box to enter a different amount of state death tax payable.
    
    
15. Sunset in 2026?:  Selects how future estate tax calculations will be handled

Results

The program displays the estimated value of an estate at the end of a joint life expectancy. To calculate this value, the calculation compounds the current net worth at a specified rate of growth. It then determines joint life expectancy according to the latest IRS mortality tables and calculates the estimated size of the estate at the end of that joint life expectancy.

If a spouse's age is entered, then the federal estate tax is calculated with two exclusion amounts (i.e., with an deceased spousal unused exclusion amount equal to the base exclusion amount for the projected future year).

The results also display the total death taxes imposed on the estate and the estate remaining after these taxes are deducted.