Brief description of estate transfer tools and a discussion of the Federal estate and gift tax.Agricultural Finance,

Kelsey, Myron

English

Research Papers in Economics

Staff Paper
ESTATE TRANSFER SUMMARY
Myron P. Kelsey
(Revision of Ag Econ Staff Paper #79-4)
#00-03 February 2000
Department of Agricultural Economics
MICHIGAN STATE UNIVERSITY
East Lansing, Michigan  48824 
MSU is an Affirmative Action/Equal Opportunity InstitutionCopyright © 2000 by Myron P. Kelsey.  All rights reserved.  Readers may make verbatim copies
of this document for non-commercial purposes by any means, provided that this copyright notice
appears on all such copies.
ESTATE TRANSFER SUMMARY
Myron P. Kelsey
kelsey@msu.edu
Summary
Brief description of estate transfer tools and a discussion of the Federal estate and gift tax.
2 pages totalStaff Paper #00-03
February 2000
ESTATE TRANSFER SUMMARY
Myron P. Kelsey
Department of Agricultural Economics
Michigan State University
Property Ownership
Fee Simple - Ownership by one person who can buy, sell, give, or mortgage as he or she sees fit.  When the owner is married, real estate is
subject to a spouse's dower rights and, therefore, any transactions require their signature.  At death, property becomes part of the probate
estate.
Tenancy in Common - Ownership by two or more individuals who own an undivided share of ownership.  At death, each tenant's share of
ownership becomes part of the probate estate.
Joint Tenancy With Rights of Survivorship - Ownership by two or more individuals, in which all owners must agree to any transactions
involving sale, gift or use of borrowing purposes.  At death, the surviving joint tenants take the property without probate proceedings.
Tenancy by the Entirety - Joint ownership with rights of survivorship between husband and wife.
Property Distribution Without a Will
Married With Children - Property distribution for a married person with child, children, or descendants is divided between the surviving
spouse (who is also the mother of all the children) who receives the first $60,000 plus one-half the remaining balance of the property, and
the children who receive one-half the property divided equally.  If there is a child or children of a prior marriage, spouse and such
children's share equally.
Married Without Children and Without Parents - All property to the surviving spouse.
Married Without Children, but With at Least One Parent Surviving - The surviving spouse receives the first $60,000 plus one-half the
remaining balance of the property and the parent or parents receive one-half the property.
Widow or Widower With Children - All property to children divided equally.  Grandchildren take their deceased parent's share.
Unmarried - In cases of an unmarried person, or widow or widower without children or descendants, the distribution is as follows:  If the
parents survive, all to the parents or survivor.  If no parents survive, all property goes to brothers and sisters, divided equally.  Nieces and
nephews take their deceased parents' share.  If no parents, brothers, or sisters survive, the property is divided ½ to the nearest kin of
maternal grandparents and ½ to the nearest kin of paternal grandparents.  If no kin, all to the state.
Federal Estate and Gift Tax
The Federal estate and gift tax law has a single tax schedule.  While living, a person may make a gift of $10,000 per year per person to
any number of individuals without filing a return or paying a tax.  The value of property given is its fair market value.  Husband and wife can
combine their exemption and therefore give $20,000 per person per year.  Any gifts in excess of the annual exemption are taxed according to
the following rate schedule.
Table 1.  Federal Estate and Gift Tax Rate Schedule
                                                                                                                                                                   
Taxable Estate and
Lifetime Gifts                                                  Tax = Of Excess
From: To: ($) + (%) Over:                                                                                                                                                                    
$ 0 $ 10,000 $ 0 18 $ 0
10,000 20,000 1,800 20 10,000
20,000 40,000 3,800 22 20,000
40,000 60,000 8,200 24 40,000
60,000 80,000 13,000 26 60,000
80,000 100,000 18,200 28 80,000
100,000 150,000 23,800 30 100,000
150,000 250,000 38,800 32 150,000
250,000 500,000 70,800 34 250,000
500,000 750,000 155,800 37 500,000
750,000 1,000,000 248,300 39 750,000
1,000,000 1,250,000 345,800 41 1,000,000
1,250,000 1,500,000 448,300 43 1,250,000
1,500,000 2,000,000 555,800 45 1,500,000
2,000,000 2,500,000 780,800 49 2,000,000
2,500,000 3,000,000 1,025,800 53 2,500,000
3,000,000  --    1,290,800 55 3,000,000                                                                                                                                                                   
The gift tax is calculated on the accumulated gifts over a person's lifetime, but no tax is paid until the unified credit is used up.  The
amount of the credit is $192,800 for 1987 which is an exemption equivalent of $600,000 of property.  The exemption equivalent was $650,000
in 1999, is $675,000 in 2000 and 2001, $700,000 in 2002 and 2003, $850,000 in 2004, $950,000 in 2005, and $1,000,000 in 2006 and
thereafter.  The estate tax is assessed on the value of property in the decedent's estate after subtracting a unified credit against estate and gift
taxes.  There is a 100% marital deduction for gift and estate transfers between spouses.2
At death the taxable estate includes all property owned by the decedent including life insurance and jointly owned property except to the
degree the surviving joint tenant can prove monetary contribution towards acquisition.  Any unified credit which has not been used for gifts
during life is available to use against the tax at death.
Cost Basis for Income Tax
The cost basis in the hands of the heirs is the fair market value at date of death or alternative value if chosen on the Federal estate tax
return.
Alternate Valuation of Certain Real Property (Code Section 2032A)
A special valuation rule applies to real property in a closely held business on the basis of the property's value as a closely held business. 
This special valuation cannot reduce the decedent's gross estate by more than $750,000.  To qualify for this valuation:
(1) The business real and personal property must be at least 50% of the adjusted gross estate.
(2) The real property must be at least 25% of the adjusted gross estate.
(3) The property must pass to a qualifying heir.
(4) The real property must have been owned and managed by the deceased or his heir for 5 of the last 8 years prior to death.
(5) The property must continue to be actively used by a qualified heir for at least 10 years after death or the foregone taxes will be
recaptured.
(6) The cost basis of the property will receive a step-up in basis to the alternative valuation, not the fair market value.
Qualified Family-owned Business (Code Section 2057)
The qualifications for this exclusion are essentially the same as the valuation of certain real property rules, except business personal
property is also included and real property, if any, does not have to be 25% of the adjusted gross estate.
The maximum exclusion is the difference between $1,300,000 and the unified credit exemption.  ($1,300,000 less $675,000 = $625,000
in the year 2000).
Unlike item (6) under the “Alternative Valuation of Real Property,” property under the small business exclusion will receive a full step-
up in basis to fair market value.
Special Payment Alternative
Code Section 6166 allows a 14-year period for payment of estate tax attributable to an interest in a farm or other closely held business if
the value of the business exceeds 35% of the adjusted gross estate.  You can defer paying estate tax for four years and then pay the tax (with
interest) in 10 annual installments.  The rate is 2% on the first $1,000,000 of taxable value above the exclusion amount and 45% of the
“underpayment of tax” rate on the excess.
Michigan Inheritance Tax (now the Estate Tax)
For deaths after 9/30/93 the Michigan Inheritance tax will be the credit for State death taxes under the Federal estate and gift tax.  This
amount is paid to the Michigan Department of Treasury and is subtracted from the amount of the Federal estate tax calculation sent to the
Internal Revenue Service.
Estate Planning Tools
Property Ownership - The individual or individuals who own the property.
Estate Splitting - Dividing property ownership between individuals in separate ownership such as fee simple or tenancy in common rather than
joint ownership.
Will - A document which gives an individual an opportunity to give the Probate Court instructions on how his or her probate estate is to be
handled and divided.  Can name the personal representative and guardian for minor children.
Gift - A transfer of property from one owner to another for no consideration or a consideration at less than fair market value.
Sale - A transfer of property from one owner to another for a consideration at fair market value.
Trust - Ownership and control of property by a third party (trustee) who manages the property and pays the income to a named beneficiary
according to instructions given by the person setting up the trust and who transfers the property to it.
Life Insurance - A contract between an owner of a policy and the insurance company which states that for a consideration (premium) the
company will pay a given sum (face value of the policy) to a named beneficiary in case of death of the named insured.  Different degrees
of savings may also be a part of the policy.
Annuity - A contract in which a given sum of money is paid on a periodic basis to a beneficiary for life.
Marital Deduction - Under the Federal estate and gift tax the exemption for the surviving spouse is equal to whatever the spouse received.
Life Estate - A transfer of ownership from an owner to a second party with a reservation of some rights, such as life use of the residence. 
Property does not go through probate, but usually is still taxable in the estate of the deceased owner.
Deed in Escrow - Papers are prepared to transfer real estate to another owner and given to a third party for delivery at a later date or when
specified conditions are met.  There is no transfer until delivery is made.

ESTATE TRANSFER SUMMARY

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics