Chapter 26

Federal Gift and Estate Tax

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

TRA 1976 - unified rates, unified credit

Formulas - Gift and Estate Tax

Gift Tax

Current taxable gifts + prior taxable gifts = tax base;

tax base x rates - credits (UTC, gift tax deemed paid) = tax due

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

JT Bank Acct, Stk, Bond

inter vivos gift if draw during life

not gift at death

Annual exclusion: – present interest, – 2503(c) minors

trust – inflation adjust

deductions – charitable – marital

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)

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

Gross Estate

Distinguish: gross est (GE) v. probate est (state law);

2033: property owned by decedent 2036: retained interest 2038: revocable interest

2039: annuities: J&S or self&S – cost to continue – (value of annuity

or refund) x decedent contrib/tot purch pr = inclusion

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

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

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)

Taxable Estate (TE)

2053 expenses, indebtedness (i.e. include FMV (net)), taxes

2054 losses during estate adm 2055 (& 2522) charitable contribution

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)

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

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

Form 706

due date who must file

GST Tax:

Examples, tax imposition, 1 million exemption, highest rate E&G

Planning

lifetime gift giving marital &

exemption trusts charitable irrevocable life

insurance trust living trust

Repeal of Estate & GST Tax Continuation of Gift Tax EGTRRA `01

In General

2001-2009

2010

After 2009

2011

Estate & GST Tax Phase-out

Estate & GST Tax Repealed

Any Gift Tax

SUNSET

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%

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%) appliesto gift tax (phasing out lower brackets& UTC >10M Estates)

5% surcharge has also been repealed starting in 2002EFFECTIVE DATE: decedents dying after 2001

Increase in UTC Exemption Equivalent & GST Tax Exemption EGTRRA `01

Gift Tax GST & Estate TaxCalendar Year Exemption Exemption

2002 $1 million $ 1 million2003 $1 million $ 1 million2004 $1 million $1.5 million2005 $1 million $1.5 million2006 $1 million $ 2 million2007 $1 million $ 2 million2008 $1 million $ 2 million2009 $1 million $3.5 million

EFFECTIVE DATE: Decedents dying after 2001

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

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

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

Phase-out & Repeal State Death Tax Credit EGTRRA `01

Percentage of CurrentCalendar 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

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)

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

Taxpayer Relief Act of 1997 - Chapter 26 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

- 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

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

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

IRS Restructuring & Reform Act of 1998 - Chapter 26 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

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

Unified Credit to Increase

Year Credit Exempt Equiv

1997 192800 600,000

1998 202050 625,000

1999 211300 650,000

2000 & 2001220550 675,000

2002 & 2003229800 700,000

2004 287300 850,000

Year Credit Exempt Equiv

2005 326300 950,000

2006 345800 1,000,000

(no inflation adjustment in UTC)