Select Page

Estate and Gift Tax
Elon University School of Law
Haile, Andrew J.

Haile
Estate & Gift Taxation
Fall 2010
 
 
Transfer Tax Overview…………………………………2 – 6
Gifts, Donative Intent, Interest Free Loan……6 – 10
Indirect Gifts, Agent gifting, Power of Atty, Distribution by Trustee.…10 – 11
Summary – What Constitutes a Gift…………….12
Retention of Control, Substantial Adverse Interest, Power to Change Trustee……13 – 15
Checks, Co-ownership, Installment Transfers……15 – 17
2514, Power of Appointment………………………………..18 – 20
2518, Disclaimers………………………………………………….21
Annual Exclusion, Present v. Future Interest….22
Crummey Withdrawal Right…………………………..24 – 27
§ 2503(c), Gift to Donee under 21………………….27
Gift Tax Overview……………………………………………30 – 32
Edu, Med, Charities, Gift Splitting……………………32
Calculating Estate Tax, Gross estate, 2033………..33 – 35
2033, Intangible Assets………………………………..….35
SCIN’s, Contingent interest, Employee Death Benefit…….35 – 37
Timing of Valuation, 2040 Joint Interests…….….37 – 40
Life Insurance Proceeds, ILIT, 2042………………..40 – 43
Retained Life Estates, § 2036, Informal Reservation…….43 – 45
Powers to Alter, Amend, Revoke or Terminate, 2038……..45 – 47
Powers of Appointment § 2041………………..……48 – 50
Transfers Within Three Years of Death § 2035….50 – 51
Expenses, Debts and Claims § 2053………………..52 – 54
Marital Deduction, Terminable Interest, QTIP, 2056……..54 – 57
Problems……p. 15, 17, 20, 21, 22, 23, 26, 29, 37, 40, 41, 47, 51….
Summary/Outline….58 – 70
Class 1
 
BNA, RIA. TM Portfolios.
 
1-2% of people file estate tax return. 1-2% of tax revenue is from estate & gift tax. 2009, could pass on 3.5 mill without tax, 7 mill with a spouse.
 
Sources of Tax Law – Title 26 of the Internal Revenue Code. Subtitle B, Chapter 11 and 12. GST Tax – when you give assets to your grandkids you have avoided tax their children would have to pay at their death. GST Tax doesn’t let them do it. It taxes direct skips and trusts. Treasury regulations explain what the statutes mean.
 
Section 2503 – p. 709 – taxable Gifts – first 10K of gifts aren’t taxable each year to one person. It’s 13K now based on inflation. Not including future interests in property. P. 712 – 25.2503-3 – future interests gifts cant be excluded for tax purposes. The 13k doesn’t count towards the 3.5 M (doesn’t reduce it). Can make gifts up to 1 M before you pay a gift tax. Regulations are section 20 and 25.
 
Revenue Rulings – Rulings issued by the IRS where they receive a hypo and say how they treat it for tax purposes. It is formal authority put out by the IRS. If the IRS audits you, you can point to this.
 
Revenue Procedures – like rulings, but is procedural, not substantive.
 
Private Letter Rulings – a written response issued to a taxpayer interpreting and applying tax laws to the taxpayer’s specific set of facts. Allows a taxpayer to establish with certainty the federal tax consequences of a particular transaction before the transaction is consummated (how would you rule if…).
 
Tratises – Westlaw, Stephens, Lind; Bittker, Lokken; Zaritsky
 
Class 2
 
Transfer Tax Overview
—These taxes apply to transfers of wealth (Important because of a constitutional limitation of direct tax)
—As an excise on the transfer of wealth, the gift and estate taxes are not “direct taxes” and therefore have survived constitutional challenge. See NY Trust Co. v. Eisner, 256 U.S. 345 (1921) (Justice Holmes – “Upon this point [that the estate tax is not a direct tax,] a page of history is worth a volume of logic.”)
 
Gift Tax Overview
—The gift tax was designed as a back-stop to the estate tax (enacted in 1924; repealed in 1926; re-enacted in 1932). 
—Without it, taxpayers could just transfer their property immediately prior to death and thereby avoid the estate tax.
—The gift tax is also a back-stop to the income tax (ex. Gifting a rental unit to a child who has a lower income tax rate)
 
—A gift tax return (Form 709) is due in any year that the taxpayer makes “taxable gifts”
—“Taxable gifts” do not include gifts under the annual exclusion amount (currently $13,000) or certain other gifts (education and medical exclusions)
—A donor may each year give to an unlimited number of donees gifts up to the annual exclusion amount without making ta

tate and Gift Taxes
—The estate tax is tax-inclusive (the amount you pay in estate taxes is included in the taxable estate)
—The gift tax is tax-exclusive (the amount you pay in gift taxes is not included in the taxable gift)
—Assume flat 50% tax rate, how much does it cost to get $1 million into a beneficiary’s hands?
◦Gift – $1,500,000 (only pay tax on the amount you pass on)
◦Estate – $2,000,000 (pay tax on the entire 2M)
 
Three Exclusion Amounts to Keep in Mind
– Gift tax annual exclusion amount                    (§ 2503(b)(2) – currently $13,000);
– Gift tax (lifetime) exemption equivalent (§ 2505 – $1,000,000);
– Estate tax applicable exclusion amount     (§ 2010 – ??? Carlton, 512 U.S. 26 (1994), retroactive tax constitutional if “rationally related to legitimate legislative purpose”)
 
 
A credit offsets a tax. You get a credit in your estate tax equivalent to 3.5 M
 
Section 2502
—The tax imposed by section 2501 for each calendar year shall be an amount equal to the excess of –
◦A tentative tax, computed under section 2001(c), on the aggregate sum of the taxable gifts (i) for such calendar year and (ii) for each of the preceding calendar periods, over
◦A tentative tax, computed under such section, on the aggregate sum of the taxable gifts for each of the preceding calendar periods.
 
Translation of 2502
—Steps in determining the gift tax:
1.Determine the amount of tax that would be owed under § 2001(c) for all taxable gifts made by the taxpayer dating back to 1932 (including those made in the current year);
2.Determine the amount of tax that would be owed under § 2001(c) for all taxable gifts made before the current taxable year;