Gift, estate, and GST tax compliance and calculation

Computing the gross estate, deductions, taxable estate and tentative tax; the unified credit and basic exclusion amount, portability, the annual exclusion and gift splitting, prior taxable gifts, and generation-skipping transfer tax with its exemption and skip-person rules. Items require the calculation using the provided figures.

Internal Revenue Code Section 2001Internal Revenue Code Section 2010Form 706Form 709

Practice question for this objective

Free sampleEstate Planninghard

Bertrand dies this year, unmarried, and his executor is preparing Form 706. His taxable estate, after all deductions, is 20,000,000 dollars. He made post-1976 taxable gifts of 2,000,000 dollars during his lifetime, all of them sheltered at the time, so no gift tax was ever paid. Assume the tentative tax on any estate tax base is 345,800 dollars plus 40 percent of the excess of that base over 1,000,000 dollars, and that the applicable credit amount available to his estate is 5,945,800 dollars. No state death tax or other credit applies. What federal estate tax is payable?

A2,745,800 dollars, taking the exclusion off the tax base before applying the rate schedule
B8,745,800 dollars, being the tentative tax produced by the rate schedule on the base
C2,800,000 dollars, applying the rate schedule and then subtracting the applicable credit Correct
D2,000,000 dollars, applying the rate schedule to the taxable estate on its own

Estate tax is computed by adding adjusted taxable gifts to the taxable estate, applying the rate schedule, then subtracting the applicable credit rather than the exclusion. The computation is cumulative and runs in a fixed order. First build the estate tax base: the 20,000,000 dollar taxable estate plus 2,000,000 dollars of adjusted taxable gifts equals 22,000,000 dollars. Second, apply the rate schedule to that base: 22,000,000 less 1,000,000 gives 21,000,000 dollars, times 40 percent gives 8,400,000 dollars, plus 345,800 dollars gives a tentative tax of 8,745,800 dollars. Third, subtract any gift tax payable on the post-1976 gifts, which is zero here. Fourth, subtract the applicable credit amount of 5,945,800 dollars, leaving 2,800,000 dollars of estate tax. The credit sits at the end of the calculation, so the sheltered amount is relieved at the top marginal rate. Deducting the equivalent exclusion from the base instead relieves it at the lower rates in the schedule and understates the tax by 54,200 dollars.

Why A is wrong: This subtracts the sheltered amount from the base and then runs the reduced figure of 7,000,000 dollars through the schedule, giving 2,745,800 dollars; the shelter is delivered as a credit against the computed tax, not as a deduction from the base, and the two routes give different answers.

Why B is wrong: This computes the tentative tax on the correct 22,000,000 dollar base but stops there and never applies the applicable credit, so it overstates the liability by the full 5,945,800 dollars of credit the estate is entitled to claim.

Why C is correct: The base is 20,000,000 plus 2,000,000, that is 22,000,000 dollars, the tentative tax on it is 8,745,800 dollars, and subtracting the 5,945,800 dollar applicable credit leaves 2,800,000 dollars payable.

Why D is wrong: This leaves the 2,000,000 dollars of post-1976 taxable gifts out of the base, producing a tentative tax of 7,945,800 dollars; adjusted taxable gifts are added back precisely so that lifetime transfers push the estate into the same cumulative rate position.

See more CFP practice questions, answers explained.

Exam traps in Estate Planning

Answers that look right on this material and are not. Each one is a distractor from a different question in the CFP bank for this domain.

He may elect it, because the gross estate would be 800,000 dollars lower on the alternate date and a fall in the value of the gross estate is the sole test the election imposes
Why it is wrong: This applies only the first of the two conditions; a candidate who remembers the election as a relief for falling markets stops here and misses the requirement that the tax itself must also fall.
No Form 709 is required, because each transfer is within the exclusion or is a tuition payment
Why it is wrong: This is tempting because two of the four transfers genuinely need no reporting, but the 30,000 dollar cash gift to the daughter exceeds the 19,000 dollar annual exclusion, and a gift above the exclusion obliges the donor to file a gift tax return.

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