IN Inheritance, FET, And GST tax

Question 1

Who does IN Inheritance tax apply to?

Answer 1

Decedents dying before 1/1/2013

Question 2

How long does INDOR inheritance tax lien run?

Answer 2

Ten years. So, would only apply to after 2011 decedents

Question 3

Where is the IH-6 (IN resident) or IH-12 (non-resident) filed now?

Answer 3

Directly with INDOR.

Question 4

How are gift and estate taxes connected?

Answer 4

The federal gift tax and the federal estate tax are imposed in a unified, cumulative fashion, using the same set of marginal tax rates and (except between 2002 and 2009) the same lifetime exclusion amount for both the estate tax and the gift tax.

Question 5

How do anti-clawback regs work?

Answer 5

Reg. § 20.2010-1 :The applicable credit amount to be applied in the fourth step of the estate tax calculation will the larger of the applicable credit amount actually used to shelter pre-2026 gifts from the gift tax or the applicable credit amount in effect in the year of death

Question 6

When must a FET Return be filed?

Answer 6

The filing of a federal estate tax return is required whenever the sum of the U. S. citizen decedent’s federal gross estate (as defined in Code § 2033) plus the decedent’s post-1976 taxable gifts exceeds the “basic exclusion amount” (e.g., $11.58 million for 2020 decedents) for the year in which the decedent died. See Code § 6018(a)(1) and (3).

Question 7

When is the FET return due?

Answer 7

Nine (9) months after death with one automatic 6 month extension by filing a Form 4768

Question 8

When is the FET tax due?

Answer 8

Nine months after death. An extension of time to file Form 706 does not extend the time for the payment of the estate tax due. An estate that can demonstrate illiquidity and an inability to timely pay the estate tax in full can request a hardship extension of time to pay part of the estate tax due. See Code § 6161(a)(2) and Reg. § 20.6161-1.

Question 9

What is the limitation for the IRS to audit a 706 return?

Answer 9

Code § 6501(c)(4) prohibits the IRS from extending, by agreement, the three-year limitations period for assessing additional estate tax. The 3-year limitations period, under Code § 6501(a), begins running immediately after the Form 706 return was filed, or if the Form 706 is filed before the deadline, immediately after the 9-month filing deadline.

Question 10

Which Code chapter is estate tax?

Answer 10

Chapter 11

Question 11

Who is liable to pay the estate tax?

Answer 11

The executor. Section 2002

Question 12

What is the applicable credit amount?

Answer 12

The actual estate and gift tax calculations require the “applicable credit amount” (the estate tax calculated on the exclusion amount) to be subtracted from the gross tax, in order to arrive at the net tax due.

The estate tax calculation is cumulative because “adjusted taxable gifts” — gifts made by the decedent after 1976 — are added to the taxable estate to produce what this writer calls the transfer tax base on Line 5 of Form 706

Question 13

What is the “Credit for tax on prior transfers”

Answer 13

Estate tax code section 2013. Allows a credit against the estate tax, in a “declining percentage,” when the decedent died within 2 years (100% credit) or within 10
years (20% credit) after the death of a transferor from whom the decedent received property on which estate tax was paid by the prior transferor

Question 14

What is the Alternate valuation for FET purposes?

Answer 14

Estate tax code section 2032:
• Allows executor to elect to determine and report the value of all assets in the gross estate as of a date 6 months after the date of death
• Alternate valuation may be elected only if it reduces the value of the gross estate and the estate tax due

Question 15

What is the Alternate Use Valuation for farmland?

Answer 15

Estate tax code section 2032A:
Allows “qualified real property” being used by the decedent and family members as a farm or in another trade or business to value the real property according to its actual use rather than highest and best use
• Many technical requirements must be satisfied
• The limitation on the permitted reduction in value is inflation indexed and is $1,180,000 in 2020 and $1,190,000 in 2021
• A section 2032A election causes a special estate tax lien

Question 16

What are “transfers with retained life estate”?

Answer 16

Broad provision (and a major tool of the IRS) that causes previously gifted property to come back into the deceased donor’s gross estate if the deceased donor retained the right to income for life or the possession or use of the property for life, or the right to determine who would ultimately receive possession or use of the property or the income.
2036(a)

Question 17

What are “Transfers taking effect at death” and revisionary interests?

Answer 17

Includes previously gifted property in the gross estate if other person(s) can receive the property only by surviving the decedent and if his or her reversionary interest exceeds 5 percent of the total value of the property
2037

Question 18

Are “Revocable transfers” included in gross estate?

Answer 18

This provision causes the gross estate to include assets (such as TOD property or revocable trust assets) where the decedent held the right to revoke at the time of death or released the power to revoke within 3 years before death
2038

Question 19

How are “Annuities” included in gross estate?

Answer 19

Includes the date-of-death value of the decedent’s annuities in his or her gross estate
2039

Question 20

How are joint tenancy interests co-owned by the decedent and non-spouse co-tenant included in gross estate?

Answer 20

Surviving co-tenant has the burden of proving what portion of the date-of-death value of the asset is attributable to his or her contributions and therefore
excluded from the deceased co-tenant’s gross estate
2040(a)

Question 21

How are joint tenancy or T by E assets included in the gross estate?

Answer 21

Special rule that applies only to joint tenancy or T by E assets for which decedent and a U. S. citizen
surviving spouse are the only owners; the decedent’s gross estate includes just half of the value
2040(b)

Question 22

How are general powers of appointment included in gross estate?

Answer 22

general rule that power holder’s gross estate includes
all assets with respect to which the power holder possessed a general power at death
2041(a)(2)
Subsection (b) defines a general power

Question 23

What is the exeception to the general powers of appointment rule?

Answer 23

“ascertainable standard” exception - not includeable in estate if access to principal was limited to ascertainable standard (same exception if the right to withdraw limited to a 5 and 5 power - lesser of 5,000 or 5%)
2041(b)(1)(A)

Question 24

When are “Proceeds of Life Insurance” includable in gross estate?

Answer 24

• Gross estate includes the proceeds of life insurance on the decedent’s life if the proceeds are payable to the estate or executor as a beneficiary OR if the decedent possessed incidents of ownership in policy at death
• “Incidents of ownership” include the power to surrender policy, to obtain policy loans, or to change beneficiaries

• The insured’s payment of premiums on the policy,
without more, is not an “incident of ownership”

• If the insured transfers ownership of the policy by gift
within 3 years before death, Code §2035(a)(2) will bring
policy proceeds into the gross estate
2042

Question 25

When are “Transfers for insufficient consideration” included in gross estate?

Answer 25

Applies to “bargain sales” made by a decedent during lifetime for less than “adequate and full
consideration”; gross estate includes the excess of the date of death value over the consideration previously received; Section 2043 effectively prevents asset value that is included in the gross estate under
some other Code section from being double-counted
2043

Question 26

Which Code section causes the spouse beneficiary’s gross estate to include the remaining marital trust assets to the extent that a QTIP election was made?

Answer 26

2044

Question 27

What are deductions on 706?

Answer 27

Deductions for funeral and burial
expenses, administration expenses, debts, mortgages
and liens on gross estate assets, and losses

Remember the prohibition in Code § 642(g) on deducting certain items on both Form 706 and on the Form 1041
fiduciary income tax returns

• Be aware of Reg. § 20.2053-1 (effective Nov. 25, 2009), which can limit the availability of deductions for certain
claims (debts) or expenses that are not “ascertainable” or that are subject to post-death events or contingencies
2053

Question 28

How do you preserve claims that are not yet ascertainable on 706?

Answer 28

Schedule PC and Form 843 regarding protective claims for refund relating to claims that are not “ascertainable” when the Form 706 is filed

Question 29

How are loses deductable on 706?

Answer 29

Allows a deduction for losses incurred during estate
administration as a result of fire, other casualty, or theft, to the extent not compensated by insurance or otherwise
2054

Question 30

What are deductions for donations to charities?

Answer 30

General provisions allowing deductions for “outright”
transfers at death to charity and for the charitable interest
in a CRAT, CRUT, CLAT or CLUT
2055

Question 31

How is estate tax calculated on 706?

Answer 31

In a cumulative manner. The “tentative [estate] tax” is calculated on the “grossed-up” transfer tax base (the total of the taxable estate plus post-1976 taxable gifts) and put on Line 6 of Form 706. Then, as required by Code § 2001(b)(2), the “gift tax paid or payable” on the post-1976 taxable gifts is inserted on Line 7 and subtracted from the Line 6 “tentative tax.” The result is the “gross estate tax” imposed on just the taxable estate, but with the decedent pushed up into the highest feasible estate tax bracket.

Question 32

What is the “applicable credit amount”?

Answer 32

The estate tax calculated on the exclusion amount

cf. “applicable exclusion amount”

Question 33

What is the Basic Exclusion Amount (BEA)?

Answer 33

The FET exclusion available in decedent’s year of death.

Question 34

What code section allows for deduction of outright transfer at death of charitable interest in a CRAT, CRUT, CLAT, or CLUT?

Answer 34

2055

Be aware of Reg. § 20.2055-2, which may disallow a
charitable deduction if the transfer to the charity is not
exclusively for charitable purposes or is subject to a
post-death condition or power that prevents determination of the amount of the charitable
transfer

Question 35

What is a QDOT?

Answer 35

“Qualified domestic trust”
Trust to obtain the marital deduction if the surviving spouse is not a U. S. citizen by the time Form 706 is
filed

Question 36

Who may file a 706?

Answer 36

Executor. If no court-appointed fiduciary is serving, the “ executor” is “any person in actual or constructive possession of any property of the decedent”

Question 37

What is the FET benefit of making a lifetime gift and surviving that gift by three years?

Answer 37

These estate tax savings occur, despite the use of the same rate schedule for both the estate and the gift tax, because the gift tax is “tax exclusive.” That is, if a net gift tax is due and payable by the donor, the tax is paid out of the donor’s other (remaining) money or property, and not from the money or property given away. In contrast, the federal estate tax is “tax inclusive,”
because the estate tax is imposed not only on the decedent’s assets that pass or are transferred at
death to non-spouse, non-charitable beneficiaries, but also on the money or other property that will be used to pay all net estate tax that is due

Question 38

What are the exceptions to gift tax liability - that is, what are non-taxable gifts?

Answer 38

1) Annual exclusion per donee for a gift of PRESENT interest in property. ($15k this year; $16k next)
2) Unlimited annual exclusion for gift of direct payment of school, health care, or insurance. Has to be direct payments.
3) Marital deduction - applies to a gift to a US citizen spouse, if outright or to a permitted trust (QTIP); if non-US citizen spouse only $159k (QDOT option) [can fund during lifetime]
4) Charitable deduction - Must be either: 1) outright gifts to charity; or 2) qualified charitable split-interest gift trusts (lead or remainder trusts)

After this are taxable gifts and must be reported on 709. However, Dible recommends filing a 709 every year, even if no taxable gifts.

Question 39

Is gift tax cumulative?

Answer 39

Yes. You put all past years gifts on each 709. Again, pushes the donor into the top bracket.

Question 40

What happens if you die within three years of making a gift?

Answer 40

Pulls the gift and any gift tax paid back into the estate.

Question 41

Do all FUTURE interest gifts (of any amount) need to be reported on 709?

Answer 41

Yes. Annual exclusion does not apply to future gifts.

Question 42

What is a “withdrawal power” or “Crummey” power?”

Answer 42

A power to withdraw and keep money or property that is added to trust; the withdrawal power causes gifts to the trust to qualify for the annual exclusion for that beneficiary.

Question 43

How do spouses make a gift split?

Answer 43

The other spouse consents to the election by signing the front of the gift tax return. A gift-splitting election can only be made on a timely-filed gift tax return, and the election requires the consenting spouse to be treated as making one-half of every gift made by the donor spouse in that year. A gift-splitting election will make the consenting spouse jointly and severally iable, with the electing spouse, for the gift tax imposed on all gifts made in that year (including additional gift taxes later assessed by the IRS on gifts made in that year but undervalued or omitted from the Form 709 return.

Question 44

How long does the IRS have to challenge the value of an adequately disclosed gift valuation?

Answer 44

Three year limitations period.

Question 45

What is the gift tax consequence of the exercise

or release of a general power of appointment by the power holder during lifetime?

Answer 45

It’s a taxable gift.

Question 46

Are property settlements in divorce a taxable gift?

Answer 46

No

Question 47

What is the time limit for a “qualified disclaimer”?

Answer 47

No gift if it is qualified disclaimer; for FET, nine months; no time limit for disclaimer under IN law.

Question 48

Why is September 25, 1985 important for GST?

Answer 48

If a trust became irrevocable on or before September 25, 1985, and if no additional asset transfers were
made to that trust, and if that trust has not been
modified, the trust and its assets would remain
exempt from the GST tax. (grandfathered)

Be very careful with this trust, especially if trying to make modifications to it. There are safe harbors that would need to be used or risk losing exempt status.

Question 49

What is the GST?

Answer 49

It is a flat-rate tax imposed at the maximum estate tax marginal rate.

GST is NOT portable to surviving spouse.

Question 50

What is the life-time GST exemption?

Answer 50

Under current law, it equals the basic (estate tax lifetime) exclusion.

Question 51

What happens when a transferor makes a gift to a skip person?

Answer 51

Use up lifetime gift exclusion AND GST exclusion.

Question 52

Who is a “skip person” for GST?

Answer 52

1) If related to the transferer, a “skip person” is a person 2 or more generations below the transferor generation.
2) If unrelated to the transfer, a “skip person” is anyone 37½ years younger than the transferor.
3) a trust that is only for the benefit of skip persons is also a “skip person”

Question 53

Are gift-tax exempt gifts also GST exempt?

Answer 53

yes

Question 54

What is the predeceased parent exception to GST?

Answer 54

If that recipient has a deceased parent who is also a descendant of the transferor’s parent (e.g., a deceased child or deceased sibling of the transferor) and who is dead at the time of the potential generation-skipping transfer, then that recipient will be assigned to a generation that is one generation below the lower of —
• the generation of the transferor, or
• the generation of the youngest living ancestor of the recipient who is also a descendant of the transferor’s parent.

**Note that can only use this to give GST free to nieces and nephews IF transferor did NOT have lineal descendants

Question 55

What is a GST “direct skip”?

Answer 55

A transfer of property by lifetime gift or at death to a skip person (can be “outright” to an individual or to a trust that has only skip person beneficiaries)

If a direct skip is from a trust, the trustee pays the tax
The transferor pays the tax for all other direct skips

Code § 2515 requires the amount of a direct skip gift to
be increased by the GST tax that the transferor pays on that gift

Question 56

What is a GST “Taxable termination”?

Answer 56

A taxable termination is the termination of an interest in a TRUST as a result of death, lapse, release of an appointment power, etc., so that —
• No non-skip person has any interest in the trust, or
• The only remaining beneficiaries (if any) eligible to receive distributions are skip persons

A partial taxable termination can occur with respect to a trust

Question 57

What is a GST “Taxable distribution”?

Answer 57

Any distribution from a trust to a skip person if the

distribution is not a direct skip or a taxable termination

Question 58

What is the “inclusion ratio” for GST?

Answer 58

First calculate the “applicable fraction,” which is the amount of GST exemption allocated to a gift/trust (numerator) divided by the value of the property transferred (denominator). Ideally, they are the same number and the fraction is 1.0.

The “inclusion ratio” for any particular transfer is one (1.0) minus the “applicable fraction”.

1-1 = 0 is always preferred.

Less preferred, but workable is an inclusion ratio of 1.0 (which results from an “applicable fraction” of 0, which would mean there was no GST exemption remaining to allocate.)

Question 59

If the inclusion ratio is 1.0 and there is a taxable generation-skipping transfer, what does that mean for gift or FET tax?

Answer 59

There is also either a taxable gift or a transfer at death that is potentially subject to the estate tax.

Question 60

How do you calculate the GST tax?

Answer 60

The GST tax is imposed at an “applicable
rate” that is equal to the maximum estate tax marginal rate (currently 40 percent) multiplied times the “inclusion ratio.”

The inclusion ratio is one (1.0) minus the “applicable fraction,”.

Whenever the inclusion ratio for a particular
generation-skipping transfer is zero, the applicable [GST tax] rate will be zero, and the GST tax will be zero.

Under current law, whenever the inclusion ratio is 1.0, the applicable rate will be the full flat GST tax rate of 40
percent.

Question 61

How and why do you always have either a 1 or 0 inclusion ratio (and no fraction)?

Answer 61

You sever the trust assets into two separate trusts: 1) one that is GST-exempt (inclusion ratio of 0) and 2) one that is GST non-exempt (inclusion ratio of 1).

You do this b/c: 1) a fractional inclusion will mean a tax consequence even when small amounts are withdrawn and 2) a fractional inclusion would have to be refigured every time new contributions made to trust.

Question 62

What is the power of severance (for GST)?

Answer 62

Power to sever trusts into two different groups (GST-exempt and non-exempt. IN law allows for this, but good to draft for it.

Question 63

How do you allocate the GST exemption?

Answer 63

On the 709; good to timely allocate at funding of the trust

Question 64

Why do you want to be careful with GST-exempt trust?

Answer 64

As long as don’t add anything to it, it will remain GST-exempt forever.

Question 65

What is the “move down” rule for GST?

Answer 65

For the purpose of determining whether future distributions from that trust will be generation-skipping transfers, the transferor’s generation assignment will be moved down to a generation that is 1 generation above the highest generation of any person who has an interest in the trust. This will prevent future distributions from the trust from being treated as generation-skipping transfers if the beneficiary receiving the distribution is a grandchild who is treated as being in a generation only 1 generation below the transferor’s generation. The movedown rule does not change the inclusion ratio of the trust.

**Note that distributions to generations of 3 or more out (great-grandkids) would be another skip.

Question 66

What Code section governs gift tax?

Answer 66

Chapter 12

Question 67

What Code section governs GST?

Answer 67

Chapter 13

Question 68

What is Chapter 14 of the Code?

Answer 68

Chapter 14 of the Code dates from 1990 and comprises four sections (2701 through 2704), which were enacted primarily to make it more difficult or impossible for wealthy individuals to use “estate freeze” techniques, which usually involved inter vivos transfers of
property rights or interests (e.g., common stock) that were likely to embrace or represent the future appreciation in the value of the underlying assets, while the donor would retain an income interest and perhaps control or management of the underlying assets.

Question 69

What does Chapter 14 allow?

Answer 69

GRATs, IDGT, QPRTs, etc.

Question 70

What is the “vertical slice” concept of family LLC interests under Chapter 14?

Answer 70

A family-controlled LP or LLC can have different classes of voting and non-voting units, and rights to participate in management (if at all) can be different between classes, but if LP or LLC units or member interests will be used in intrafamily gift transfers, member interests of
different classes should have identical rights and interests with respect to distributions and allocations of profit and loss, to satisfy Code § 2701(a)(2)(C)’s requirement for the retained interest [“such interest is proportionately the same as the transferred interest . . . .”]
Only difference b/n classes should be as follows:
Class A - have a right to vote and can get involved in management;
Class B - do not have a right to vote and cannot get involved in management. Parents should not give away Class B shares, or they could inflate the value of these shares.

Question 71

What are the “special valuation rules” for GRATs, GRUTS, and QPRTs?

Answer 71

If T makes a transfer of property to a trust and retains a beneficial interest in the trust, T’s retained interest is valued at zero for gift tax purposes UNLESS the retained interest is an annuity interest, a unitrust interest, or an interest for a term of years in a QPRT

Question 72

How do you protectively claim a expense or debt deduction on 706 for a lien or other debt that may not yet be ripe?

Answer 72

IRS has procedures that allow you to preserve this deduction so that you can amend later or bring it up in an audit

Question 73

What are anti-Hubert regs?

Answer 73

If claiming marital or charitable deductions on 706, certain types of expenses cannot be claimed if claiming these types of deductions. This is a US S.Ct. case, Hubert. IRS created regs around this messy case.

Question 74

What is the SOL benefit of filing a 709?

Answer 74

If it’s an adequate disclosure (have to include everything), then it starts the clock running for 3 years.

Include trust, the LLC, the appraisal report as to value.

Question 75

What is the DSUE?

Answer 75

Deceased Spouse Unused Exclusion.

Can only used the exclusion of most recently deceased spouse.