Basic Estate Tax
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Transcript of Basic Estate Tax
By Ward J. Wilsey, JD, LLM3655 Nobel Dr. Suite 345
San Diego, CA 92122(858) 764-2672
The Wilsey Law Firm www.wilseylaw.com
Basic Estate Tax
Estate TaxTransfer Tax Paid at Death
Internal Revenue Code § 2001Paid on Taxable Estate
Gross Estate Less Exclusion AmountInternal Revenue Code § 2001
45% Tax on Taxable EstateInternal Revenue Code § 2001
But see marginal rates
Calculating an Estate Tax EstimateLINE
INSTRUCTION VALUE
1. Enter Value of Gross Estate $5,000,000
2. Enter Applicable Exclusion Amount $3,500,000
3. Calculate Taxable Estate $1,500,000
4. Multiply By Estate Tax Rate 45%
5. Calculate Approximate Estate Tax $675,000
Exclusions from the Taxable EstateExclusion Amount ($3,500,000 in 2009)Expenses of the Estate (IRC § 2053)
Funeral ExpensesAdministration ExpensesClaims Against the EstateDebts
Marital Deduction (IRC § 2056)Charitable Bequests (IRC § 2055)Qualified Domestic Trust (IRC § 2056A)
GiftingYou are subject to a 45% tax on gifts made
to another personUnless an Exclusion Applies
Exclusions$13,000 Annual Gifting under IRC §2503(b)$1,000,000 Lifetime Exclusion under IRC
§2505(a)Certain direct expenditures for health care
and educational expenditures under §2503(c)
Annual GiftingYou can gift $13,000 to as many different
people as you wish. IRC 2503(b)Must be a gift of a present interest
Options for giftingOutright529 planUTMATrust
Gifting OutrightOutright gifts are fairly simpleCan be done to minor’s with Guardian.
Rev. Rul. 54-400, 1954-2 CB 319Gifts outright will be spent outrightGifts can be paid indirectly in the form of
medical or educational expensesMust comply with IRC § 2503(e)
Gift to 529 PlanAllow donor’s to prepay educational
expenses on a tax advantaged basis.Contributions to 529 Plan are taxable gifts.
IRC § 529(c)(2).Eligible for annual exclusion
Neither the donor or done is subject to income tax on distributions or growth within 529 planAs long as distributions are paid directly for
qualified educational expenses
529 PlanDonor can elect to gift five years worth of
annual exclusions, and apply next five years worth of exemptions. IRC 529(c)(2)(b).
Assets in 529 Plan are not in estate of donor or done. IRC 529(c)(4)
529 plan can be transferred to another beneficiary when no longer needed. IRC 529(c)(3)(c)
529 Plan DownsideDistributions not used for qualified
educational expenses will be subject to income tax plus 10% penalty.
Donor is taxed on returned contributions, to extent of earnings, plus 10% penalty. IRC 529(c)(3)
May be easier to make contributions directly to educational provider. 2503(e)
Opportunity Cost for gifts made
UTMATransfers made into custodial account for
beneficiaryDistributed at appropriate age according to
state law21 in California
Disadvantages are too numerous to bother with
Gifts in TrustGift to an Irrevocable Trust, properly
drafted, it outside the estate of the Grantor. Options
2503(c) Trust2503(b) TrustCrummey Trust
2503(c) TrustGifts to this trust will qualify under the
annual exclusions if:1. The trust principal and income may be
paid to or spent on behalf of the donee before he or she reaches age 21;
2. Any money not spent is distributed to the donee when he or she reaches age 21; and
3. Any unspent money is either paid to the donee's estate or passes under a general power of appointment granted to the donee if the donee dies before reaching age 21.
2503(b) TrustBeneficiary receives income interest for lifeIncome must be paid out, cannot
accumulate.Gifts are part subject to exclusion, and part
gift of non-present interest.Very difficult
Crummey TrustTrust that has gifts qualify for the annual
exclusion by giving beneficiaries a special withdrawal rightCrummey v. Comm'r, 397 F2d 82 (9th Cir.
1968)Rev. Rul. 73-405, 1973-2 CB 321 , revoking
Rev. Rul. 54-91, 1954-1 CB 207Flexibility is main advantage
Broad discretion in investmentsBroad discretion in distributionsMultiple beneficiaries
Crummey DisadvantagesCrummey beneficiary must have a
withdrawal right to take out gifts for set period of time
Drafter should not use less than 30 day time period. See, e.g., Priv. Ltr. Ruls. 200130030 , 200011058 , 200011054–200011056 , 199912016 , 9812006 , 9810006 , 9809006 , 9809004 ; see also Estate of Cristofani v. Comm'r, 97 TC 74 (1991) , acq. in result only 1992-1 CB 4, 1996-1 CB 1 .
Crummey TrustsNotice to Beneficiaries is required to notify
Gift has been madeWithdrawal right is allowedRev. Rul. 81-7, 1981-1 CB 474
What happens if you do not give noticeAssets are still out of Grantor’s estateBut they may not qualify for annual exclusion
Crummey TrustsWaiver of Notice is not allowed by the IRS
Technical Advice Memorandum 9532001“current notice of a gift and the withdrawal rights
over it is an absolute prerequisite to a donee's “real and immediate benefit” from the gift”
Minor BeneficiariesThe trust must include a provision allowing
guardians to exercise a Crummey Withdrawal Right on behalf of minor beneficiariesNaumoff v. Comm'r, TC Memo. 1983-435 (1983)
Crummey TrustsSplit Gifts
Husband and Wife may elect to split gifts into a Crummey Trust. IRC 2513
Reciprocal GiftingIRS will scrutinize interrelated family
structures, where A creates trust for B’s kids, and B creates a trust for A’s kidsRevenue Ruling 85-24
Naked Crummey PowersIRS has attacked giving Crummey Powers to
contingent beneficiaries.Tax Court has rejected this argument
Estate of Cristofani v. Comm'r, 97 TC 74 (1991)IRS has said they will continue to deny
Crummey Rights to Contingent BeneficiariesAction on Decision (AOD) 1992-00
Avoid Cristofani issues by naming grandchildren and other beneficiaries as permissible current beneficiaries, with children as “primary beneficiary”
Crummey PowersLapse of Gift
Beneficiary who lets Crummey Powers lapse makes a gift to the other beneficiaries. IRC 2514
ExceptionsNo gift to the extent that lapse does not exceed the
greater of $5,000 or 5% of the trust assets. IRC 2514(e)
No gift if Beneficiary has a Testamentary General Power of Appointment over assets. Priv. Ltr. Ruls. 8142061 , 8229097 , 8517052. See also Regs. 25.2511-2(b)
Hanging Crummey Powers
Hanging Crummey PowersCrummey Withdrawal Power that lapses in
stages:After 30 days to extent of 5&5 powersEvery year to extent remainder is less than
5% of trust assetsAuthority
IRS has treated favorably unless withdrawal right mentions amounts subject to gift tax. Private Letter Ruling 8901004
Make sure Hanging Power does not make reference to “taxable gifts”Priv. Ltr. Rul. 200130030
Crummey GST ResultTransfers to Crummey Trust do not qualify for
the annual GST Exclusion unless:It is a direct skip gift
All beneficiaries are skip personsMade to a Trust with one beneficiaryAssets are in beneficiary’s estate at death
Otherwise, lifetime GST Exemption will be used under IRC 2642(c)
Watch out if you have made lifetime transfers to Irrevocable TrustsYou may be creating gifts currently subject to GSTLimit Crummey Gifts to Kids if possible
Generation Skipping Transfer TaxTransfer Tax Imposed on Transfers to Skip
PersonsIn Addition to Estate TaxRate is the Product of the Maximum Estate
Tax Rate multiplied by the Inclusion Ratio (IRC § 2641)
Skip PersonPersons in a generation that is two or more
generations below the transferorGrandchildrenPersons 37.5 years younger than transferor, unless
transferee is a spouse
When the GSTT OccursTransfers that are subject to a GST Tax, absent an
exemption (IRC § 2611(a)):Direct Skip
Direct Transfer to skip person (IRC § 2611(a)(3))Taxable Termination
Termination of an interest in a trust by a non-skip person unless: A transfer subject to an estate or gift tax occurs A non-skip person has an interest in the trust; or No transfer to a non-skip person is made
Taxable DistributionDistribution from a Trust to a Skip Person
Does not include any transfer relating to exclusion of certain transfers for educational or medical expenses under IRC § 2503(e)
Exemptions From Generation Skipping Transfer Tax$3,500,000 Exemption during life or upon
deathIRC § 2631(a)
Once you allocate your exemption, it’s Irrevocable.IRC § 2631(b)
Automatic Allocation on Direct SkipsAny direct skip made during your lifetime
will receive automatic allocation, of remaining exemption, to extent necessary to make inclusion ration zero. IRC § 2631(b)(1)You may elect not to have a deemed
allocation apply by timely filed gift tax return.IRC § 2631(b)(1)Automatic allocation is permanent once this due
date expires.
Transfers to TrustGST Exemption is deemed to be allocated
to all lifetime “non-skip” transfers to GST trusts, unless the transferor elects otherwise.IRC § 2632(c)Unless, the trust principal is distributed to a
non-skip person before the age of 45, or upon an event that will reasonably happen before age 45
Watch this provisions for non-Dynasty TrustsEx. of a Problem. Trust property will be distributed to
my child 10 years after my death