Transfer Taxes

Question 1

What do the terms “testate” and “intestate” mean?

Answer 1

A person who dies with a valid will has died testate, while a decedent without one has died intestate

Testator = person who made the will

Question 2

When is a will valid?

Answer 2

If (1) the testator has legal capacity and (2) the will is signed by the testator and by witnesses, all in the presence of one another

Question 3

What is a legacy and a devise?

Answer 3

Legacy = gift of personal property through a will

Devise = gift of real property through a will

Both of these can be specific or general (e.g. a certain amount of cash or land, rather than a specific item or location)

Question 4

How are a decedent’s assets distributed if he dies intestate?

Answer 4

According to state law, which varies but has a lot of commonality

Question 5

What are usually the rights of a decedent’s spouse?

Answer 5

If the decedent is intestate, the spouse receives a particular % of the estate, usually 50%

Even if he is testate, the spouse can elect to receive a particular %, though this is usually smaller (often 33%)

Question 6

What is the usual order of distribution for an estate after the decedent’s spouse?

Answer 6

(1) descendants, (2) ancestors/ascendants, and (3) collaterals
(3) includes siblings

Question 7

How do per capita and per stirpes distributions of property differ?

Answer 7

Per capita = all heirs receive an equal share of the estate

Per stirpes = all heirs in the closest relationship (usually children) receive an equal share, and if any of them are deceased, their descendants receive an equal share of what they would have received

Question 8

What is an example of a per capita distribution?

Answer 8

A decedent has three children, X, Y, and Z. X has two children, A and B, and Y has a child C. Otherwise, the decedent has no other descendants.

Since there are 7 total descendants here, each would receive 1/7 of the estate. If one of them were deceased, then each would receive 1/6 (and so on)

Question 9

What is an example of a per stirpes distribution?

Answer 9

A decedent has three children, X, Y, and Z. X has two children, A and B, and Y has a child C. Otherwise, the decedent has no other descendants.

X, Y, and Z would each receive 1/3 of the estate. If X were deceased, however, Y and Z would still receive 1/3, but A and B would each receive 1/6. Similarly, if X and Z were alive but Y were deceased, then A and B would get nothing while C would get 1/3 in place of his parent.

Question 10

Which court oversees estate matters?

Answer 10

Probate court

Ensuring a will is valid = “probating” that will

Question 11

Who carries out the administration of an estate?

Answer 11

Either the executor (if testate), as nominated in the will, or administrator (if intestate), as nominated by the court

This is because the executor executes the terms of the will, rather than “administering” the estate according to general laws

Question 12

What are the rights and duties of an executor or administrator?

Answer 12

Rights = can enter into contracts for estate, employ professionals (e.g. appraisers), and sell assets

Duties = must exercise due diligence (will be held liable for harms resulting from negligence)

Question 13

What is the general procedure for the administration of a decedent’s estate?

Answer 13

(1) collect assets, file these with the court
(2) publish a notice for all claims against the estate to be filed with the court
(3) pay off debts
(4) file a final accounting of the administration
(5) executor/administrator is discharged

Question 14

What is abatement and ademption?

Answer 14

Abatement = deciding how to distribute assets when they are, in total, not enough to satisfy all claims

Ademption = when a specific bequest becomes impossible given the circumstances

Question 15

What are the two different kinds of transfer taxes?

Answer 15

Estate tax (if giver is dead)

Gift tax (if giver is alive)

Question 16

What is the full calculation of the estate tax?

Answer 16

Gross estate
- nondiscretionary deductions
= adjusted gross estate
- discretionary deductions
= taxable estate
\+ adjusted taxable gifts
= tentative tax base
x uniform tax rate
= tentative estate tax
- gift taxes payable
= gross estate tax
- credits
= estate tax due

Question 17

How is the value of the gross estate determined?

Answer 17

It is by default the value of the estate when the decedent died, but one can elect a date six months into the future – the alternative valuation date (AVD) – if the estate’s value will be smaller (and so a smaller tax will be owed)

However, any property transferred before the AVD must be measured at that date

Question 18

Besides what is actually owned by the decedent, what is included in the gross estate?

Answer 18

(1) whatever is constructively owned by the decedent (e.g. gifts given to others over which he had control)
(2) certain gifts made three years prior to death or earlier, e.g. life insurance
(3) one-half the FV of community property (e.g. a home shared with a spouse)

Question 19

What are some examples of nondiscretionary deductions?

Answer 19

(1) administration expenses (though these cannot also be deducted for the decedent’s final income tax)
(2) funeral expenses
(3) losses from casualty and theft
(4) claims against the estate, including debt on property (e.g. mortgages)
(5) various taxes, though not post-death income taxes

Question 20

What are discretionary deductions?

Answer 20

(1) charitable contributions (if specifically ordered by the will)
(2) marital deduction – deducts all property given to spouse, but applies only if there is a non-terminable interest in the property given

Question 21

What is a non-terminable interest?

Answer 21

Ownership of the property that is not subject to end after a given amount of time or after a given event occurs (e.g. a spouse’s remarriage)

Question 22

What are adjusted taxable gifts?

Answer 22

Gifts given within the year above the annual deductible threshold ($14,000 for 2013) – but does not include any gifts already included in the gross estate

Question 23

What is included in gift taxes payable?

Answer 23

These apply to all gifts made after 1976 for which taxes have not yet been paid (and doesn’t include any of the adjusted taxable gifts)

Question 24

Which credits are applicable against the gross estate tax?

Answer 24

The unified tax credit, as well as various miscellaneous credits

Unified tax credit = huge credit applicable to the sum of taxable gifts and (taxable) estate assets – because gifts and estate are linked, it is a “unified” credit

Question 25

How much is the unified tax credit for 2013?

Answer 25

Taken as an actual credit (i.e. directly reducing the tax liability), it is $2,045,800 for 2013

The more common number is the exclusion amount (i.e. the amount of taxable estate deducted), which is $5,250,000 for 2013

Question 26

How does the gift tax differ from the estate tax?

Answer 26

They are mostly the same, except that the gift tax applies to gifts given while the giver is alive

Remember that the applicable exclusion amount applies to the sum of gift and estate taxes – they are “unified”

Question 27

How are the total taxable gifts for the year calculated?

Answer 27

Gross gifts for year
- 1/2 of gifts under gift-splitting election
- annual exclusion
= statutory total amount of gifts made
- marital deduction
- charitable deduction
= total taxable gifts for year

This is most likely as far a calculation of gift tax as the CPA exam will require

Question 28

How do you calculate the gift tax from total taxable gifts?

Answer 28

Total taxable gifts for year
\+ taxable gifts for past years
= total taxable gifts
x tax rate
= tentative tax on total taxable gifts
- tentative tax on prior-year gifts
= tentative tax
- remaining unified credit
- foreign gift tax credit
= gift tax due

Question 29

What is the gift-splitting election?

Answer 29

An election where, if one spouse gives a gift to a third party, the couple can treat the gift as having been given 50% by each of them

Since the annual exclusion amount is per donor per person, this basically doubles the amount excluded for the gift

Question 30

What is the annual exclusion for gift taxes?

Answer 30

A deduction for gifts given by a donor to a particular donee – $14,000 for 2013

The donee must have an unrestricted power over the property for it to count as “given” to him – or if he is a minor, he must be granted power over it as of age 21

Question 31

How do marital and charitable deductions work for gift taxes?

Answer 31

The same as for estate taxes

Question 32

What is the generation-skipping transfer tax (GSTT)?

Answer 32

A tax on top of the estate and gift taxes for transfers of property to individuals who are at least two generations younger than the transferor (generally, 37.5 years) – usually grandparent to grandchild

Does not apply if the transferor’s child (i.e. the transferee’s parent) is already deceased

Question 33

How does the GSTT usually get avoided?

Answer 33

The annual exclusion amount which applies to the total of gift taxes and estate taxes ($5,250,000 for 2013) also covers GSTTs