Credits Against the Federal Estate Tax

In order to relieve double taxation, there are three credits that offset the federal estate tax liability:

(1) the unified estate and gift tax credit discussed here;

(2) the foreign death tax; and

(3) credit for tax on prior transfers.

A credit is available for foreign death taxes actually paid by the estate on property located in the foreign country that has been included in the gross estate of the decedent which then becomes to federal estate tax. The credit is authorized only by statute or treaty.  The credit is limited to the foreign or the U.S. tax attributable to the property, whichever is less. It is only allowable if the decedent is a citizen or resident of the United States at the time of death.  To support the credit, the executor of the decedent’s estate must file Form 706-CE  and have the form certified by the foreign country to whom the death tax was actually paid.

A credit against the estate tax is allowed for estate taxes paid on property transferred to you while you were living from someone who died within 10 years before or 2 years after your death. There is no requirement that the property be identified in the estate of the transferee or that it even exist on the date of the transferee’s death (Instructions to Form 706).

Case Studies: Utilizing Tax Credits to Minimize Federal Estate Tax Liability

Case Study 1: The Unified Estate and Gift Tax Credit

John, a wealthy individual, passed away, leaving behind a substantial estate. His estate was subject to federal estate taxes, which could have imposed a significant burden on his beneficiaries.

However, John had made significant lifetime gifts to his family members, utilizing the unified estate and gift tax credit.

By strategically using the credit, John reduced his estate tax liability, ensuring that a substantial portion of his wealth would be preserved for his loved ones.

Case Study 2: The Foreign Death Tax Credit

Sarah, a U.S. citizen, had significant assets located in a foreign country. Upon her passing, her estate faced potential double taxation due to the foreign death taxes imposed on the property.

Sarah’s executor worked diligently to navigate the complex process of claiming the foreign death tax credit.

By coordinating with the foreign country’s tax authorities and providing the necessary documentation, Sarah’s estate was able to claim the credit, effectively offsetting a portion of the federal estate tax liability.

Case Study 3: Credit for Tax on Prior Transfers

Michael, a retiree, had received a significant gift from his aunt, who passed away two years later. The gift was subject to estate taxes, which would have added to Michael’s estate tax liability upon his death.

However, thanks to the credit for tax on prior transfers, Michael was able to offset a portion of the estate tax burden.

Even though the gifted property did not exist at the time of his aunt’s death, Michael was still eligible to claim the credit, reducing the overall tax liability on his estate.