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Chapter 27

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  1. Chapter 27 Federal Gift and Estate Tax

  2. Introduction • Growth area, Statutory • Excise taxes on transfers, estate tax v. inheritance tax • J/T, T/E, T/C, CP, JTCP • persons subject to federal E&G: U.S. citizens (and residents) - world-wide • NRA - prop w/i US, except intan pers prop gifted (e.g., stk) - est tax: sep sub chap + treaties

  3. TRA 1976 - unified rates, unified credit • Formulas - Gift and Estate Tax

  4. Gift Tax • Current taxable gifts + prior taxable gifts = tax base; • tax base x rates - credits (UTC, gift tax deemed paid) = tax due

  5. Reqs of Gift • <full & adequate consideration; • incomplete - e.g., revocable trust; • excluded - to political org, to educational institution for tuition, for medical care; • at death - life insurance – not gift, but testamentary disposition

  6. JT Bank Acct, Stk, Bond • inter vivos gift if draw during life • not gift at death

  7. Annual exclusion: • present interest, • 2503(c) minors trust • inflation adjust • deductions • charitable • marital

  8. add ALL prior gifts (cumulative) • credit for tax paid or deemed paid (deemed paid - use current rates) • gift splitting • Form 709 • due date • who must file (>annual exclusion to donee, must file to split gifts)

  9. Estate Tax • GE - deducs = TE + post 76 (ONLY) gifts = tax base • base x rate = tentative tax - credits (unified, gift tax paid or deemed paid paid) = tax due

  10. Gross Estate • Distinguish: gross est (GE) v. probate est (state law); • 2033: property owned by decedent • 2036: retained interest • 2038: revocable interest

  11. 2039: annuities: J&S or self&S • cost to continue • (value of annuity or refund) x decedent contrib/tot purch pr = inclusion

  12. 2040: joint interests • T/C & CP include portion owned at death • J/T: survivor contrib/total cost x FMV = exclusion • except J/T H&W, 1st to die incl 1/2

  13. 2042: life insurance • Incl if payable to est • Or for ben of est • Or if dec has incidents of ownership • CP: CA tracing: % prems with CP = % proceeds CP

  14. 2035 Gifts COD (add back to estate) • only certain gifts w/i 3 years • gifts under 2036, 2037, 2038, 2042 • and add back any gift tax paid w/i 3 years (gross up)

  15. Taxable Estate (TE) • 2053 expenses, indebtedness (i.e. include FMV (net)), taxes • 2054 losses during estate adm • 2055 (& 2522) charitable contribution

  16. 2056, 2056A (& 2523) marital deduction; unlimited: • property included in estate & passes or has passed to surviving spouse • terminable interest to spouse: usually not qualify (eg L/E)

  17. Surv sp include in her estate at FMV DOD if QTIP elec re qtip prop (qualifd inc int for life & no plan to appoint to other) • Est Tax - phase out low brakets & unifd credit >10M before 02

  18. Credits • 2010 Unified Transfer Credit • 2011 State Death Taxes (table) • 2012 gift tax on prop included in estate • 2013 tax on prior transfers • 2014 foreign death taxes

  19. Form 706 • due date • who must file

  20. GST Tax: • Examples, tax imposition, 1 million exemption, highest rate E&G

  21. Planning • lifetime gift giving • marital & exemption trusts • charitable • irrevocable life insurance trust • living trust

  22. 2001-2009 2010 After 2009 2011 Estate & GST Tax Phase-out Estate & GST Tax Repealed Any Gift Tax SUNSET Repeal of Estate & GST Tax Continuation of Gift Tax EGTRRA `01 In General

  23. Maximum Unified Transfer Tax Rate EGTRRA `01 Maximum Unified Trans- Calendar Year fer Tax Rate 2002 50% 2003 49% 2004 48% 2005 47% 2006 46% 2007 45%

  24. Maximum Unified Transfer Tax Rate EGTRRA `01 (continued) Maximum Unified Trans- Calendar Year fer Tax Rate 2008 45% 2009 45% 2010 & later Estate tax & GST repealed Highest individual rate (35%) applies to gift tax (phasing out lower brackets & UTC >10M Estates) 5% surcharge has also been repealed starting in 2002 EFFECTIVE DATE: decedents dying after 2001

  25. Increase in UTC Exemption Equivalent & GST Tax Exemption EGTRRA `01 Gift Tax GST & Estate Tax Calendar Year Exemption Exemption 2002 $1 million $ 1 million 2003 $1 million $ 1 million 2004 $1 million $1.5 million 2005 $1 million $1.5 million 2006 $1 million $ 2 million 2007 $1 million $ 2 million 2008 $1 million $ 2 million 2009 $1 million $3.5 million EFFECTIVE DATE: Decedents dying after 2001

  26. Qualified Family Owned Business Deduction Repealed EGTTRA `01 • Enacted as exclusion in `97 • Amended to deduction in `98 • Repealed for `04 Effective date: decedents dying after 2003

  27. Basis of Property from a Decedent EGTRRA `01 • Because of Estate tax repeal in 2010 • 2010: Modified carryover (instead of step up to FMV) • Lesser of AB of decedent or FMV DOD • No 6 month alternate valuation

  28. Basis of Property from a Decedent EGTTRA `01 (cont’d) • Executor can step-up basis 1.3m (plus certain unused capital, net op, built-in losses) • And step-up an additional 3 m for property passing to the surviving spouse

  29. Phase-out & Repeal State Death Tax Credit EGTRRA `01 Percentage of Current Calendar State DeathTaxCredit Year Disallowed 2002 25% 2003 50% 2004 75% 2005 100% • On Repeal in 2005, State Death Taxes can be deducted • EFFECTIVE DATE: decedents dying after 2001

  30. Retention of Gift Tax EGTRRA `01 • Max gift rate = 35% (max indiv inc tax rate) after 2009 • Exemption amount 1 million after 2009 • Transfer to trust = taxable gift unless donor or donor spouse grantor trust (or otherwise provided)

  31. Modification of GST EGTRRA `01 • Beyond Scope • Deemed allocation of GST tax exemption – lifetime transfers to trust (not direct skips) • Retroactive allocation of GST exemption • Severing of Trusts holding property where inclusion rates >0 • Modification of Valuation rules • Relief from late elections • New substantial compliance rules Effective Date: After 2000

  32. Taxpayer Relief Act of 1997 - Chapter 27 • Transfers from decedent’s Revocable Grantor Trust; w/i 3 yrs of death; - not included in decedent’s estate; - incldg relinguishment of power to revoke; - treated as if gift made directly by dec; For 2035; For 2038; - if under gift exclusion amt, no reportable (taxable) gift

  33. - revocable trust treated as owned by decedent under 676; • - codifies 2 8th cir. Cases - H. McNeely and E. Kisling Est. • - effective for estates of decedents dying after 8/5/97

  34. Inflation indexing (1) 10000 annual gift exclusion (2) 750000 special use valuation ceiling (3) 1m GSTT exemption (4) 1m closely held bus installm paym reduced int ceiling • Effective - after 1998 for deaths and gifts after 12/31/97

  35. Gift Tax Filing for Gifts to Charity • return not req’d for gifts >annual exclusion (10,000) • if entire value = gift tax charitable deduction • effective - gifts made after 8/5/97

  36. IRS Restructuring & Reform Act of 1998 - Chapter 27 • Qualified family owned business deduction (1998) • up to 675,000 for QFOBI • QFOBI deduction + UTC exemption equivalent 1.3 M (reduce UTC otherwise) • rationale eliminate need small bus to liquidate • complex detailed requirements

  37. Value QFOBI >50% adjusted GE (less certain passive interests plus certain gifts) • sole proprietorship, p’ship, corp (p’ship corp owned 50/70/90% by 1/2/3 fams) • dec (or fam memb) own & mat partic 5 of 8 yrs • qualified heir mat partic 5 of 8 of 10 • recapture: • elective

  38. Unified Credit to Increase Year Credit Exempt Equiv 1997 192800 600,000 1998 202050 625,000 1999 211300 650,000 2000 & 2001 220550 675,000 2002 & 2003 229800 700,000 2004 287300 850,000

  39. Year Credit Exempt Equiv 2005 326300 950,000 2006 345800 1,000,000 (no inflation adjustment in UTC)