Gift and Estate Tax Compliance

Question 1

Gift Tax Filing Requirements

Answer 1

• federal gift tax returns must be filed for any calendar year in which a taxpayer has made total gifts of a present interest to any one person, exceeding the annual exclusion.
• must be filed even if no gift tax is due
• a return must also be filed for a gift of future interest, regardless of the amount
• there is no joint filing of a gift tax return, so each spouse must file a separate return.
• no gift tax return is needed for gifts to a spouse
• no gift tax return is needed for charitable contributions unless there is a transfer of a partial interest, such as a remainder interest in a personal residence

Question 2

Differences between Gift and Estate Taxes

Answer 2

• the gift tax is tax-exclusive, while the estate tax is tax-inclusive.
• under gift tax rules, the money used to pay the gift tax is not added to the taxable gift in calculating gift tax liability.
• estate tax rules require the calculation of the value of all assets in the estate and then impose the tax, so tax is paid on the money used to pay the estate tax

Question 3

Qualified Transfers

Answer 3

• there are two kind of qualified transfers that are excluded as gifts under the IRC
  1) payment of tuition (not room and board) directly to an educational institution for the education or training of a person
  2) Payment directly to any provider of medical care on behalf of a person.

Question 4

Front Loading 529 Funding

Answer 4

• $70,000 can be made to a 529 in a single year with no gift tax consequences, due to an election to treat the contribution as if it were made over five years and the application of five years of gift tax exclusions.
• if the donor makes the gift of $70,000 and then lives only long enough to have made two years of annual exclusion gifts, $42,000 will be brought back into the donor’s gross estate for federal estate tax purposes.

Question 5

Gifts of Non-Income Producing Property

Answer 5

• the gifts will be eligible for the annual exclusion when the property is given outright
• if the property is placed in trust for the beneficiaries , the donor will not be able to use the annual exclusion because the present value of income interest cannot be determined. If the trustee is given the authority to sell the asset to buy income producing property this can be avoided.

Question 6

The Marital Deduction

Answer 6

• The donee must be a US Citizen
• the gift must be made during marriage
• the gift must not be of a terminable interest. A terminable interest is a property interest that will cease under some specified condition.

Question 7

Gifts to Noncitizen Spouses

Answer 7

• do not qualify for the unlimited marital deduction, but instead get a $149,000 annual exclusion.
• the gift must be of present interest, and it must not be a terminable interest.

Question 8

Unified Credit or Applicable Credit Amount

Answer 8

• offsets the gift tax that would otherwise be owed on lifetime taxable gifts
• the credit must be used each year that a person makes a taxable gift until the unified credit is used up.

Question 9

Calculation of Gift Tax

Answer 9

-the total value of all taxable gifts made since 1932 must be added to the total value of taxable gifts made in the current year.

Question 10

Circumstances Causing Inclusion of Gifts in the gross estate

Answer 10

-lifetime gifts will be included in the gross estate if the donor has a retained interest or reversionary interest.

Question 11

Three Year Rule for Gifts

Answer 11

• gifts made within three years of death are excluded from the decedents gross estate. Exceptions to the rule:
• gifts of life insurance
• gift taxes paid on gifts given within three years of death
• gifts of retained life estates
• gifts of retained interests, such as the right to revoke a trust of gift
• gifts of reversionary interest

Question 12

Gross-Up Rule

Answer 12

-any gift taxes paid within three years of death are included in the gross estate, even though the gift was not included in the gross estate.

Question 13

Exception for Gift Taxes Paid on Appreciation

Answer 13

• any gift tax paid by the donor or donee will increase the donee’s cost basis to the extent the gift tax was paid on any appreciation of the property.
• addition to basis = gift tax paid x appreciation/value of taxable gift

Question 14

Property Interests Included in the gross estate

Answer 14

• property owned by the deceased or in which the deceased had an ownership interest at death
• property subject to the deceased general power of appointment
• proceeds of life insurance policies on the life of the deceased, payable to the deceased estate, or in which the deceased had any incidents of ownership
• property held in JTWROS
• the survivorship interest of joint and survivor annuities
• dower or curtsey interests
• gifts of certain property made within 3 years of death, such as gifts of life insurance on the deceased life and gift taxes paid within 3 years of death
• retained interest in gifts of property over which the deceased retained control of the income
• gifts over which the deceased retained the power to alter, amend or revoke
• reversionary interests or gifts, where enjoyment of the property is conditioned on the donee surviving the deceased

Question 15

Joint and Survivor annuity amount included in estate

Answer 15

• the present value of the future payments that will be made under the contract to the beneficiary
• this rule also applies to pension and retirement plans that provide a survivorship benefit
• the value that the survivor contributed to the purchase of the annuity will not be included

Question 16

Gifts Causa Mortis

Answer 16

• a revocable gift where the donor thinks his or her own death may be imminent and expects to receive the gift back in the event of recovery
• the gift is retained by the donee, but included in the donors gross estate

Question 17

Reversionary Interests

Answer 17

-transfers that become effective at death are included in the gross estate if the decedent’s reversionary interest at the date of death is actuarially computed to exceed 5% of the value of the property.

Question 18

Income in Respect of a Decedent (IRD)

Answer 18

• income the decedent was entitled to be paid, but did not receive it before death.
• includes dividends, commissions, partnership income, s corp income, annuity payments, unpaid debt on installment note
• beneficiary must pay income taxes on IRD
• deduction for estate taxes on IRD reduces, but does not eliminate, income tax
• beneficiary does not receive step up
• retirement assets are the most common IRD
• retirement assets are reduced by both estate and income taxes.

Question 19

Election of alternate valuation date

Answer 19

• the alternate valuation date may be elected only when the result will be an overall reduction in the gross estate
• may not be elected for assets that normally decline in value over time, such as annuities
• if assets are sold between the date of death and the alternate date then the sale price must be used.

Question 20

Valuation of publicly traded stock

Answer 20

-the FMV is the mean between the highest and lowest quoted selling prices on the valuation date.

Question 21

Pegging Value with Buy-Sell Agreements

Answer 21

• for a closely held corporation a peg can be put into place to fix the price of the stock
• the agreement must be a bona fide business arrangement
• the terms must be comparable to similar arrangements entered into by persons in arm’s length transactions
• the agreement must not be a device to transfer property to members of a deceased family for less than full or adequate consideration

Question 22

Valuation of mutual funds

Answer 22

-valued at their redemption price on the valuation date

Question 23

Life Insurance Gifted

Answer 23

• for a new policy, the value is the gross premium paid
• for a paid-up or single premium, the value is the single premium the insurer would charge for a comparable contract of equal face value on the life of a person in a similar situation
• for an established whole life policy in the premium paying phase, the value is computed by adding the unearned portion of the last premium to the interpolated terminal reserve
• for term policy, the value is the unused premium

Question 24

Term Interests, Life Estates, and Remainders

Answer 24

• to determine the FMV you compute their present value using IRS tables
• the IRS tables are prepared based on a interest rate that is 120% of the AFR

Question 25

Qualified Conservation Easement

Answer 25

• an income tax charitable tax deduction is available for the irrevocable transfer of a qualified real property interest for conversation purposes
• up to 40% of the value of the land may be excluded from the gross estate, up to a maximum of $500,000

Question 26

Special Use Valuation

Answer 26

• applies to real estate used in closely held business or for farming
• on the date of the death, the real estate must be used as a farm or in a closely held business
• the business or farm operation must be at least 50% of the gross estate after the deduction of any secured debt and mortgages
• the real estate must be at least 25% of the gross estate after the deduction of any secured debt and mortgages
• the real estate must past to a member of the decedents immediate family, lineal descendants, ancestors, cousins, daughter in law, or son in law
• the decedent must have owned the land and been a material participant in the operation of the farm or business in 5 of the last 8 years. operation by a family member is included
• to remain eligible for the tax benefits the heirs must continue to use the land in the same farming operation or closely held business over a period of the next 10 years

Question 27

Generation Skipping Transfer Tax (GSTT)

Answer 27

• each person is entitled to an exemption of $5.49 MM and this amount is not portable
• if gift splits are used, they are considered split for GSTT too
• Payments for tuition and medical expenses are exempt

Question 28

GSTT annual exclusion

Answer 28

• gifts under $14,000 are not subject to GSTT
• if gifts are made to a trust, 2 requirements must be met:
  1) during the beneficiaries life, no distribution will be made to any person other than the beneficiary
  2) at the beneficiaries death, the trust assets will be included in the beneficiaries gross estate.

Question 29

Direct Skip

Answer 29

• the transfer of assets is made to a person two generations younger than the donor or a transfer to a trust for the benefit of such a person
• when the donor is not related to the donor, generations must be determined by ages. If the donee is 37 1/2 years younger than the donor, the donee is treated as two generations below the donor.
• the gift is subject to gift or estate tax as well as GST tax.

Question 30

Taxable Distribution

Answer 30

• a payment from a trust to a skip-person or skip-beneficiary is a taxable distribution
• the beneficiary rather than the donor is ultimately responsible for paying the GST tax on the distribution amount

Question 31

Taxable Termination

Answer 31

• the passing of all interest in a trust to skip-persons. The termination may occur due to lapse of time, the release of power, the death of other persons who had an interest, or for some other reason
• this amount is subject to GST

Question 32

NOTE

Answer 32

-donors may use the GSTT exemption for taxable terminations, taxable distributions, and direct skips, however, the annual exclusion can only be applied to direct skips. Indirect skips are not eligible for the annual exclusion.