Estates and Trusts FNBSLW 442

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Estates and TrustsFNBSLW 442

• Wealth Transfer Taxation
• Federal Gift Tax

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History

• 1797 Congress imposed the first wealth transfer
  tax, repealed shortly thereafter.
  
• 1862 Transfer tax imposed to fund the Civil
  War, repealed in 1870.
  
• 1870-1915 Several transfer taxes imposed but
  repealed or unconstitutional.
  
• 1916 Transfer tax imposed to raise revenue for
  WWI, found constitutional by U.S. Supreme Court.

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History (cont.)

• Estate planners began using inter vivos transfer
  techniques.
  
• 1924 Congress imposed federal gift tax,
  repealed in 1926.
  
• 1932 Revamped gift tax imposed.
• 1976 Gift and estate taxes combined to create a
  unified systems of wealth transfer taxation.

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History (cont.)

• Economic Growth and Tax Relief Act of 2001
  (EGTRRA)
  
• Repeal of estate and generation skipping transfer
  taxes as of January 1, 2010.
  
• Lower rates and greater exclusions during
  preceding years.
  
• Retention of gift tax but with lower rates.
• New method for computing income tax of heirs and
  beneficiaries when selling property acquired from
  decedent.
  
• Until January 1, 2011, unless reenacted.

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Three Types of Taxation

• Federal Gift Tax
• Federal Estate Tax
• Federal Income Tax (on gratuitous transfers)

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Gift Tax

• A tax on a donors privilege of making a
  gratuitious transfer of property during life.

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Transfers Subject to Gift Tax

• Completed gifts
• Gifts for less than adequate and full
  consideration
  
• Exercise of Power of Appointment

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Computation of Gift Tax

• Total value of all gifts made during donors
  lifetime
  
• Minus exclusions
• Minus deductions
• Minus adjustments
• Tentative Tax Schedule
• EGTRRA Rate Chart
• Applicable Credit Amount Chart

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Valuation of Gifts

• The price at which such property would change
  hands between a willing buyer and a willing
  seller, neither being under any compulsion to buy
  or to sell and both having reasonable knowledge
  of the relevant facts. Treas. Reg. 25.2512-1.

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Valuation of Gifts

• Valuation is made at the date of the gift.
• Retail value is used.
• For stocks average of the highest and lowest
  quoted selling prices on the date of the gift.

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Excluded Gifts

• Annual Exclusion
• Education and Medical Expenses

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Annual Exclusion

• First 11,000 in value of present interest gifts
  to each donee per calendar year. I.R.C.
  2503(b)(1).
  
• No upper limit on total amount.
• No limit on number of donees.
• Off-set not allowed.

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Present Interest

• An unrestricted right to the immediate use,
  possession, or enjoyment of property or income
  from property. Treas. Reg. 25.2503-3(b).
  
• Exceptions to Present Interest rule
• Minors Trust, I.R.C. 2503 (c)
• Crummy Trust

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Minors Trust - Elements

• Beneficiary must be under 21 yoa
• Beneficiary must be sole life beneficiary.
• Beneficiary must be sole remainder beneficiary.
• Beneficiary must control remainder if beneficiary
  dies b/f age 21.

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Crummy Trust

• Trust giving each beneficiary the right to
  withdraw each year the lesser of (1) the annual
  exclusion or (2) the value of the assets the
  settlor contributed during the year.

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Education and Medical Expenses

• All payments made by donor for a donees
  education or medical expenses are not subject to
  the federal gift tax.
  
• No limit on amount.
• No limit on number of donees.
• Donor and donee need not be related.

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Deductions

• Marital Deduction
• unlimited as to amount
• Charitable Deduction
• unlimited as to amount

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Tentative Tax Rate Schedule
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Maximum Rates under EGTRRA
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Applicable Credit Amount
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Gift Tax Example

• Donor made 500,000 of taxable gifts in 2002.
  Donor had previously made a total of 700,000 of
  taxable gifts and had used 192,800 of Donors
  gift tax credit to offset Donors gift tax
  liability on those gifts. How much federal gift
  tax does Donor owe for Donors 2002 gifts?

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Explanation

• Taxable gifts over Donors entire life
• 700,000 of previous gifts 500,000 of gifts in
  2002 1,200,000.
  
• Tentative tax as if all taxable gifts made in
  2002
  
• 345,800 .41 (1,200,00 - 1,000,000)
• 345,800 .41 (200,000)
• 345,800 82,000 427,800
• Tentative tax as if only taxable gifts made prior
  to 2002 were made in 2002
  
• 155,800 .37 (700,000 500,000)
• 155,800 .37 (200,000)
• 155,800 74,000 229,800
• Tentative tax for taxable gifts made in 2002
• 427,000 - 229,000 198,00
• Unused applicable credit amount
• 345,000 - 192,000 153,000
• Federal estate tax due
• 198,000 - 153,000 45,000

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Split Gifts

• Spouses may treat gifts made by one spouse to a
  third person as if each spouse made ½ the gift.
  
• Permits spouses to reduce their gift tax
  liability.
  
• No special steps need be taken in community
  property states.

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Gift Tax Return

• Donor must file gift tax return by April 15 of
  following year, unless all gifts are below annual
  exclusion amount or made to spouse.
  
• This is true even if no tax is owed b/c of the
  application of the applicable credit amount.
  

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Liability for Gift Tax

• Donor of the gift is primarily liable for the
  gift tax.
  
• In some situations, the donee may be responsible
  for the gift tax.
  
• E.g., Donors federal gift tax liability for
  35,000 for gifts made in 2002. Donor has not
  paid. Are the donees liable for this tax?

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Liability for Gift Tax (cont.)

• Re example on previous slide donee is
  personally liable for the gift tax to the extent
  of the value of the gift the donee received.
  
• And that amount is not limited to the unpaid gift
  tax on the donees particular gift. Liability is
  for the entire amount that year
  
• Even if the donee no longer has the gift and even
  if the gift was exempt from gift tax because of
  the annual exclusion or the educational and
  medical expenses exclusion.