Specific LO's Flashcards
6.3 ALLOWABLE REDUCTIONS FOR GIFT TAX
Gift tax rates are applied to a net figure—taxable gifts. Before the tax on a transfer is computed,
certain reductions are allowed. These reductions may include the following:
• gift splitting
• an annual exclusion
• a marital deduction
• a charitable deduction
Gift splitting applies only to gifts that are made by a married donor to a third party and only with respect to noncommunity property. It was introduced into the tax law to equate the tax treatment of common-law taxpayers with that of community property residents.
True
An annual exclusion is allowed only for present-interest gifts and is denied to gifts of a future interest?
True
A present interest is one in which the donee’s use, possession, or enjoyment begins at the time the gift is made. Stated technically, a present interest is an immediate, unfettered, and ascertainable right of the donee to use, possess, or enjoy the gift.
Crummey Powers
- -Crummey power allows a person to receive a gift that is not eligible for a gift-tax exclusion and then effectively transform the status of that gift into one is eligible for a gift-tax exclusion.
- -Crummey power was first created in the 1960s, when a wealthy grantor named Clifford Crummey had a strong desire to build a trust fund for his children, while still reaping the yearly tax exemption benefits.
- -For Crummey power to work, individuals must stipulate that the gift is part of the trust when it is drafted.
- -The gift amount cannot exceed $12,000 per beneficiary, per year.
Corpus Definiton
The corpus of a trust is the sum of money or property that is set aside to produce income for a named beneficiary. In the law of estates, the corpus of an estate is the amount of property left when an individual dies. Corpus juris means a body of law or a body of the law.
Entity-Purchase Agreement.
Under the entity-purchase agreement, it is the partnership entity that becomes the purchaser in the buy-sell agreement. Technically, the partnership
liquidates the interest held by the decedent-partner’s estate. In other words, the partnership makes payments to the estate that liquidate the interest held by the estate. Under an entity buy-sell agreement, both the partners and partnership are parties to the contract that provides for continuation of the partnership business by the surviving partners.
Cross-Purchase Agreement.
With a cross-purchase buy-sell agreement, the individual partners are the sellers and purchasers. The partners make mutual promises to be a buyer or seller
depending on the circumstances. Each partner agrees to purchase a share of any decedent partner’s interest and to bind his or her estate to sell its partnership interest to the surviving partners.
Entity (Stock-Redemption) Purchase Agreement.
With a stock-redemption buy-sell agreement,
the corporation is the purchaser of the stock at the death of a shareholder. Each shareholder- party to the agreement binds his or her estate to transfer the stock to the corporation in exchange for the required purchase price. The corporation redeems a decedent-shareholder’s stock in exchange for a redemption distribution. The corporation either retires the stock
or holds it as treasury stock. From the surviving shareholders’ standpoint, the practical effect of a stock redemption is that the percentage ownership held by each surviving shareholder increases proportionately when a decedent-shareholder’s stock is redeemed.
Citizenship test for a marital deduction
The marital deduction is generally allowed only for transfers to a spouse who is, at the date of
the decedent’s death, a U.S. citizen. The marital deduction can be preserved if the surviving
spouse becomes a citizen before the decedent’s estate tax return is filed.
Income in Respect of a Decedent (IRD)
Income in Respect of a Decedent (IRD)
• earned by decedent but not received by death (would be included on decedent’s final
income tax return if received prior to death)
• taxable to beneficiary or entity (estate) receiving it
• subject to estate tax (with corresponding deduction to income recipient)
possible for IRD to be included on both the estate’s income tax and estate tax returns
Income First Rule
Aside from the foregoing rule regarding specific bequests, there is an income-first rule requiring that all distributions are deemed to be paid out of income first, even if the executor, administrator, or trustee in fact distributes corpus in the form of cash or property.
Estate Income Taxation
Estate Income Taxation
• Estate income is taxed to either the beneficiaries or the estate.
• An income tax return must be filed.
• Estate administration expenses are deductible.
• Deductions are allowed for income distributed.
• The estate may take a $600 exemption (no standard deduction allowed).
Types of Closely Held Corporation
Buy-Sell Agreements
Types of Closely Held Corporation
Buy-Sell Agreements
• entity (stock-redemption) purchase agreement
- corporation purchases decedent-shareholder’s interest
• corporate cross-purchase agreement
- surviving shareholder(s) purchase(s) decedent-partner’s interest
Entity-purchase agreement & Cross-purchase agreement
Types of Partnership Buy-Sell Agreements
• entity-purchase agreement
- partnership makes payments to the estate to liquidate the decedent-partner’s
interest
• cross-purchase agreement
- surviving partners purchase the decedent-partner’s interest
