Tax - Estate & Gift Taxation Flashcards
Gift tax
Levied against donor on FMV of all taxable gifts made in calendar year.
It is an excise tax on transfer of property where less than adequate in full consideration was received.
Gift tax returns
Required by each donor who makes gifts of present interest where total value to any one donee exceeds $14,000 during the year.
Lifetime exemption of $5,450,000 is available for gifts in excess of annual exclusion starting in year 2016.
– Any gift of future interest must be reported
– Form 709 filed on calendar year, due date for return and payment is April 15
– Gifts above $14,000 to qualify charity does not require gift tax return
Exception to present interest rule: transfer for benefit of person not yet age 21 is considered present interest if:
– Both property and it’s income may be spent by or for benefit of minor before reaching 21 years
– Any portion of property or its income not expended before 21 must go to minor as 21 years
– If minor dies before 21, property and its income must be payable to minors estate or as minor directs
Incomplete gift
– If upon creation of trust, transferor retains the right to revoke trust, gift has not occurred
- Gifts of future interests: not eligible for annual exclusion
Gross gifts
Includes only FMV of gifts made to donee in excess of $14,000 during year due to annual exclusion.
Exclusions:
– First $14,000 of gifts made to each donee in each calendar year.
– Medical expenses paid directly to care provider on another’s behalf
– Tuition paid directly to university on another’s behalf
– Transfers to political organizations
Not excluded:
– Gifts of future interest
Gift splitting
Married taxpayers can reduce amount of property subject to gift tax.
- Donors spouse may elect to treat donor’s gift as though gift was made one half by each.
– Can exclude $28,000 from gift tax
– Each spouse will also apply the gift tax applicable credit.
Deductions from gross gifts
Charitable deduction: unlimited.
Marital deduction: unlimited for property given to a spouse.
Estate tax
Imposed on estate of decedent rather than beneficiaries.
Estate tax returns must be filed and paid within nine months after death of decedent.
No tax is payable until value of estate exceeds $5,450,000. Excess will be taxed no higher than 40%.
Gross estate
Includes all property in which decedent had interest at time of death.
Value of property is generally FMV at date of death.
– Executory may elect alternate value valuation date that is six months after date of death if reduces both gross estate and tax liability
Examples of properties include:
– Joint ownership
– Lifetime transfers of property by decedent
– Properties where decedent possessed general power of appointment
– Life insurance proceeds payable to estate
– Income earned by decedents at time of death
– Gift taxes paid on gifts made within three years of death
Deductions from gross estate
– Funeral expenses
– Administrative expenses
– Debts of the decedent
– Casualty of theft losses during administration
– Charitable bequests specified by decedent
– Value of all property left outright to surviving spouse, not those with terminable interest
– State death taxes
Estate tax credits
- Applicable credit – Tax on prior transfers – Foreign death taxes – Gift taxes - Unified credit
Generation-skipping transfer tax
Imposes additional tax when one generation is bypassed in favor of the later generation.
Applies to anyone who is two generations or more below the transferor.
These transfers are taxed at a flat rate of 40%.
Each grantor is entitled to $5,450,000 exemption that can be allocated to whichever generation-skipping transfers grantor chooses. Gift splitting applies. Separate from unified credit.
Basis of property acquired by inheritance
Equals value of property used for a state tax purposes: FMV at death or six months after death.
Special rule applies when estate includes appreciated property that decedent acquired by gift within one year of death, and after death, property passes back to donor for donor spouse. Here, basis to donor will be it’s adjusted basis to decedent immediately before death.
Executor’s responsibilities
At minimum: – Execute decedent's final wishes – Offer will for probate – Distribute property to beneficiaries – Pay taxes and debts of the estate – Prepare final accounting of estate
Marital deduction
Unlimited deduction available for gifts made to donor’s spouse:
– To apply, spouse must be US citizen a time of gifts
– Does not apply to transfer of terminable interest in property, which is one that will terminate all lapse of time we’re on occurrence, or failure to occur of a contingency.
Unlimited deduction also allowed against the state tax. To apply:
– Decedent must be married and survived by their spouse
– Spouse must be US citizen
– Property must be included in gross estate and pass to surviving spouse
– Spouses interest in property must not be terminable interest
Unified credit
Aka applicable credit
Aka against taxes that would be paid for lifetime exclusion
Allows donors and decedents to transfer limited amount of property without being subject to gift or estate tax.
Credit amount for gift and estate tax is $2,125,800. Gift tax paid reduces applicable credit against estate tax.
