Ch 5 - Gifts To Family Members & Trusts Flashcards
–removes property from the estate
–removes appreciation from the estate
How do gifts reduce the size of the estate?
•gifts reduce estate taxes
What can reduce the size of the Estate
–Consider income tax issues
- Income-shifting
- Carryover basis for gifts vs. basis step up
- must be considered in the context of the client’s goals and objectives
What needs to be considered when trying to reduce an estate size through gifts?
Outright giving
What is easiest way to reduce the size of a gross estate?
•Gifts which completely remove property from the estate
- –Annual Exclusion Gifts
- –Medical and tuition expenses paid directly to a provider
- Unified Credit exempts the equivalent of $5,250,000 of taxable transfers from gift tax.
- Gift taxes are exclusive if made more than 3 years before death
- gifts of income producing property can shift (and lower) income tax burdens
- Some lifetime gifts to grandchildren avoid the GST
What are the 5 Advantages of Lifetime Gifts
- IRC Section 2503(b)
- permits donor to give $14,000 per year per donee free of gift tax
What is the Annual Gift Exclusion Amount?
Can spouses combine their Annual Gift Exclusion Amount?•
YES - gift splitting with the donor’s spouse is permitted BUT gift tax return must be filed
•Can a gift of future interest qualify for the Annual Gift Exclusion Amount?
NO - to qualify, the gifts must be gifts of a present interest
- independent of and available in addition to the annual exclusion
- payments must be made to service provider
- no family relationship is required
- –note that parental support payments are not gifts
How do Gifts for Tuition & Medical Expenses work? [IRC Sec. 2503(e)]
- grantor can give assets without giving outright control to the donee
- grantor determines the terms of the trust
What is an advantage of Giving Through Trusts
•to serve estate reduction goals, must be truly irrevocable
Does a trust need to be truly irrevocable to qualify for estate tax reduction?
•may be complete for gift tax purposes, but incomplete for estate or income tax purposes
Do the same rules for completion of a gift apply to a estates tax reduction as it does to income tax reduction?
- gives temporary withdrawal powers to beneficiaries when property is transferred to the trust
- withdrawal power makes the transfer eligible for the annual gift tax exclusion
What is a Crummey Accumulation Trusts?
•Irrevocable Life Insurance Trusts (ILITs)
What is normally associated with a Crummey Accumulation Trusts?
- the donor wishes to make systematic gifts to family members to reduce his or her gross estate
- the donor wishes to qualify gifts for the annual exclusion
- the donor wants the assets held under the protection and dispositive control of a trustee and wants the assets to accumulate for a time before the beneficiaries receive distributions.
What are the 3 reasons for using a Crummey Trusts?
•What is the primary goal of an Estate Freezes
primary goal is estate tax reduction
•What is impact of appreciation in an Estate Freezes
appreciation in property is transferred to someone other than the original owner
•What is the secondary goal of an Estate Freeze
secondary goal is to retain enough assets to provide for needs until death
How is an Estate Freeze distinguished from an outright gift?
•distinguished from outright gift by the fact that the transferor does not depart with complete dominion and control
“Solely for the purpose of determining whether a transfer in trust to or for the benefit of a member of the family of the transferor (a) is a gift and (b) the value of such gift, the value of any interest in the trust retained by the transferor or any applicable family member is generally treated as zero.”
What is the IRC Section 2702 General Rule
•only applies to completed gifts •only applies to transfers in trust for the benefit of the grantor’s family
- –applies to transfers to junior and senior family members
When does IRC Section 2702 apply?
- Personal Residence Exception
- Tangible Personal Property
- Qualified Retained-interest exception
What are the 3 Exceptions to Section 2702
–“House GRITs” or QPRTs
What is the Personal Residence Exception to Section 2702
–2702 does not apply if the exercise or non-exercise of the holder of a term interest in tangible property would not affect the valuation of the remainder interests in such property
What is the Tangible Personal Property Exceptions to Section 2702
–annuity interest
–unitrust interest
What is the Qualified Retained-Interest Exceptions to Section 2702
•the principal residence of the term holder
- –can include a home office
•one other residence of the term holder
- –can be a part-personal, part-investment property within the meaning of Sec. 280A(d)(1)
•an undivided fractional interest in either of the above
What is a Qualifying Residences
- taxpayer limited to being termholder in 2 QPRTs at a time
- Failure to Qualify as QPRT
- –the full Section 7520 value of the grantor’s retained interest will be treated as an additional gift
What are 2 other limitations of QPRTs
•completed gift of remainder interest is made
- –value of gift is the current value of the house less the value of the retained interest
- –since a QPRT transfers a future interest, the gift tax annual exclusion is not available
What is the Gift Tax Consequences of QPRTs
- transfer tax savings are realized only if the grantor survives the term of the retained-income interest
- if the grantor dies with the retained interest, the property is included in the gross estate under Section 2036(a)
- unified credit used on transfer, plus gift tax paid, is allowed as a credit against the estate tax due
What is the Estate Tax Consequences of QPRTs
- GRAT
- GRUT
What are the 2 types of Trusts Providing Qualified Retained Interests
•right to receive fixed amounts payable at least annually
What is a GRAT
•right to receive income equal to a fixed percentage of trust’s assets, valued annually
What is a GRUT
- treated as current TAXABLE gift for gift tax purposes (i.e., no annual exclusion)
- unified credit (A/K/A gift tax exemption) is available to shelter gift from tax
- A retained right that does not end before death causes all, or a portion of the trust property to be included in the donor’s gross estate, even if it is currently treated as a current gift for gift tax purposes
What is the impact ot Estate Planning with GRATs
- irrevocable trust
- grantor retains right to fixed payments for life or for a term of years
- remainder is paid to designated remainder beneficiaries
What are 3 characteristics of a GRAT
- remainder interest is an immediate gift
- future interest part of gift does not qualify for annual gift tax exclusion
What is the Gift Tax Treatment of GRATs
- if grantor fails to survive the term of the trust, some value of the retained rights returns to the gross estate
- amount included equals the amount of principal of the trust that would be required under actuarial valuation principles to produce the annuity or unitrust payout
- With low interest rates, generally full principal will be included if Grantor dies during term
What is the Estate Tax Treatment of GRATs
•length of term and/or size of payout is arranged so there is no taxable gift under the Sec. 7520 Valuation Tables
What is a Zeroed Out GRAT
•the higher the appreciation potential, the better the asset
–expected rate of return should exceed the Sec. 7520 rate
–Some distribution must be made so hard to partition or hard to value property that does produce cash flow may be impractical
What is the Investment Strategy for GRATs
•GRAT –the value of a fixed annuity is higher when interest rates are lower. A higher retained annuity interest will minimize the value of the gift
What is the Impact of Sec. 7520 Rate on GRATs
