Tax Planning Flashcards
Transfer Taxes - General Purpose
- Freezes current value and shift future appreciation. When we make a transfer out, the gift tax value is frozen in time – at the time of the gift. The appreciation will be outside of the estate.
- To apply discounts and not pay a pro rata percentage of the value of the property
- Time value of money – defer the payment or use the time value of money to drive the discount
Income Tax Planning - General Purpose
*A step up for basis – an upward adjustment for property that has appreciated. This occurs on the date of death and will wipe out any gain.
Retirement Asset Planning - General Purpsoe
*Stretch out the payment of benefits and avoid income tax at higher rates.
Gift Tax - General Purpose
- Tax on transfer of property, whether tangible or intangible, real or personal, by gift made during the calendar year.
- Shift to donees who have a lower tax bracket.
Taxable Transfers - § 2511
*Completed transfers where the donor parts with “dominion and control” or the power to change who can take the property or the ability to take back the property.
Exception: Transfers that are not complete
Gift Tax - Excepted Transfers
Why are they exempt? Policy reasons
- Legal obligations of support
- Transfers to political organizations
- Annual exclusion
- Educational / Medical Expenses
- Transfers of intangibles by nonresidents
- Transfers in the ordinary course of business
Are non-qualified disclaimers subject to gift tax?
Yes
Disclaimers § 2518 - Requirements for Excepted Transfers
Requirements:
- In writing
- Irrevocable and unqualified
- Delivery to transferor or personal representative of transferor
- No acceptance of benefits of disclaimed interest
- The disclaimed interest passes without direction
- Within a 9 month time limit
- From the date of decedent’s death
Transfers by Gift § 2512(b) - definition
This occurs when property is transferred for LESS than “adequate and full consideration in money or money’s worth
Fair Market Value - definition
TR code - the price at which the property would change hands between a willing buyer and a willing seller, and neither are under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts. It is an objective standard
What if a transfer occurs for less than fair market value
It is a transfer by gift
Taxable gifts § 2503 - definition
Total gifts made during the calendar year less any deductions.
Annual Exclusion - why are they excluded
These are technically gifts, but for policy reasons, these annual gifts are excluded from the tax base.
Annual Exclusion - Key Requirement
The donee must have a present interest. An unrestricted right to the immediate use, possession, or enjoyment of property or the income from property.
Insurance Trusts - gifts made into the trust
Is typically not a present interest because the trustee must exercise discretion to make distribution to the beneficiary.
The beneficiary does not have an immediate access.
Insurance Trust - How to qualify for the annual exclusion
The trust must either:
- Provide Crummy withdrawal rights - The right to withdrawal assets in the trust.
- Grant the beneficiary a lifetime general power of appointment
- Create a 2503(c) Trust - Mandatory payout
Education / Medical Expense Exclusion § 2503(e) -
Requirements
These are unlimited
They must be paid directly to the educational organization or medical care provider
Educational - tuition payments only
Medical care
Charitable Deductions § 2522
These can be for public, religious, charitable,
scientific, literary, and educational charities.
Marital Deduction § 2523
Unlimited marital deduction and passes to surviving spouse and surviving spouse must be a U.S. Citizen
Marital Deduction to a non-marital spouse - Enhanced Annual Exclusion
If a transfer to a non-citizen spouse is qualified for an annual exclusion, then can leave up to $155,000
Form 709
Must be filed when the gifts exceed annual exclusion; gift splitting; or a future interest in property has been transferred.
Return is due April 15th following the calendar year - it can be automatically extended for 6 months.
Unified or Applicable Credit § 2505
Donor is entitled to an applicable credit amount
- Basic exclusion amount; and the
- DSUEA - Deceased Spousal Unused Exclusion Amount
Gift Tax - Form 709
Must be filed for a calendar year
Can receive an automatic 6 months to file, but the payment is due on April 15th, regardless if an extension is granted.
Estate Tax - what does it include
Tangible, intangible, real or personal property owned at death.
Retained Life Estate § 2036, requirements
- The decedent gratuitously transferred during life
- while retaining a prescribed interest; and,
- for a prescribed period (generally for the life of the decedent
Retained Life Estate § 2036, retained interests
- The right to income from the property
- The right to possession of the property
- The right to enjoyment of property
- The right to designate who shall receive income, possessor enjoy the transferred property
Reversion § 2036
The decedent has made a transfer but has retained an interest.
Revocable Interests 015537
If a decedent retains a power to revoke, alter or amend a transfer, then the decedent still has control over the transferred property.
Inclusion - 2035(a)
Gifts made with three years of death are re-included in the gross estate
- Life Insurance
- Gift of an interest in property that would have caused inclusion under 2036 and 2038, if the interest was held until death
Gift Tax - 2035(b)
Gift taxes within three years of death
Joint Interests 2040
Is includable in the estate, unless decedent is survived by a U.S. citizen spouse. It does not matter whether it was community property or separate property and the amount of consideration provided by decedent.
Power of Appointment - 2041
Taxation is triggered if there is an exercise or a release that is includable under 2036 or 2038.
Power of Appointment Taxation - Exemptions
HEMS
Exercisable only in conjunction with power creator
Exercisable only in conjunction with substantial adverse interest.
Life Insurance, 2042
Death benefits are includable where:
- the death benefits are payable to the insured’s estate
- the insured has any incidents of ownership over the policy - e.g. power to change beneficiary, cancel policy, revoke, pledge the policy to creditors, borrow against policy, change beneficiary enjoyment of trust owned policy.
Marital Deduction Property, 2044
For any property where a marital deduction was taken, the surviving spouse must include it in their gross estate.
Valuation 2031
This value must be based on the fair market value
Qualified Real Property 2032A
Fair market value must be based on its “highest and best use.”
How can premiums and discounts be used? Examples
FMV is based on what a hypothetical buyer would pay - so adjustments can be made. For example, lack of marketability, blockage discount, lack of control discount
2053 Discounts
Payment for funeral expenses and trust administration, e.g. payment of debts, collection of assets - must be actually and necessarily incurred.
Estate Tax - Deductions
Expenses, Losses, Indebtedness, marital deduction, charitable deduction
642 Election
Can claim on state and federal income tax return
2054 Losses
Deductible - fire, storms, shipwrecks or other casualties
Marital Deduction - 2056
- Passes to the surviving spouse from the decedent
- Surviving spouse is a U.S. Citizen
- Interest is not a terminable interest
Terminable Interest Requirement
No marital deduction is allowed, where, due to the lapse of time or on the occurrence (or failure to occur) of an event or contingency.
DSUEA - Section 2010(c)
If a portability election is made, the decedent may utilize the predeceased spouse’s unused basic exclusion amount of DSUEA.
This amount is NOT indexed for inflation.
Credit Shelter and Marital Trusts - Formulas
- Pecuniary (easier to administer, postmortem value changes do not affect funding but may raise income tax issues.
- Fractional - generally avoids income tax issues but more difficult to administration due to fluctuations postmortem value. If the trust asset increases postmortem, then capital gains will not occur.