Gift and Estate Taxes (Lesson 2) Flashcards
Who is the donor
- Person who makes the gift
Who is the donee
- Person who receives the gift
When does a gift occur
- whenever an exchange of property occurs and each of the parties does not receive full and fair consideration for their property or services
What are the two types of gifts
- direct gifts
- indirect gifts
What is a gift loan
- an indirect gift that occurs through the payment of another’s debt or through an interest free or below market loan
If the gift loan is $0 - $10,000 how must interest needs to be imputed
$0
If the gift loan is $10,001 - $100,000 how must interest needs to be imputed
The lesser of:
- Net Investment income or
- Interest calculated using the AFR less interest calculated using stated rate of the loan
If the borrowers net investment income < $1,000:
- $0 imputed interest
If the gift loan is > $100,000 how must interest needs to be imputed
- Interest calculated using AFR less interest calculated using stated rate of the loan
When is a gift complete when a joint checking account is created
- does not occur until the noncontributing party withdraws money for their own benefit
What is a net gift
- occurs when a gift is made on the condition that the donee pay any gift tax due
- donor will have taxable income (income tax) to the extent that any gift tax paid by the donee exceeds the donors adjusted basis in the gifted property
How can a gift qualify for the annual exclusion amount
- gift must be of a present interest
What is gift splitting
- one donor makes the gift and the donors spouse consents and agrees to use their annual exclusion for that donee
- 709 is required and both spouses must sign return
Do gifts of community require gift splitting
- no since each spouse is deemed to own one half of any community property
What is a present interest gift
- is a unrestricted right to the immediate use of property
What is a future interest
- is an interest which is limited in some way by a future date or time
Is stock in a trust with a life estate gifted to a beneficiary a present interest
Yes
What is a Crummey provision
- is the explicit right of a trust beneficiary to withdraw some or all of any contribution to a trust for a limited period of time (30 days) after the contributions
- Essentially a GPOA
- May be limited to the annual exclusion amount
What is the 5x5 lapse rule
- a taxable gift is deemed to have been made when a power to withdraw an amount in excess of the greater $5,000 or 5% of the trust assets has lapsed or not been used by a beneficiary
What is a qualified transfer
Payment made directly to a:
- Qualified educational institution or
- Qualified medical care provider for qualifying medical expenses
- Transfer is not allocated against the annual exclusion and do not reduce the applicable lifetime credit
Are payments made from one spouse to another pursuant to a divorce decree considered a gift
- No they are nontaxable property settlements with a carryover basis or alimony payments
- Must occur within one year of the termination of the marriage
Do non citizen spouses receive an unlimited marital dedcution
- No but a citizen spouse may transfer $159,000 annually to their non citizen spouse with no transfer tax consequences
When is a gift tax return required
- donor makes a gift during the calendar year unless all of the gifts are less than of equal to the annual exclusion, qualified transfers, transfers to spouses, or transfers to charities
Which spouse must file a gift tax return if a split gift election is made
- must be filed by the spouse who makes the gift or both if both make a gift
What happens if the donor dies in the year of the gift
- gift tax return must be filed no later than the due date including extensions of the estate return
- donor is liable for the payment of gift tax but the donee may be liable in the event that the donor does not pay
What are the steps used to determine the gift tax liability for a particular donor
- Sum the total gifts for the calendar year
- subtract the total exclusions and deductions
- add the donors taxable gifts for the calendar year to the donors previous taxable gifts for all prior calendar years
- calculate the gift tax from the unified estate and gift tax rate schedule
- Reduce the gift tax by the gift tax deemed paid and the lesser of the applicable gift tax credit or the calculated gift tax
What is the tentative tax on the first $1,000,000 of taxable gifts
- $345,800
(Gifting Strategies)
Gifts of Appreciating Property
- if overall objective of the client is to reduce their federal gross estate
- Property is transferred rather than cash
(Gifting Strategies)
Gifts to Spouses
- not subject to gift tax
- large gifts are made to spouse so that the spouse will have an amount equal to the estate exemption equivalency
(Gifting Strategies)
Gifts to Minors
- usually made in trust or a custodian type account
- UGMAs and UTMAs are less expensive than trusts and transfers to either are considered present interest gifts
How should property with an adjusted basis above the FMV of the asset be gifted
- The asset should be sold and the donor recognizes the capital loss and then the proceeds gifted to the individual
Who should income producing property be gifted to
- the individual in the lowest marginal income tax bracket so that the income is subject to the lowest possible income tax
What are the advantages of a lifetime gift instead of a bequest
- Any appreciation will be excluded from the estate
- any gift tax paid will be removed from the estate if the gift was made more than 3 years prior to the donors death
- annual exclusion can be utilized
- income from gifted property will be excluded from estate
- qualified transfers can be utilized
What is the definition of a gross estate
- as the FMV of all interests owned by the decedent at their time of death
What is a down and curtesy interest
- were developed to require that a surviving spouse receive a statutory share of their deceased spouses estate
- includes the FMV of any property subject to dower, curtest, or elective share rights in a decedents gross estate
What three types of property that will be pulled back into a decedents gross estate
- any gift tax paid on gifts made within the three years of the decedents date of death
- the value of any property gifted within three years of the decedents date of death if the decedent retained an interest
- death proceeds of any life insurance policy insuring the decedents life that was gifted within three years of the decedents date of death
When will a gift be pulled back into a donors estate
- if the gift was made within three years of a decedents date of death
- the gift tax paid will be added to the donors estate though not the FMV of the gift
When will a life insurance policy be pulled back into a donors gross estate
- death proceeds will be included in the decedents gross estate if within year years of the decedents death the decedent made a gratuitous completed transfer of the policy
Does a decedent who retains an interest in transferred property for their life have to include the property in their gross estate
- Yes the value of the property must be included in their gross estate
What is a interest retained for a period only ascertainable by death mean
- if a decedent retains an interest in property for any period not ascertainable without reference to the decedents death must include the FMV determined at the decedents date of death
What happens if a retained interest is held at death
- The FMV of the property at the decedents date of death must be included in their gross estate
A decedents gross estate includes the FMV at the decedents date of death of any interest in property transferred by the decedent if the transfer was conditioned on all of the following
- possession or enjoyment of the property can be obtained only by surviving the decedent and
- the decedent has retained a revisionary interest in the property and
- the value of such revisionary interest immediately before the death of the decedent exceeds 5% of the value of such property
When is a revisionary interest value calculated for a decedents gross estate
- The FMV of a decedents revisionary interest is calculated as of the moment immediately before their death
- alternative valuation date does not apply
Will a straight life annuity be included in a decedents gross estate
- No any amount related to the annuity will not be included in the decedents gross estate
Will a survivorship annuity be included in the first to die annuitants estate
- the value of a comparable policy on the second annuitant is included in the first annuitants gross estate
- if the second to die has contributed to the purchase of the policy then only the proportionate value of the annuity is included in the gross estate of the first to die Gross estate inclusion = (VADD x decedents cost basis/ total annuity cost basis)
What is the formula for the value of the survivorship annuity to be included in the first to dies gross estate
Gross Estate Inclusion = (Value of annuity at decedents death x (Decadents cost basis/Total annuity cost basis))
When will the full value of the joint interest be included in the decedents gross estate
- if the property was fully furnished by the decedent and the other joint partner did not provide any other consideration
- Does not apply to spouses
When will a power of appointment be included in a decadents gross estate
- when it is a GPOA
What happens if a decedent dies before their 5x5 power lapses
- the decedent will include the greater of 5% or $5,000 in their gross estate
When are death benefit proceeds included in the estate of the decedent
- if at death either the proceeds were receivable by the decedents estate or the decedent possessed any incident of ownership in the policy
What happens if the death benefit from a life insurance policy is included in a decedents gross estate but if is paid in the form of an annuity for life, or term in years
- the amount included in the decedents gross estate is the value of the available lump sum payment at the decedents death
When is a decedent considered to have an incident of ownership in a life insurance policy on their life in trust
- if the decedent has the power to change the beneficial ownership in the policy or its proceeds or the time or manner of enjoyment even though the decedent may not have a beneficial interest in the trust
What is property that is included in a decedents gross estate valued at
- either the FMV at death or the value at the alternate valuation date if that is elected
What is the minority discount
- is a reduction in the value of an asset transferred and is often allowed if the asset transferred represents a minority interest in a business
- usually 15% to 50%
What is a lack of marketability discount
- is a reduction in the value of an asset transferred and is often allowed if the asset transferred has an inherent risk of marketability
- usually 15% to 50%
What is a blockage discount
- is a discount attributable to the value of large blocks of corporate stock that are listed on a public exchange
- large amount of stock included in the decedents estate cannot be liquidated at one time without a decrease in the stocks price
How are financial securities valued for estate tax purposes
- the value that is included is the high and low trading price for the decedents date of death or the alternate valuation date
- if valuation date is a weekend the valuation is the values for the trading day before and the trading day after
How is a security valued if the valuation date falls on a weekend
- if valuation date is a weekend the valuation is the values for the trading day before and the trading day after
How is accrued interest on a bond treated when a decedent dies
- Any interest accrued but not paid to the decedent at the decedents date of death is added to the value of the security
How are accrued dividends treated when a decedent dies
- the value of any declared dividends at the decedents date of death may also be included in the decedents gross estate
How are securities not traded on the valuation date treated for determining the value of a gross estate
{(Trade price after death x Number of days before date of death) + (Trading before death x days after death)} / Sum of days before and after date of death
- Weekends, holidays, or days the market is closed is not included in the calculation
What will be the value of a life insurance policy death benefit that is included in the decedents gross estate
- will be the full death proceeds
- if paid as a annuity it will be the amount that would’ve been payable as a lump sum
What is the qualifications to use the alternate valuation date for the gross estate
- the total value of the gross estate must depreciate after the date of death and
- the total estate tax must be less than the estate tax calculated using the date of death values
Which assets will be valued at the alternate valuation date if elected
All assets except:
- assets distributed or sold before 6 months which are valued at the date of distribution or sale and
- wasting assets must be valued at the date of death value (annuitized annuities, patents, royalties, installment notes, lease income)
How is the adjusted gross estate determined
It is determined by deducting the following items from the gross estate:
- Funeral Expenses
- last medical expenses
- administrative expenses
- debts of the decedent
- losses during estate administration
How is the taxable estate determined
It is the adjusted gross estate including the below deductions:
- Charitable deduction
- unlimited marital deduction
- state death tax deduction
How is the tentative tax base of an estate determined
- add back all taxable gifts after 1976
- added back at the FMV as of the date o f gift
When must a 706 be filed for a decedents gross estate
- must be filed if a decedents gross estate plus adjusted taxable gifts, is greater than the applicable estate tax credit equivalency for the year of death
When is the 706 need to be filed by
- 9 months after the decedents date of death
When is the tax due for an estate tax return
- paid within 9 months
- executor may also request an extension of time not to exceed 12 months if the request is based upon reasonable cause
What is the failure to file penalty
5% per month up to a maximum penalty of 25%
What is the penalty for failure to file if is determined to be fraudulent
- penalty is increased to 15% per month up to a maximum of 75%
What is the failure to pay penatly
- 0.5% per month up to a maximum penalty of 25%
What happens if both the failure to file penalty and the failure to pay penalty both apply
- the failure to file penalty is reduced by the failure to pay penalty
- does not eliminate the need to also pay the failure to pay penalty
What is the reverse gift and what are the estate tax consequences
- heir receives property from a decedent that was acquired by the decedent through a gift from the same heir within one year of the decedents death the heir/donor takes the decedents basis (which will be the donors basis)
- Heir/donor does not receive a step to FMV in the adjusted basis of the property
How is the basis of property calculated for JTWROS for the surviving owner
- the survivor determines their basis in the property by adding the value of the property included in the decedents gross estate to their original basis
Does community property have a right of survivorship feature
no
How is the basis adjusted for a spouse that receives the deceased spouses half of community property
- both halves of the property receive a step up in basis
