Kathleen ReynoldsKeymasterOctober 18, 2022 at 5:51 pmPost count: 428
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.
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 exemption 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, as well as the American Taxpayer Relief Act of 2012.
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.
- Current Year Enter the current calendar year.
- 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.
- Expected Growth Rate of Estate Enter the rate at which the estate is expected to grow.
- Client’s Age at End of Current Year Enter the age of the client at the end of the current calendar year.
- 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.
- 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.
- Estate Tax Calculations In 2010, the user can select the 35% rate or No Estate Tax.
- 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.
- 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.
- 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.
- 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.
- Insurance Excluded This input will appear when you select a state that excludes insurance proceeds from the taxable estate for the inheritance tax calculation.
- Inflation Rate for Exclusion Enter the rate of inflation to be applied to increase the unified credit exclusion amount in future years.
- 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.
- Sunset in 2026? Selects how future estate tax calculations will be handled
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.
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