Estate and Gift Taxation Flashcards
Transfer Taxes
The gratuitous transfer of property during a taxpayer’s life or upon the death of the taxpayer is subject to a federal transfer tax
Called a gift tax when imposed on lifetime transfers
Called an estate tax when it is imposed on transfers triggered by the death of the taxpayer
Donor is primarily liable for the gift tax, the decedent’s estate is primarily liable for the estate tax
Unified Credit
provides an exemption for transfers from an estate so that most individuals are not subject to the estate tax at death; ALSO applies to the gift tax
Trusts
When a taxpayer transfers property to a trust, the taxpayer has made TWO gifts; the income interest and the remainder interest
- Beneficiary of the income interest receives the INCOME from the trust each year
- Beneficiary of the remainder interest receives the PROPERTY (CORPUS) of the trust when the trust terminates
**Apple tree/Apples e.g.
Interests are valued using actuarial tables provided by the IRS
Gift Tax
Value of gifts for tax purposes is the FMV at date of gift
FORM 709 due Apr 15th
Each INDIVIDUAL can give away up to the annual exclusion PER DONEE without paying any tax
($14,000)
MUST BE of present interest for exclusion to apply
Gift-Splitting
Married couples can give away an amount up to twice the annual exclusion a year to a donee and pay no gift tax
gift tax return MUST be filed to elect gift-splitting
Gift Tax Exclusions
UNLIMITED amounts to spouses, charities, and political organizations
ALSO… for educational tuition and medical expenses paid on behalf of individual –directly to institution or provider
Gift Tax Formula
Taxable Gifts Current Year \+ Taxable gifts for all prior years \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Total lifetime gifts *Unified tax rates \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Total gift tax - gift tax paid in prior years (at current rates) - unified tax credit (if elected) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Gift tax due for current year
*gross up due to the progressive nature of the gift tax; later gifts taxed at higher tax rates
**LIFETIME taxable gifts/transfers at death are taxed on a cumulative basis
Estate Tax Formula
Gross Estate - Deductions \_\_\_\_\_\_\_\_\_\_\_\_ Taxable Estate \+ Taxable gifts made after 1976 \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Total taxable transfers * Unified tax rates \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Tenative Transfer Tax - Gift tax paid after 1976 (current rates) - Unified credit and other credits \_\_\_\_\_\_\_\_\_\_\_\_\_\_ Estate Tax Due \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Gross Estate
FMV of all of the property owned at the date of death
*EXECUTOR can elect to value certain realty used in farming or in connection with a closely held business at a “special use” valuation
Farm or business MUST continue to be used for 5 years after election is made during 8 year period after death
***MAX amount of discount for this is 1,110,000 (farm near interstate; fmv may be to high for family to continue operations)
Alternate Valuation Date - Estate Tax
6 months after the date of death (usually valued at the date of death)
ONLY be elected IF the AVD will be less than the date of death value
IF elected and the property is distributed before the AVD, the FMV is determined on the DISTRIBUTION date
Jointly-Owned Property - Estate Tax
Husband and Wife (tenancy by the ENTIRETY) - 50% of property owned jointly by husband and wife goes into the estate of the first spouse to die
JOINT TENANCY - Property owned with a right-of-survivorship, meaning that ar death the property immediately passes to the other owner that is living.
TAX purposes - 100% of property is included in the estate of first owner to die, UNLESS it can be proven that the surviving owner contributed to the purchase of the asset
TENANCY IN COMMON - no right of survivorship; decedent;s share passes into the probate estate and its distribution is controlled by will
**decedent’s share of property IS INCLUDED in the gross estate for tax purposes
Life Insurance - Estate Tax
Proceeds are included in the gross estate under either of two conditions:
- The decedent has INCIDENTS of OWNERSHIP (the right to designate the beneficiary)
- The decedent’s ESTATE is THE BENEFICIARY of the policy
- *Need to give up control of the policy to keep out of the gross estate
- *proceeds from a buy/sell agreement are generally excluded from a gross estate
Retained Interests - Estate Tax
Retained life estate OR the retention of a power to alter, amend, or revoke a transfer are interest that cause the property subject to the power to be included in the gross estate
*E.g. principal residence gifted to children but retain right to live in until death, being able to use is just as good as owning, upon death even though not titled to parents, still in estate
POWER to designate possession or enjoyment of property or income (including power created by another can be exercised in the decedent’s favor) will ALSO cause the property to be included in the gross estate
Transfers within 3 years of Death
involving retained interests and revocable transfers where retention or right to revoke was terminated within three years of death are included in the gross estate
Transfer of life insurance policy within three years of death
Gift tax paid on transfers within three years of death is included in the gross estate
Deductions - Estate Tax
Marital Deduction Debts of the Estate Funeral and Administrative Expenses Charitable Contributions Casualty Losses (during the time the estate owned the property)
***Admin expenses and lossess CANNOT be taken on both estate and income tax return; IF deducted on 1041, the executor MUST file an election to waive the estate tax deduction (if 706 filed first and ded taken no waiver needs to be filed)
