Federal Estate Tax Overview

The federal estate tax is a transfer tax imposed on the value of property transferred at death. Understanding how to calculate the estate tax is essential for CFP candidates, as it forms the foundation of estate planning strategies.

The Estate Tax Calculation Formula

The estate tax follows a systematic calculation process. This "estate tax formula" is a critical concept for the CFP exam:

GROSS ESTATE (FMV at death or alternate valuation date)
- Funeral expenses
- Administrative expenses
- Debts and mortgages
- Casualty/theft losses during administration
= ADJUSTED GROSS ESTATE

- Marital deduction (unlimited)
- Charitable deduction (unlimited)
- State death tax deduction
= TAXABLE ESTATE

+ Adjusted taxable gifts (post-1976 gifts not in gross estate)
= TENTATIVE TAX BASE

Calculate tentative tax using unified rate schedule
- Unified credit ($5,541,800 in 2025)
- Gift taxes paid on post-1976 gifts
- Other credits (foreign death tax, prior transfers)
= ESTATE TAX DUE

What Is Included in the Gross Estate

The gross estate encompasses more than just assets the decedent owned outright at death. IRC Sections 2033-2044 define what must be included:

Property Owned at Death (IRC Section 2033)

All property in which the decedent had an ownership interest at death is included at fair market value (FMV). This includes:

• Real estate (primary residence, vacation homes, rental properties)
• Personal property and tangible assets
• Bank accounts and investments
• Business interests
• Retirement accounts (IRAs, 401(k)s)

Life Insurance (IRC Section 2042)

Life insurance proceeds are included in the gross estate if the decedent:

• Possessed incidents of ownership at death (ability to change beneficiaries, borrow against policy, surrender or cancel policy, assign policy)
• Was the beneficiary (proceeds payable to estate)

Exam Tip: Even if the decedent transferred a policy, the proceeds are included if death occurs within 3 years of the transfer (the "3-year rule").

Joint Tenancy (IRC Section 2040)

For joint tenancy with right of survivorship (JTWROS):

• With non-spouse: Use the contribution rule - include the percentage the decedent contributed to acquiring the property
• With spouse: Automatically 50% included (qualified joint interest)

For tenancy by the entirety (spouse only): 50% included

General Powers of Appointment (IRC Section 2041)

Property over which the decedent held a general power of appointment at death is included. A general power allows the holder to appoint property to:

• Themselves
• Their estate
• Their creditors
• Creditors of their estate

Special (limited) powers of appointment do NOT cause estate inclusion.

Retained Life Interests (IRC Section 2036)

Property transferred during life but with a retained life interest is included. This applies when the decedent retained:

• Right to income from the property
• Right to possess or enjoy the property
• Right to designate who enjoys the property

Revocable Transfers (IRC Section 2038)

Property transferred during life where the decedent retained the power to alter, amend, revoke, or terminate the transfer is included. This is why revocable living trusts are included in the gross estate.

Transfers Within 3 Years of Death (IRC Section 2035)

Certain transfers made within 3 years of death are "pulled back" into the gross estate:

• Life insurance policies transferred within 3 years
• Gift taxes paid within 3 years ("gross-up rule")
• Certain retained interests relinquished within 3 years

Deductions from the Gross Estate

Expenses and Debts

• Funeral expenses: Reasonable costs
• Administrative expenses: Executor fees, attorney fees, accounting fees, court costs
• Debts: Mortgages, loans, credit cards, unpaid taxes
• Medical expenses: Can be deducted on estate return OR decedent's final income tax return (not both)

Unlimited Marital Deduction

Transfers to a surviving U.S. citizen spouse qualify for an unlimited marital deduction. Key requirements:

• Must pass to spouse outright OR in qualifying trust (QTIP, general power of appointment trust, estate trust)
• Spouse must be U.S. citizen (or use Qualified Domestic Trust - QDOT)
• Property must be included in gross estate
• Cannot be a terminable interest (unless QTIP election made)

Unlimited Charitable Deduction

Bequests to qualified charities receive an unlimited deduction. The charity must be:

• Organized and operated exclusively for charitable purposes
• A qualified 501(c)(3) organization

2025 Estate Tax Numbers

Valuation Date Options

The executor may choose between two valuation dates:

1. Date of Death: FMV on the exact date of death (default)
2. Alternate Valuation Date: FMV 6 months after death OR date of disposition if sold/distributed earlier

The alternate valuation date can only be elected if it:

• Decreases the gross estate value AND
• Decreases the estate tax liability

Filing Requirements

Form 706 (United States Estate Tax Return) must be filed:

• Within 9 months after death
• Automatic 6-month extension available (Form 4768)
• Required if gross estate plus adjusted taxable gifts exceed applicable exclusion amount

Exam Tip: Portability election (DSUE - Deceased Spousal Unused Exclusion) requires timely filing of Form 706, even if no tax is due.