IN Estate & Gift Tax - 23%

Question 1

ESTATE, GIFT, GENERATION-SKIPPING & TRANSFER TAX

FEDERAL TRANSFER TAXES

Overview

Answer 1

No estate/inheritance taxes in Indiana.

• There are two separate and distinct federal transfer taxes:
  
  • The gift and estate tax (one, combined system of tax); and
  • The generation-skipping transfer (“GST”) tax.
• Federal gift tax: triggered upon Gift by taxpayer.
• Federal estate tax: triggered upon the taxpayer’s death.
• Federal GST: triggered when a transfer made to the taxpayer’s grandchildren and others either during the taxpayer’s lifetime or at the taxpayer’s death. GST is a separate and distinct tax with its own separate exemption, which under the law is the same amount as the estate

Question 2

FEDERAL GIFT TAXES

Federal Gift Tax – Applicable Credit and Applicable Exclusion.

Answer 2

Federal Gift Tax – Applicable Credit and Applicable Exclusion.

1. The applicable exclusion amount for 2018 is $5.6 million with a corresponding applicable credit of $2,185,800
2. The annual gift tax exclusion (adjusted for inflation) is $15,000 for 2018.

Question 3

FEDERAL GIFT TAXES

A “Gift” For Gift Tax Purposes.

Answer 3

Gift must be COMPLETE = it must be

• irrevocable AND
• donee receiving complete dominion and control ^{over the gift}
• State property law generally controls whether and to what extent a gift has been made.

A “Gift” For Gift Tax Purposes:Transfer of an interest in property by an individual (“donor”) to another person (“donee”).

• Federal Gift Tax based on FMV^{<strong><em><u> </u></em></strong>of the gifted property} _as of the date of the gift_
• Donor is Obligated to Pay the Gift Tax.
• Legal obligations for payment are not taxable (for example, child support).

Question 4

Gifts made under Power of Attorney.

Answer 4

Gifts made under Power of Attorney.

Agent (per Power of Attny) must have legal Authority. Transferwill be complete only if the attorney-in-fact has authority to make such gifts under state law.

• A power of attorney document can include language which allows the attorney-in-fact to make gifts on behalf of the principal to the principal ‘s family.
• Attny-in-Fact CANNOT receive Annual Gift above $15,000. However, the attorney-in-fact, or a person that the attorney-in-fact has a legal obligation to support, may not receive a gift from the principal in any year in excess of the annual gift tax exclusion, which is currently $15,000.
• The power of attorney document may alter this statutory default rule.

Question 5

Gifts by Check.

Answer 5

Gifts by Check

a.Generally, a gift by check is complete on the earlier to occur of:

1. The date the donor no longer has any control over the check; or
2. The date the donee deposits or cashes the check.

b. However, 2.a.(1) is only true if:

1. The check is honored by the donor’s bank when presented;
2. The donor is alive when the bank pays the check;
3. The check is delivered unconditionally to the donee; or
4. The check is cashed or deposited within a reasonable time of receipt.

Question 6

Gifts of Stock.

Timing for Completion of the Gift

Answer 6

Gifts of Stock.

• Complete on the date the donor delivers the properly endorsed stock certificate to the donee or the donee’s agent.
• If the donor delivers the certificate to the donor’s bank or broker or to the issuing corporation for transfer into the name of the donee, the gift is not considered completed until the stock has been reissued to donee by the issuing corporation.

Question 7

Gifts and Joint Interest

Scenarios for Transfer of Real Estate

Answer 7

Scenarios for Transfer of Real Estate

1. Tenant in Common: If John transfers real estate to John and Peter, as an equal tenant-in-common, then John has made a gift to Peter of 50% of the value of the real estate.
2. Joint Tenancy, w/ Right of Survivorship: If John creates, as a gift, a joint tenancy with rights of survivorship in real estate with John and Mary ^{(and if Mary did not contribute to the purchase or improvement of the property prior to the transfer to Mary),} then John made a gift of 50% of the total value of the property ^{(but note that the entire property will be included in John’s estate )}
3. Joint Tenants: If John conveys real estate to Mary and Sue, as joint tenants with rights of survivorship, then John has made gifts to Mary and Sue (each separately) of 50% of the value of the property.
4. Exceptions to Gifts of Jointly Held Property:
   
   • Bank Deposits - Gift Effective Upon Withdrawal by Donee. ^{Donor deposits funds in bank/brokerage account, the title to which is either joint tenancy with rights of survivorship or tenancy by the entireties with the donor and doneee, then <u><em>no gift until:</em></u> the donee removes funds for such joint owner’s benefit and such withdrawal need not be<img></img> repaid.}
   • ^{If an individual purchases US savings bond and registers title to the bond in donor’s and donee’s name, either as joint tenants or tenancy by the entireties, then <em>no gift</em> <u>until </u>the bond is reissued in the other joint tenant’s name, or until the bond is redeemed and cash is given to such other tenant and there is no obligation for the funds to be repaid.}

Question 8

Gifts in Trust

Timing for Completion of Gift for Tax Purposes

Answer 8

Gifts in Trust. A gift in trust may or may not be a completed gift for gift tax purposes.

• Necessary to determine from the trust document whether donor has given up all of the donor’s rights to control the property held by the trust.
  
  • ^{For example, a gift to a revocable trust is generally treated as an uncompleted gift because the donor can revoke and terminate the trust, amend the trust terms and name new beneficiaries, or change the interests of the beneficiaries.}
• Gift to Irrevocable Trust = Comlete. A gift to an irrevocable trust will generally be treated as a completed gift since the donor cannot make any changes to the trust agreement. However, a gift to an irrevocable trust will not be a completed gift if the donor retains the right to:
  
  • Change the trust beneficiaries,
  • Alter the proportions of the trust property which the beneficiaries will receive, or
  • Modify the conditions under which the beneficiaries will acquire their interests in the irrevocable trust.

Question 9

Indirect Gifts.

Interest-Free and Below-Market Loans.

Answer 9

Indirect Gifts. Interest-Free and Below-Market Loans.

• A transfer made for full consideration will not be a gift for gift tax purposes.
• Loan Interest Rate is Compared to IRS’s Adjustable Fixed Rate (AFR)
• ^Gift = $ Difference in AFR and Loan^
  
  • Exception: Certain loans between family members are exempt from the rules if Primary Purpose of Loan NOT Tax Avoidance.
    
    1. Tax Avoidance Loan if Primary Purpose of Loan was tax avoidance.

Question 10

Indirect Gifts.

General Powers of Appointment

Answer 10

General Powers of Appointment

A “power of appointment” is the power to decide who will receive trust or estate trust property, in what amount and under what conditions.

• A “general power of appointment” is a power of appointment exercisable in favor of the holder of the power, the holder’s estate, the holder’s creditors or the creditors of the holder’s estate.
• All powers of appointment that are not general powers of appointment are “limited powers of appointment.” In other words, the power to appoint property to anyone other than one’s self, one’s creditors, one’s estate, or the creditors of one’s estate is a limited power of appointment. For example, the power to appoint to one’s children (only) would be a limited power of appointment, the exercise (or release) of which would not be a gift by the person exercising the power
• The exercise or release of a general power of appointment in favor of someone other than the donor/holder of the power is subject to gift taxation in the same manner as if the donor exercised the power in favor of themselves, and then gave the property away to someone else.
• The exercise or release of a general power of appointment will not be taxed if the holder’s power to appoint property to himself or herself is limited by an “ascertainable standard.” “Ascertainable standard” is defined under the Code as anything relating to the holder’s health education, support or maintenance (also sometimes called the “HEMS” standard in various estate and gift tax contexts).

Question 11

Indirect Gifts

Disclaimers Why they are not “indirect gifts.”

Answer 11

Disclaimers Why they are not “indirect gifts.”

1. Under the law, there is no requirement to accept property intended to be given during life or at death. The refusal to accept property is known as a “disclaimer” and carries with it certain transfer tax consequences. There are federal and state statutes which mitigate, or eliminate those consequences when properly followed.
2. Under traditional gift notions, if a person refused to accept property, this would necessarily mean that someone else was going to receive that property. Under gift tax law, this would mean the person refusing to accept (i.e., “disclaiming”) made or caused that transfer to happen, and thus, made a taxable gift.
3. This seemingly harsh result is ameliorated under IRC section 2518 which provides that if a person makes a “qualified” disclaimer with respect to any interest in property, the property will be treated as if the property had never been transferred to that person for purposes of estate tax, gift tax, and generation-skipping transfer tax, and thus no gift (or taxable transfer of any kind) is deemed to occur as a result of the disclaimer.
4. To have a qualified disclaimer, the refusal to accept an interest in property must meet federal and state statutory requirements which include the following:

(1) The refusal must be in writing
(2) The refusal must be received by the transferor of the interest, the legal representative of the transferor, or the holder of the legal title to the property to which the interest relates within nine months after the later of
(a) The day on which the transfer creating the interest is made; or
(b) The day on which the disclaimant reaches age 21.

1. The disclaimant must not have accepted the interest or any of its benefits.
2. The refusal must be irrevocable and unqualified. Accordingly, the disclaimant is not regarded as making a gift to the person who receives the property because of the qualified disclaimer.

e. Compliance with the applicable state and federal statutes determines whether a disclaimer is a qualified disclaimer, and thus not a gift.

Question 12

Federal Gift Tax Exclusions.

Annual Exclusion.

Answer 12

Federal Gift Tax Exclusions.

l. Annual Exclusion.

1. Donor is allowed an annual exclusion of $15,000 per donee for 2018. As will be discussed later, the gift tax exclusion can be $30,000 if husband and wife agree to “split the gift” (discussed infra).
2. The annual gift tax exclusion of up to $15,000 is computed per donee per year, and the use of the exclusion does not use up any of the donor’s lifetime exemption.
3. Unused gift tax annual exclusions do not carry over to the next calendar year.
4. There is no limit on the number of the annual gift tax exclusions available. It is dependent on the number of persons to whom a gift of a present interest is actually given (donees) during the particular calendar year involved.

Question 13

Federal Gift Tax Exclusions.

l. Annual Exclusion.

In order to qualify for the annual exclusion, the gift must be a gift of a

Answer 13

1. In order to qualify for the annual exclusion, the gift must be a gift of a “present interest.” A present interest is an unrestricted right to the immediate use, possession or enjoyment of property, or of the income from the property. In contrast, a “future interest” is typically a gift made in trust and will not qualify for the annual exclusion.

Question 14

Federal Gift Tax Exclusions.

l. Annual Exclusion.

Present Interest Exceptions

Answer 14

1. The only two exceptions to the “present interest” requirement is a gift of a future interest given to an individual who has not attained the age of 21 years, and gifts to Section 529 College Savings Plans.
   
   1. Individual Donees Under 21 Years Old - if the following three conditions are met:
      
      1. The property and income must be used for the benefit of the individual prior to the individual reaching age 21.
      2. Any part of the property (or income) remaining when the individual reaches age 21 must pass outright to the individual at such time.
      3. If the individual dies prior to reaching age 21, then the property and any income must be distributable to either the individual’s estate or to whomever the individual may appoint under a general power of appointment.
      4. There are two common ways of establishing a minor individual’s arrangement which meets the tests of IRC section 2503(c), specifically: use of the applicable state’s law, which is generally referred to as either the Uniform Gifts To Minors Act or the Uniform Transfers To Minors Act; or, use a trust arrangement.
   2. Section 529 College Savings Plans
      
      1. Gifts will qualify for the annual exclusion.
      2. Under a special rule, up to five years worth of annual exclusions can be prefunded into such a plan (example —5 x $15,000 = $75,000) can be put in plan in year one and amortized over five years for gift tax annual exclusion purposes.
      3. Each of the 50 states offers Section 529 plans. Contribution and age limits on contributions, and other plan aspects, differ from state to state so you need to check the states rules. Many states, Indiana included, provided tax deductions or credits (Indiana) for contributions to that state’s plan. (Indiana offers a 20% Indiana income tax credit up to S 1,000 for contributions to Indiana’s plan).
   3. Section 529A Plans for Disabled Individuals (“529Able”)(new in 2015). These plans operate in a similar fashion to 529 College Savings Plans and gifts that qualify for the annual exclusion may be made to them but not in Indiana yet!

Question 15

Federal Gift Tax Exclusions.

Alien Spouse

Answer 15

Alien Spouse — Annual Exclusion (technically, not a marital deduction):

1. Annual Exclusion - Gifts of present interests to donor’s alien spouse are excluded from taxable gifts up to $152,000 in 2018 (adjusted for inflation) per year.
2. Transfers to joint ownership with an alien spouse with rights of survivorship may be taxable gifts.

Question 16

Federal Gift Tax Exclusions

Qualified Transfers Educational and Medical Payments

Answer 16

Qualified Transfers Educational and Medical Payments.

• a. IRC provides gift tax exclusion for “qualified transfers,” which are amounts which a donor pays on behalf of an individual such as tuition to an educational institution for the education or training of the individual; or as a medical care payment to any person who provides medical care to such individual.
• B. payments must be made directly to the institution
• C. the exlusion for the qualified transfer is in addition to the annual exclusion

Question 17

Federal Gift Tax Exclusions

Transfer Incident To Divorce.

Answer 17

Transfer Incident To Divorce.

1. Transfers as the result of divorce are not subject to gift taxes.
2. Transfers of property between spouses are excluded from federal gift tax where the spouses have entered into a written separation agreement and divorce occurs within the three-year period beginning one year before the execution of the agreement.
3. In order to qualify for the exclusion, the transfer of property must be in settlement of the spouse’s marital or property rights and is considered to be for adequate consideration in money’s worth and, therefore, exempt from gift tax (whether or not the agreement is approved by a divorce decree).
4. Transfers to provide a reasonable allowance for the support of minor children (including legally adopted children) of a marriage are not subject to gift tax if made under an agreement that satisfies these requirements or under court order.

Question 18

Federal Gift Tax Deductions.

General

Answer 18

Federal Gift Tax Deductions.

1. The two deductions allowed for federal gift taxes are: charitable gifts and gifts to spouses
   a. “Deduction” for gift tax purposes means that the value of the gift to a charity or spouse is deducted from the donor’s total gross gifts during the year

b. Charitable Deduction: an unlimited gift tax deduction for gifts to qualified charities.

c. Marital deduction: an unlimited gift tax marital deduction for gifts of present or future interests made to the donor’s spouse.

Question 19

Federal Gift Tax Deductions.

Marital deduction

Answer 19

Marital deduction: an unlimited gift tax marital deduction for gifts of present or future interests made to the donor’s spouse.

To qualify for the gift tax marital deduction, the following conditions must be met at the time the gift is made:

1. The spouses must be married to each other.
2. The spouse making the gift must be a United States citizen or resident.
3. The donee spouse must be a citizen of the United States.

Question 20

Federal Gift Tax Deductions.

Terminable Interests

Answer 20

Terminable Interests.

• With the exceptions listed below, terminable interest will not qualify for the unlimited marital deduction
• Terminable interests are interests that will terminate or fail after the passage of time or upon the occurrence or nonoccurrence of some event or contingency.
• Examples of terminable interests:
  
  • Life estates, annuities, and estates for a term of years.
• A terminable interest will qualify for the unlimited marital deduction if:
  
  • Interest is transferred to the donor and the donor’s spouse and the property is held as joint tenants with rights of survivorship or as tenants by the entireties.
  • The donee spouse is given a general power of appointment in the interest.
  • The interest meets the requirements of a “qualified terminable interest property (QTIP).”

Question 21

Federal Gift Tax Deductions

Gift Splitting

Answer 21

a. IRS allows one spouse to treat his or her gifts to any person other than his or her spouse as made one-half by each spouse.
b. For example, Mom gifts to daughter stock whose fair market value is $30,000. If Mom and dad elect to split Mom’s gift, one-half (1/2) will be treated as made by Mom ($15,000) and one-half (1/2) ($15,000) will be treated as made by Dad.
c. In order to “split gifts,” all of the following requirements must be met:

1. Both spouses must be U.S. citizens or residents at the time of the gift.
2. The donor must be married at the date of the gift.
3. Both spouses must elect to split their gifts on their gift tax returns.

Question 22

Federal Gift Tax Deductions

Determination Of Basis Of Gifts To Donee

Answer 22

Determination Of Basis Of Gifts To Donee - A Different Number Depending on Whether Donee (in the future) Is Selling the Property For a Gain or Loss!

1. Sale By Donee For More Than Donor’s Basis - The donee’s basis in gifted property depends on whether the donee is ultimately selling the property for a gain or loss (as compared to donor’s basis) and thus cannot, with certainty, be determined until the time of a future sale by the donee.
2. The starting point for determining donee’s basis is the donor’s basis.
3. If the donee is selling the property for an amount in excess of that figure, in other words, is selling it at a gain, then the donee’s basis is, in fact, the donor’s basis and is also known as a “carryover” basis. This works out to be the correct result so often that in practice many think it is always the rule — that is, that carryover basis is always the rule for gift basis, but that is not the case.
4. However, for the purposes of determining a loss, the donee’s basis is the lesser of: the donor’s basis; or, the fair market value of the property at the time of the gift.

Question 23

Federal Gift Tax Deductions

Determination Of Basis Of Gifts To Donee

Examples

Answer 23

Question 24

Federal Gift Tax

Calculation Of Gift Tax

Answer 24

Calculation Of Gift Tax And Gift Tax Return Filing Requirements.

The federal gift tax is computed by using the fair market value of the gifted property as of the date of the gift.

The term “fair market value” refers to the price at which the property would change hands between a willing buyer and a willing seller, neither one being under any compulsion to buy or to sell, and both having reasonable knowledge of all relevant facts.

• Ex. 1: Donor makes a gift of stock to her niece in 2018. Donor’s basis for capital gains purposes is $2,000. The fair market value of the stock at the time of the gift was $16,000. Federal Gift Tax is calculated as follows:

Fair Market Value of the Gift

Less Annual Exclusion (2018)

$16,000

$15,000

Total Taxable Gift

$1,000

Prior Taxable Gifts

-0_

Total Taxable Gifts

$1.000

Tax on $1,000 Taxable Gift (18% - lowest bracket) $180

(assumes taxable gifts) (No check to write to the IRS!)

• Example 2: Niece sells stock later in 2018 for $16,000. Niece’s capital gain is as follows:
  
  • Sales Price $16,000
  • Less Basis* (for gift sold at gain Ex. 1 above) ($2,000)
  • Capital Gain (short-term) ($13,000)

*Remember, Niece receives a Carry-over basis when she receives the stock from the Donor and sells at a gain over that Ex. 1 above.

Question 25

Federal Gift Tax

Filing Requirements

Answer 25

The requirements for filing gift tax returns are as follows:

1. In general, if the donor makes a transfer by gift during a calendar year, then the donor must file a United States Gift Tax Return (Form 709) for that year.
2. However, no gift tax return needs to be filed for gifts between spouses. However, a return is required where spouses elect to “split the gifts.”
3. No gift tax return needs to be filed for gifts of present interests of $15,000 or less. See IRC section 6019.
4. Gift tax returns and gift taxes are due on April 15th of the year following the calendar year in which gifts are made.
5. Documents Submitted with the Form 709. When shares of stock of a closely held corporation are listed, then documents used to value the shares, such as balance sheets, profit and loss statements for each of the five years preceding the valuation date, and statements of dividends paid during that period, must be included.

Question 26

Federal Gift Tax

Gifts to Charities

Answer 26

Gifts to charities.

• If the only gifts you made during the year are deductible as gifts to charities, you do not need to file a return as long as you transferred your entire interest in the property to qualifying charities.
• If you transferred only a partial interest, or transferred part of your interest to someone other than a charity, you must still file a return and report all of your gifts to charities,
• If you are required to file a return to report non-charitable gifts and you made gifts to charities, you must include all of your gifts to charities on the return.

Question 27

Federal Gift Tax

Transfer NOT subject to gift tax

Answer 27

Transfer NOT subject to gift tax (these transfers never have to be put on a gift tax return even if one is required for other reasons).

1. Transfers to political organization.
2. Payments that qualify for the educational exclusion.
3. Payments that qualify for medical exclusion.

Question 28

Federal Gift Tax

Statute of Limitations

Answer 28

1. The Internal Revenue Service has three years to assess additional gift tax.
2. The statute of limitations period begins to run on the filing date or the due date whichever is later.
3. Exceptions to the three year statute of limitation are as follows:
   
   1. If the gift tax return omits more the 25% of the total amount of gifts, the statute of limitation period is extended to six years. IRC section 6501 (e)(2).
   2. The statute of limitations can be extended by agreement with the Internal Revenue Service. IRC section 6501 (c)(4)
   3. If the no gift tax return is filed, if the gift tax return is false or fraudulent, the Internal Revenue may assess gift tax at any time (i.e., there is no statute of limitations).

Question 29

Gift Tax Exam Tips

1-5

Answer 29

Identify if a transfer has taken place has someone given up property or a property right to another party?

If so, has consideration been given for the transfe

If no, or the consideration was less than adequate, it is likely a gift.

Keep in mind that there are examples of transfers for no consideration which do not constitute a gift such as payment of child support or transfers incident to a divorce.

Describe the specifics of the gift:

• Is it a transfer outright from one party to another?
• Is it a transfer to a trust?
• Is it a transfer of an interest to the property such as joint ten

Identify the parties to the gift:

1. Who is the donor the party giving away the property?
2. Who is the donee the party receiving the property?
3. c. donor is the party responsible for reporting his or her gifts on the federal gift tax return and paying the federal gift taxes if any are due.

Question 30

Gift Tax Exam Tips

Is it a taxable gift (6-7)?

Answer 30

Is it a taxable gift? The gift tax was not repealed in 2010 as were the estate and GST taxes.

Is the gift complete?

Does the donor have to take any further steps for the donee to benefit from or take control from the property being gifted?

Is the gift irrevocable?

Can the donor get the gift back from the donee?

A gift which is both complete and irrevocable is a taxable gift for federal gift tax purposes.

If it is a taxable gift:

Is it a gift of a present interest?

Does the donee have the right to use or enjoy the property immediately after receiving the gift?

If yes, then the gift is a present interest, and the gift will qualify for the annual gift tax exclusion of $15,000.

Is it a gift of a future interest?

Does the donee have to wait until certain events occur in order to enjoy or benefit from the gift?

If yes, ‘then the gift is a gift of a future interest (typically this is a gift in trust) and will not qualify for gift tax annual exclusion. Therefore, the donor cannot deduct the annual exclusion of $ 15,000 from the value of the gift in determining the donor’s gift tax liability.

Question 31

Gift Tax Exam Tips

Who is the donee (8-9)?

Answer 31

Who is the donee?

1. Is the donee the donor’s spouse?

If yes, the gift may qualify for the unlimited marital deduction. If so, the value of the gift to the donee spouse can be deducted from the total value of the donor’s gifts for the calendar year.

1. Is the donee a charity?

If yes, the gift may qualify for the unlimited charitable deduction. If so, the value of the gift to the donee charity can be deducted from the total value of the donor’s gifts for the calendar year.

Is the donee a noncitizen spouse? If so spousal exclusion is limited.

List all of the gifts made (or proposed to be made) by the donor during the calendar year. For each gift, identify the following:

1. The donee of the gift;
2. The fair market value of the gift;
3. The donor’s basis in the gift (basis=what the donor paid for the property which was gifted);
4. Whether it is a gift of a present or future interest (in other words the annual exclusion of $ 15,000 apply?); and

Is the donee the donor’s spouse or charity? If so, the gift may qualify for the unlimited martial or charitable deduction.

Question 32

Gift Tax Exam Tips

Simplified Calculation

Answer 32

Simplified Calculation of Federal Gift Taxes

Donor’s Total Gifts during Calendar Year Reported on Form 709

• • Less Annual Exclusion(s)
• • Less Marital Deduction Gifts
• • Less Charitable Deduction Gifts
• + All Accumulated Prior Taxable Gifts

Current Taxable Gifts

• Less Applicable Gift Exclusion
• = Adjusted Taxable Gifts

The “adjusted taxable gift” figure is multiplied by the applicable gift tax rate (18%-40%) to determine the gift tax

• = Gift Tax
• • Gift Tax Paid On Prior Gift Tax Returns, if any
• • Applicable Credit (shelters taxable gifts up to $5.6 million in 2018)

= Gift Tax Due

Question 33

Estate Tax Simplified Calc

Answer 33

Question 34

“Gross Estate” For Estate Tax Purposes.

Answer 34

“Gross Estate” For Estate Tax Purposes.

1. The gross estate includes:
   
   1. Probate Property: Assets in a decedent’s individual name transferred by Last Will or the intestate laws.
   2. Nonprobate Property: Assets transferred by joint tenancy or beneficiary designation (such as life insurance and retirement plans); and revocable trusts.
2. The gross estate is reduced by certain specified expenses
   
   1. Funeral expenses
   2. Administrative expenses
   3. Secured claims against the estate

d. Unsecured claims against the estate

1. The taxable estate (gross estate expenses = taxable estate) is further reduced by certain deductions:
   
   1. The marital deduction.
   2. The charitable deduction.
   3. Uninsured losses that were incurred after the decedent’s death.

Question 35

Valuation Of Gross Estate.

Answer 35

Valuation Of Gross Estate.

In general, the value of a death transfer is the fair market value of the property on the day on which the decedent dies, whether or not such property was owned by decedent at decedent’s death.

• The term “fair market value” refers to the price at which the property would change hands between a willing buyer and a willing seller, neither one being under any compulsion to buy or to sell, and both having reasonable knowledge of all relevant facts.
• There are special rules for determining the fair market value of some kinds of property, such as stocks and bonds, shares of mutual funds, interests in a business, life insurance policies, annuity policies, and present or future interests in, for example, trusts.
• The fair market value of a listed stock is the average of the high selling price and the low selling price on the day of valuation.
• The fair market value of stock in a closely held corporation or an interest in an unincorporated closely held business is determined by qualified business appraisers using numerous variables and formulas, and approaches. For example, capitalizing the earnings of a business at a market capitalization rate.
• The determination of the fair market value of bonds generally includes the determination of the amount of unpaid interest, which has accrued, on the bonds up to the valuation date.
• Qualified real estate appraisers generally make the determination of the fair market value of real property.
• If a decedent transfers only part of the total interests in a particular type of property, then that partial interest is valued at the partial interest’s fair market value and frequently discounts for a partial interest apply, such as a discount for a fractional interest in real estate, and discounts for the lack of marketability of a business interest and discounts for a minority interest in a business.
• The fair market values of an annuity, life estate, term for years, remainder, reversion, or unitrust interest is determined by the IRS actuarial tables. Intangible rights are also includible in a decedent’s gross estate if the decedent has an interest in the rights and such interest passed by reason of the decedent’s death to another person.
• U.S. Government bonds and other United States Government indebtedness and state and local bonds are includible in the gross estate of a decedent even if, by law, such bonds (and other debts) are exempt from federal income tax.
• If a decedent was entitled to a refund due to the overpayment of an item (such as a refund of a property tax or an income tax or any other item), then the overpayment, as any other asset, is includible in the decedent’s gross estate

Question 36

Gross Estate Alternate Valuation

Answer 36

Alternate Valuation — Six Months After Date of Death.

l . IRC section 2032 provides that a decedent’s personal representative may elect to value the separate interests of property in the decedent’s gross estate at either:

1. the decedent’s date of death; or
2. the earlier of the day on which the property (or property interest) is disposed of or six months after the decedent’s death (this is referred to as “the alternate valuation date”).

2. However, in order to elect the alternate valuation date for estate tax valuation purposes, the value of the decedent’s gross estate and the amount of the decedent’s estate tax must decrease due to such election.

3. If the personal representative elects to value the decedent’s gross estate at the alternate valuation date, then all of the property in the gross estate must be valued at the alternate valuation date.
4. Generally, the value of property on the date of a decedent’s death (or at the alternate valuation date) is the basis of that property, for income tax purposes, to the recipient of the property at the decedent’s death (including, the decedent’s estate).
5. The alternate valuation date election is not available for any interest or property if the change in value of the property (or property interest) is the result of the mere passage of time.
6. For instance, a discount bond becomes more valuable as the maturity date of the bond approaches. However, the alternate valuation date value does not take this into account because the only factor affecting value is the passage of time.
7. Also, as an annuity gets closer to the end of the annuity period, the annuity becomes less valuable.

Question 37

Gross Estate and Marital Interest

Answer 37

Marital Interest.

1. A decedent’s gross estate includes, for estate tax purposes, the full value of the decedent’s interests in property including property being transferred to the surviving spouse.
2. Only one-half (1/2) of property held jointly between spouses is included for purposes of determining the decedent’s gross estate.

Question 38

Gross Estate and Gift With Retained Interests.

Answer 38

1. Gift With Retained Interests.
   
   1. IRC section 2036 includes in the decedent’s estate the entire value of property gifted by the decedent if the decedent retained an interest in the property for the decedent’s life or a period that does not in fact end before the decedent’s date of death.
   2. The three types of retained interests are:
      
      1. The possession (or enjoyment) of the property transferred.
      2. The right to the income from the property transferred; or,
      3. The right to designate the person who may possess (or enjoy) the property or the income from the property.

Example: Grandmother deeds farm to grandson but retains the right to live in the farm for her lifetime. Grandmother subsequently dies still living on the farm. The entire value of the farm is included in grandmother’s estate for federal estate tax purposes.

also applicable to the case in which a donor transfers, by gift, stock of a controlled corporation to another individual and retains the right to vote the shares or collect dividends.

Example: If John gives common stock to Peter, but John reserves the right to vote the shares for a period often years and John dies within eight years, then the entire value of the stock, at John’s death, is includible in John’s gross estate, for estate tax purposes.

Question 39

Transfers Intended To Take Effect At Death.

Answer 39

Transfers Intended To Take Effect At Death.

If a decedent transfers property, during the decedent’s life, and if the following three conditions are met, then the value of the property is includible in the decedent’s estate.

The three conditions are:

• Possession or enjoyment of the property can be obtained only be surviving the decedent;
  
  • The first condition is met if the only way in which a beneficiary can obtain possession or enjoyment of the property (through ownership of the property) is by surviving the decedent.
• The decedent retained a reversionary interest in the property;
  
  • The second condition is met if the decedent keeps a reversionary interest in the property transferred.
• The value of the reversionary interest immediately before death exceeds five percent (5%) of the value of the entire property.
  
  • The third condition is met if the value of the reversionary interest, as of the moment just before the decedent’s death, is more than five percent of the value of the property transferred.

A reversionary interest is generally any right under which the transferred property will or may be returned to the decedent or the decedent’s estate. It also includes the possibility that the transferred property may become subject to a power of disposition by the decedent.

Question 40

Decedent’s Right To Alter, Amend, Revoke Or Terminate.

Answer 40

Decedent’s Right To Alter, Amend, Revoke Or Terminate.

1. If a decedent transfers interests in property during the decedent’s life and, at the decedent’s death, the decedent has a power to alter, amend, revoke, or terminate the interests, and then the entire value of the property subject to the decedent’s power is includible in the decedent’s gross estate.
2. The following are examples of powers, which, if retained by a transferor-decedent, will cause the transferred property to be includible in the transferor-decedent’s estate.

a. The power to revoke or terminate a trust.

1. The power to control and manage the corpus of a trust (except where such power is concerned only with the purely administrative functions).
2. The power to change beneficiaries or alter amounts distributable.
3. The power to appoint by Last Will and Testament.
4. The power to invade the corpus or a trust created by another for whose benefit the decedent created a similar trust (reciprocal trust doctrine).

If a grantor makes a gift in custodianship under either the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act, Section 529 College Savings plans, and designates the grantor as the custodian, and dies while serving in that capacity, then the custodial property is includible in the grantor’s gross estate under IRC section 2038, because the power to delay distributions to the beneficiary is considered to be a power to alter the arrangement.

Question 41

Certain Relinquishment of Rights, Made Within Three Years Of Decedent’s Death and Gifts of Life Insurance.

Answer 41

1. If, within three (3) years of the decedent’s date of death, the decedent transfers property which would have otherwise been included in the decedent’s taxable estate (retained life estate or right to enjoy and use), (transfers taking effect at death), (revocable transfers although there is an exception for transfers to revocable trusts (proceeds of life insurance), the decedent “relinquishes” the right described in the particular section within three years of death, the value of the property subject to the relinquishment is added back to the decedent’s estate.
2. As noted, the transfers (the relinquishment of which are) subject to the three year rule are:
   
   1. Transfers with a retained interest under IRC section 2036;
   2. Transfers intended to take effect at death under IRC section 2037; and
   3. Transfers subject to decedent’s right to alter, amend, revoke or terminate under IRC section 2038.
3. Death proceeds of life insurance insuring the donor’s life are brought back into the estate of the donor if the donor dies within three years of the transfer.
4. Example: Mary creates an irrevocable trust for the benefit of Bob on June 1, 2012. Mary retains the right to receive income from the trust for her lifetime. In 2014, Mary gives up (i.e., “relinquishes”) her right to income from the trust. Mary dies in 2015. The entire value of the trust is included in Mary’s estate because the trust would be been includible in Mary’s estate under the retained interest provisions of IRC section 2036(a) and this is true because her relinquishment of those rights occurred within three years of her death.

Question 42

Inclusion of Gift Tax on Gifts Made During 3 Years Before Decedent’s Death.

Answer 42

Inclusion of Gift Tax on Gifts Made During 3 Years Before Decedent’s Death.

1. Under Section 2035 (b) a decedent’s gross estate will also be increased by any gift taxes paid by the decedent on gifts made within three years of the decedent’s date of death.
2. ‘Paid” does not mean the decedent applied his or her applicable credit to the gift tax liability but actually paid (i.e. – wrote a check for) the tax liability to the Internal Revenue Service.
3. If you understand how the mathematics of the estate calculation work, it would be better to give everything away the day before death and pay gift tax, which would be a deductible liability of the estate and thus would reduce estate tax, than to die with the assets and pay estate tax. (The exact mechanics of this are beyond the scope of this outline and the bar exam.)
4. This rule combats that strategy by bringing back the gift tax paid on gifts made within three years of death into the taxable estate and taxing the gift tax! This can be a very large issue in taxable estates.

Question 43

Jointly Owned Property.

Answer 43

Jointly Owned Property.

• If an individual dies when the title to personal property or real property is in the decedent’s name and someone else’s name as joint tenants with rights of survivorship (or as tenants by the entireties), then the value of the property at the time of the decedent’s death (or at the alternate valuation date) is includible in the decedent’s gross estate, for estate tax purposes, to the extent of the value of the decedent’s percentage contribution for the acquisition of the property.
• If the joint tenants are not married to each other, then that part of the property which was acquired by an individual other than the decedent for adequate and full consideration in money or money’s worth, or by devise or gift from a third party, is not includible in the decedent’s gross estate.
• If the owners of property are jointly and severally liable on a mortgage debt which is secured by that property, and, if, at the death of a joint tenant, the mortgage is outstanding, then the surviving joint tenant’s total contribution to the purchase is the sum of that survivor’s actual payments for the purchase plus the later mortgage payments and plus 50% of the mortgage indebtedness which remains outstanding at the decedent’s death.

Question 44

Property Subject To Power Of Appointment.

Answer 44

Property Subject To Power Of Appointment.

1. If an individual has a general power of appointment at the time of the individual’s death, then the decedent’s gross estate includes the value of the property at the decedent’s death (or at the alternate valuation date), which the decedent could have appointed by the general power of appointment.
2. A “power of appointment” is the power to decide who will own or enjoy the property held in trust.
3. A “general power of appointment” is a power of appointment exercisable in favor of the holder, the holder’s estate, the holder’s creditors or the creditors of the holder’s estate.
4. Example: In his will, brother creates a trust for the benefit of his brother. Pursuant to the terms of the trust, the brother can appoint to whom he wishes, without limitation, the trust balance at his death by a statement made in his Last Will. This is a general power of appointment and at brother’s death, the trust is included in his taxable estate, irrespective of whether he actually exercises the power.
5. If the holder’s power to appoint property is limited by an ascertainable standard relating to the holder’s health, education, support or maintenance, the power will not be considered a general power of appointment and the trust will not be includible in the holder’s estate for estate tax purposes.
6. A limited power of appointment is any type of power of appointment, which is not a general power of appointment. A limited power of appointment is not includible in the holder’s estate.

Question 45

Special Use Valuation.

Answer 45

Special Use Valuation.

1. The personal representative of a decedent’s estate may elect to value certain real property (which is includible in the decedent’s gross estate and which real property has been used, prior to the decedent’s death, in a business, for example, in the business of farming) on the basis of this special business use, rather than at the real property’s fair market value.
2. The amount of the reduction in value allowed under this provisions is inflation adjusted and is $140,000 for 2018.
3. There are two important “family” terms, which must be understood in order to understand the requirements of IRC section 2032A.
   
   1. “Qualified heir” a member of the decedent’s family who acquires or acquired an interest in the qualified real property which is involved.
   2. “Member of family” the decedent’s spouse; children; stepchildren; parents; siblings; and, the lineal descendants or spouses of these five categories.
4. Generally, all interests in the property to be specifically valued must pass to a qualified heir. However, at least two cases have held that de minimis successive interests which do not go to qualified heirs will not prevent special use valuation for otherwise qualified property.

5. There are seven major requirements, which determine whether or not a particular piece of real property is for valuation under the provisions of IRC section 2032A, and in order to remember the requirements, remember the word “LUPOPPA.”

a. The word “LUPOPPA” is derived from: Location; Use; Participation; Ownership; Percentage; Pass; and, Agreement.

6. The new basis of the transferred property that qualifies for the special use valuation is the reduced value (i.e. , the value that is used to determine estate taxes) and not the original “highest and best use” value of the property.

Question 46

Deductions From Gross Estate.

Answer 46

1. Deductions From Gross Estate.
   l. IRS permits estate tax deductions for the following four items.
2. Funeral expenses.
3. Administration expenses.
4. Unsecured claims against the estate.
5. Secured claims on property that is includible in the decedent’s gross estate.

• Also allows estate tax deductions for casualty and theft losses which are incurred during the settlement of the estate and which arise from theft or casualties, such as storms or fires.
• Enforceable personal obligations of the decedent at the time of death and interest on those obligations which accrues up to the time of the decedent’s death, may be deducted as claims against a decedent’s estate.

Question 47

Unlimited Charitable Contribution.

Answer 47

Unlimited Charitable Contribution.

1. IRS allows charitable contribution deductions for the value of property transferred to qualified charitable organizations.
2. The estate tax charitable deduction is unlimited.
3. If, at the date of the death, the transfer to a qualified charitable organization is contingent upon some act or occurrence, a charitable contribution deduction is allowable only if it is virtually certain that the transfer will become effective and the contingency can be ignored.

If estate taxes are paid from the portion of the estate that qualifies for a marital deduction, then the marital deduction is reduced by the amount of the taxes that are so paid.

Question 48

Unlimited Marital Deduction.

In order for a transfer of property (or interest therein) to qualify for the estate tax marital deduction, the following conditions must be met at the time when the decedent dies.

Answer 48

In order for a transfer of property (or interest therein) to qualify for the estate tax marital deduction, the following conditions must be met at the time when the decedent dies.

1. The spouses must be married to each other.
2. The spouse making the death transfer must be a United States citizen or resident.
3. The decedent’s surviving spouse must be a citizen of the United States of America.

Question 49

Unlimited Marital Deduction.

Where decedent’s spouse in not a United States citizen

Answer 49

Where decedent’s spouse in not a United States citizen:

1. If the decedent’s surviving spouse is not a United States citizen, then the property (or interest therein) must pass to the surviving spouse through a “qualified domestic trust.” See IRC section 2056(d) and IRC section 2056A to qualify for an estate tax marital deduction.
2. A “qualified domestic trust”:

(l) Must require at least one of the trustees to be either a United States citizen or domestic corporation.

1. Must be required to pay to all of the trust’s net income to the decedent’s surviving spouse either annually or in more frequent intervals.
2. Must elect to be treated as “qualified domestic trust” on the decedent’s estate tax return and the election is irrevocable.

Question 50

Unlimited Marital Deduction.

The interest transferred from the decedent must “pass” to (or for the initial and exclusive benefit of) the decedent’s surviving spouse, which is taken by the decedent’s surviving spouse in any one of the following ways:

Answer 50

The interest transferred from the decedent must “pass” to (or for the initial and exclusive benefit of) the decedent’s surviving spouse, which is taken by the decedent’s surviving spouse in any one of the following ways:

1. Making a specific devise to the decedent’s surviving spouse.
2. Interest transferred to the decedent’s surviving spouse as a tenant by the entireties or as a surviving joint tenant with rights of survivorship with the decedent.
3. Interest transferred to the decedent’s surviving spouse due to the exercise or failure to exercise or the release of a power of appointment.
4. Interest transferred to the decedent’s spouse in the form of life insurance proceeds under a life insurance policy owned by the decedent at the decedent’s death and under which the decedent’s spouse is the beneficiary.

Question 51

Unlimited Marital Deduction

Terminable Interests

Answer 51

Certain interests in property, which pass from a decedent to the decedent’s surviving spouse, are referred to as “terminable interests.”

1. A terminable interest is nondeductible if another interest in the same property passes from the decedent to a person (other than the decedent’s surviving spouse or the estate of the decedent’s surviving spouse).
2. Example: A decedent devises real property to the decedent’s surviving spouse for life, with the remainder interest being devised to the decedent’s children.
3. The decedent’s surviving spouse’s life estate does terminate, no value of the life estate is includible in the decedent’s surviving spouse’s estate, because the life estate ends at the decedent’s spouse’s death.
4. IRC section 2056(b)(3) provides that a marital deduction is available for a transfer to surviving spouse if the only condition under which the interest will terminate is the death of the surviving spouse within six months after the decedent’s date of death.

Question 52

Unlimited Marital Deduction.

QTIP Trust

Answer 52

A Qualified Terminable Interest Property (“QTIP”) Trust which meets the following requirements will qualify for the unlimited marital deduction:

• The surviving spouse is entitled to all of the income from the trust for the spouse’s life
• The income payable to the surviving spouse must be payable at least annually.
• The entire interest or specific portion must not be subject to a power in any other person to appoint any part to any person other than surviving spouse.
• A QTIP election must be made on the decedent’s federal estate tax return with respect to a specific portion or all of the trust.

Question 53

Basis Of Property To Recipient.

General Rule

Answer 53

Basis Of Property To Recipient.

1. General rule: property included in a decedent’s estate will receive a “step-up” in basis equal to the value of the property at the decedent’s date of death or at the alternate valuation date.

Example: Bob bought stock in 2001 for $50. Bob died in 2006. In his Last Will, Bob devised stock to Mary. The value of the stock for federal estate tax purposes was $100. Mary’s basis in the stock is $100 and not Bob’s cost basis of $50. Mary sells the stock in 2007 for $150. Mary realized a capital gain of $50 from the sale of stock ($150 - $100 $50).

Question 54

Stock Redemption To Pay Estate Taxes.

Answer 54

1. Stock Redemption To Pay Estate Taxes.
   
   1. Allows an estate to treat the redemption of its stock as an exchange to the extent that the redemption proceeds do not exceed the sum of estate and inheritance taxes, funeral expenses and estate administration expenses.
   2. IRC Section 303 is a relief provision intended to enable a shareholder’s estate facing liquidity problems to achieve “sale or exchange” (as opposed to dividend) treatment on the redemption of its stock. Certain percentage requirements must be met and the redemption must occur within a specified period after the date of death.
   3. A Section 303 redemption usually generates little or no income tax liability for the estate because the stock being redeemed has received a “step-up” in bases.
   4. A possible tax drawback to a Section 303 redemption is a restriction on the use of IRC Section 6166 (discussed later in this outline), under which an estate whose major asset is a close corporation may defer the payment of estate tax for up to 15 years.
   5. Qualifying Percentage Requirements. The redeeming corporation’s stock must make up more than 35 percent of the decedent’s adjusted gross estate. If more than 20 percent in value of the outstanding stock of each of two or more corporations is included in determining the decedent’s gross estate, such stock may be considered as the stock of a single corporation for the purpose of meeting the 35 percent requirement.
   6. Gifts made within three years of death are included in the gross estate of decedents for purposes of determining qualification for Section 303 redemptions even if the gift is not of otherwise includable in decedent’s gross estate.
      
      1. The only gifts that are not includable for this purpose are gifts that qualify for the $15,000 annual exclusion and the unlimited exclusion for qualified tuition and medical expense payments.
      2. Substantial pre-death transfers can be made that qualify for these two exclusions which effectively reduce the value of the gross estate for purposes of meeting the percentage requirements of IRC Section 303.

7. Qualifying Dollar Limitations. The sum of all federal and state death taxes (including generation-skipping taxes), all interest collected with respect to those taxes, and all administration expenses allowable as estate tax deductions, including executor’s and attorney’s fees.

8. Timing Requirement. A Section 303 redemption must ordinarily be made within four years of the date of death.

Question 55

Estate Tax Filing Requirements.

Answer 55

• For a decedent who died a citizen or resident of the United States at the time of death, the personal representative must file an estate tax return if the decedent’s gross estate (increased by lifetime taxable gifts) exceeds the amount of the decedent’s Applicable Exclusion (2018 - $5,600,000)
• The estate tax return and estate tax payment are due nine months after the date of death unless an extension of time for filing has been granted. This is true regardless of whether or not the decedent was a citizen or resident of the United States on the date of death.

Question 56

Estate Tax Payment Requirements.

Answer 56

The estate tax return and estate tax payment are due nine months after the date of death unless an extension of time for filing has been granted. This is true regardless of whether or not the decedent was a citizen or resident of the United States on the date of death.

• Allows payment of estate (and generation-skipping) tax attributable to a business interest in the estate of a US citizen or resident to be postponed for five years after the date the tax otherwise would have been due; after the five-year period the tax can be paid in ten equal annual installments. Thus, full payment of estate tax may be postponed for up to 15 years.

1. The interest rate charged on these deferred estate tax payments is quite low, only 2 percent on the estate tax attributable to the first $1 (2018, adjusted for inflation) above the exemption equivalent, of taxable value of the closely-held business. Any tax deferred above that bears interest at 45% of the normal IRS interest rate for deficiencies. However, any amounts distributed in a Section 303 redemption reduce the amount of estate tax that may be deferred
2. Qualifying Requirements.
   
   1. The decedent’s interest in the business must exceed 35 percent of his adjusted gross estate (the gross estate less deductions allowed)
   2. The portion of the estate tax eligible for deferral is calculated by multiplying the estate tax by the ratio of the decedent’s interest in the closely-held business to the adjusted gross estate.

c. The interest on the deferred estate tax is no longer deductible as an administrative expense for estate tax purposes. It also may not be deducted for income tax purposes.

d. During the first five years, only interest is required to be paid, and that is once annually. After that five-year period, interest is paid annually along with 10% installment payment of the tax.

1. Under certain circumstances, there is an acceleration of payments of the estate tax that had been deferred
   * These circumstances include a sale, exchange, or other disposition of 50 percent or more of the value of decedent’s interest in the business.

• Also triggering an acceleration is a withdrawal from the trade or business of 50 percent or more of the value of the trade or business.
• Dispositions and withdrawals are aggregated to determine the applicability of acceleration rules.
• Missing payments can cause acceleration.

Other Special Payment Issues and Rules.

1. Extension of time for paying tax. Estate tax payment may be extended for up to 12 months “where it is shown to the satisfaction of the Secretary that payment of a deficiency upon the date fixed for the payment thereof will result in undue hardship to the taxpayer”

Question 57

Federal Estate Tax Exam Tips

Questions to Ask

Answer 57

• What year did the decedent die?
  
  • If decedent died in 2018, federal estate tax is computed using the 40% rate multiplied by the taxable amount above the exemption of $5.6 million exemption (after adding back lifetime taxable gifts (annual gifts above the annual exclusion and marital charitable deductions)).
• List all of the assets in the decedent. For each asset, identify the following:
  
  • What was the decedent’s interest in the asset: did the decedent own the asset outright? Own the asset as a joint tenant? Held interest in trust? All assets which the decedent had an interest are part of the decedent’s taxable estate for federal estate tax purposes.
  • The beneficiary of the asset;
  • The date of death value of the asset; and
  • Is the beneficiary the decedent’s spouse or charity? If so, the gift may qualify for the unlimited martial or charitable deduction.
• Did the decedent own real estate? Consider if special use valuation would apply.
• Did the TOTAL value of the decedent’s taxable estate decrease six (6) months after the decedent’s date of death? If yes, then consider if alternate valuation would apply. Alternate valuation only applies if it lowers the federal estate tax. If the federal estate tax is already zero, it cannot be lowered and alternate valuation does not apply.
• Did the decedent make gifts before his or her death?
  
  • Were the gifts taxable? If so, need to add the taxable gifts for purposes of calculating federal estate taxes.
  • What type of gifts were made prior to date of death?
    
    • Gifts of an interest such as life estate or an interest in a trust?
    • Gift of life insurance?
    • If any answer is yes to any of the above, the full date of death value of the gift may be includable in the decedent’s taxable estate.
    • Was gift tax paid during life? If so, how much? It will be a credit against estate tax as shown below.

Question 58

GENERATION-SKIPPING TAXES (“GST” Tax)

General Concepts.

Answer 58

General Concepts.

• Applies when a gift or estate transfer is made to a person more than one generation below the transferor, for example, a grandparent to a grandchild.
• The gift tax annual exclusion of $ 15,000, and the medical and educational exclusions are also excluded from the calculation of the GST tax.
• GST tax can apply to the same transaction that the gift tax or estate tax also apply to. Thus, a transfer to a grandchild can be subject to both gift tax and GST tax, and a transfer from an estate to a grandchild can be subject to both estate tax and GST tax.

Question 59

GST Exemption

Answer 59

1. Exemption.
2. As noted above, for 2018, each transferor is entitled to a lifetime exemption of $5.6 million. The GST exemption can be used during life (by gifts) or at death (by bequests and gifts through trusts).
3. The transferor or the transferor’s personal representative can choose to which transfers to allocate the exemption if generation-skipping transfers exceed the GST exemption amount.
4. There is no counterpart in the GST law to the applicable credit. The GST law speaks only in terms of the GST exemption.

Question 60

GST Tax Rate

Answer 60

1. All generation-skipping transfers are taxed at a flat rate.
2. The rate is equal to the maximum estate tax rate then in effect, which is 40% for 2018, multiplied by the GST taxable transfer.
3. The tax is applied to the property that “skips a generation” and exceeds the GST exemption.

Question 61

GST

Predeceased Ancestor Exception to GST

Answer 61

Predeceased Ancestor Exception to GST.

1. If a child’s parent has predeceased both child and grandparent, transfers from grandparent to child are not generation-skipping transfers.
2. The untimely death of a child’s parent that would otherwise result in a GST is considered an exception as such an untimely death cannot be planned and should not result in a tax penalty.

Question 62

GST Exam Tips

Answer 62