Estate and Gift Tax
Types of Taxes: Income Tax, Gift Tax, Estate Tax, Generation-Skipping Transfer Tax (GST)
Income Tax:
§ 102: A gift or inheritance is not income to recipient and cannot be taxed
§ §102(b): income from property that is a gift is income
§ 641: Trusts and Estates treated as separate taxpayers loss and deductions same as individual
§ Exceptions: If trust keeps income, must pay interim tax; if distributed to beneficiary, beneficiary pays distributed income.
§ 671-679: Grantor Trust Rules:
§ If grantor gives property to trust and earns income, if satisfied these rules, grantor gets taxed on income whether or not beneficiary because grantor has control over the trust.
§ 1014: Inheritance Basis: Stepped up or down basis: FMV on date of Ds death.
§ Stepped up basis for inheritance.
§ 1015: Transfer basis: Donee takes donors basis
§ Carry over basis for gifts.
§ 1223: Long term gain because of tacking- donee can count the holding period of donor for purpose of determining STG or LTG
§ Ex: Held stock for 9 months, donee sold 6 months later.
Estate Tax: (Congress trying to get rid of for years)
§ Unified w/ Gift tax because:
§ Exemption= isn’t included in base of TI
– Benefit those in a higher tax bracket.
– Wealthy people could benefit from E+GT together.
§ Credit: Taken off tax base, once calculated.
§ Elements: Tax (on) value of property transferred from D at death.
§ The transferred requirement changes this tax from direct to excise- a tax to do something.
§ Property= State law determines property interest
§ What is to Transfer from D? Test
§ Did D have a beneficial interest in the property? (use for his/her benefit?/ income)
§ Did D have enough control to attract tax? (say where property goes
Federal Gift Tax
Definition: Excise tax on the value of property transferred during life w/o adequate and full consideration in money or money’s worth; measured by the value of what the donor has given away, not what the donee has received (Reg. 25.2511-2(a))
§ Ex. a gift occurs when the donor’s estate is diminished by the transaction
Purpose: Enacted to prevent people from avoiding estate tax by giving away property before death because of the advantages of giving inter vivos gifts.
2501(a)(1). General Rule: A tax, computed as provided in §2502, is hereby imposed for each calendar year on the transfer of property by gift during such calendar year by an individual, resident or nonresident
Elements:
1. Transfer – transfer must be complete
2. Of Property
3. By Gift – lack of consideration (donative intent irrelevant)
Code Sections:
§2591(c): donor pays the gift tax
§ 2502: Computation of tax
§ 2503: Taxable gifts: Amount of gifts made during calendar year, less deductions.
· (b)Annual Exclusion: Any gift that qualifies in this section is not a gift. $13,000/person/yearà gift must be a present interest.
· (e):Med-Ed Exclusion: Payment of Tuition only (not room and board) and Medical expenses DIRECTLY to institutional does not equal a gift.
o Note: If trust is set up that is irrevocable then it is a gift because not paid directly to the institution. If it is revocable, then it is not a gift because they are free to change it whenever they want.
§ 2505: Unified Credit against GT:
(a)(1): Amount of Credit: Credit and Exclusion: Amount of credit you need to shelter the tax. $1M .
§2511: applies to a broad category of property
§ 2511(a): Transfers: In trust, direct/indirect gift, BROAD DEFINITION.
§ 2512:
· (a). Valuation: Value gifts on date of gift.
· (b). Definition: Where property is transferred for less than adequate and full consideration in money or money’s worth. Amount of excess = Gift.
Adequate and Full Consideration – §2512
Definition of a Gift – §2512(b): a gift occurs when the transferor receives less than adequate and full consideration in money or money’s worth/where the donor’s estate is diminished
General Rule: Consideration alone is not enough, needs value in Money or Money’s worth.
§ Even if the consideration would support a contract, it may not offset the FMV of the property transferred unless it can be valued
§ Tax occurs when donor’s estate diminished.
Commissioner v. Wemyss (1945) – Promise for marriage. Widow receives a sizable income from a trust created by her deceased husband’s will but the income will cease if she remarries. Boyfriend agrees to transfer stock to widow, the value of which would make up for the loss of the trust income. Under the agreement, widow promises to marry boyfriend and is allowed to keep her marital property and support rights if they divorce. Tax court found deficiency.
· Holds: Detriment to donee and/or promise to get married does not equal consideration, so Gift. Donor’s estate was diminished by what he paid her, nothing of value in return.
· Detriment to widow/donee does not matter because §2512(b) requires the consideration to flow directly back to the donor (boyfriend)
Measuring Adequate and Full Consideration – if the consideration received by the transferor is not capable of being valued in terms of dollars it is “wholly disregarded” when determining whether a gift occurs under §2512(b). Reg. 25.2512-8.
Release of Marital Rights:
§ Release of a dower or curtesy or a statutory substitute (inheritance rights) is NOT consideration in money or money’s worth (Reg. 25.2512-8)
§ Release of support rights by a wife constitutes consideration in money or money’s worth (Rev. Rul. 69-347)
Merril v. Fahs (1945) – prenup where H gave W a trust and she would give up her marital rights to his property but keeps her marital support rights. Different from Wemyss because involved the revocation of marriage rights. Relinquishment of marital rights does not equal consideration.
§ Under §2043(b)(1) of the ET, marital rights are not treated as consideration; since taxes must be interpreted in light of each other, marital rights will not be treated as consideration for GT
Payment of Gift Tax By Donee:
§ the payment of the gift tax by the donee may be treated as offsetting consideration, depending on whether there was an agreement for the donee to pay any gift tax due on a transfer
Prior Agreement by Donee to Pay Tax – “net gift” – if the donee agreed prior to the transfer to pay the gift tax, such payment is treated as offsetting consideration
§ Payment of the tax would offset the amount of the gift, which would reduce the amount of the gift tax, which in turn would change the amount of the gift, etc.
§ Rev. Rul. 75-72: formula to determine the amount due in this situation
– gift tax due is equal to the tentative tax (computed on the full fair market value of the property transferred) divided by one plus the rate of tax
No Prior Agreement for Donee to Pay Gift Tax – there is no reduction in the amount of gift where the donee is either forced to pay the gift tax by operation of law, or does so voluntarily w/ no prior agreement
§ §6324(b): the donee can be held liable for the payment of any gift tax due by the donor up to the FMV of any gifts received from the donor
– Any payment under §6324 does not reduce the amount of the amount of the gift from donor to donee
Relation to Estate Tax – under §2035(b), any gift paid on gifts made during the 3 years prior to the D’s death is included in the GE; this also applies if the donee pays the gift tax
Relation to Income Tax – if the donee pays the gift tax, that amount is included in the AR by the donor under §1001(b)
§ Diedrich v. Comm’r (1982) – an arrangement where the donee must pay the tax was a part sale/part gift for income tax purposes, and the amount of the tax paid is included in the amount realized by the donor under §1001(b)
– If the gift tax paid by the donee is greater than the donor’s AB in the property transferred, the donor realizes and recognizes gain
§ Reg. 1.1015-4: The donee will have a basis in the property equal to the higher of the gift tax paid or the donor’s adjusted basis
Exception for Business Transactions – transfers made in the “ordinary course of business” are considered made for adequate and full consideration in money or money’s worth. Reg. 25.2512-8.
§ This permits bad bargains, loss leaders and the like to escape gift taxation
Valuation – look at the m
ents, i.e., the present value of the amount of forgone interest.
Disclaimers – §2518
§ When recipient of property refuses to accept gift, no transfer from disclaimed person to next. Treated as if disclaimed person predeceases owner.
§ Purpose: to use as a planning tool or to fix things that went wrong after someone died
§2518: any person making a “qualified disclaimer” of an interest in property is treated as if the interest was never transferred to that person at all (prevents person disclaiming from making a gift)
§ Applies to Estate, Gift, and GST taxes
§2518(a): “Qualified Disclaimer” means that NO disclaimant gets interest, so never gives interest
Elements: §2518(b)
1. Disclaimer must be irrevocable and unqualified
2. Disclaimer must be in writing
3. The writing must be received by transferor, transferor’s legal representative, or holder of legal title of the property no later than 9 months after creation of the interest or the date on which the disclaimant turns 21
4. The person disclaiming cannot have accepted the property interest or any of its benefits
5. The disclaimed property interest must pass w/o any direction by the person disclaiming either to the D’s spouse or to a person other than the one disclaiming
· State Law: Disclaimant treated as predeceased, so if by state law it comes back to the disclaimant, they must disclaim twice
Examples:
§ Christensen v. Comm’r – daughter disclaimed, went to trust which paid a charity w/ remainder to daughter; this was not a qualified disclaimer because she had a contingent remainder in the disclaimed property, so GT for disclaimed property (she would have had to disclaim gift and trust remainder)
§ Nantucket Disclaimer – parent transfers house to trust which expired 10 years later; son disclaims 11 years after transfer because attorney thought son had 9 months to disclaim, but its 9 months from the date of the transfer, so too late
§ MUST know when transfer occurred: doesn’t matter if it’s contingent or whether vested
When is a transfer of a gift Complete?
Rule: Transfer is complete when it becomes contractually enforceable; when the donor gives up dominion and control over the property – 25.2522-2(b)
Example: A person agrees to quit smoking for two years. Enforceable when 2 years is up.
§ If donor can manipulate who receives the property, there is no transfer and the gift is not complete.
§ If power can only be used w/ another who possesses a “substantial adverse interest” or if donor’s control is subject to fixed and ascertainable std, donor has given up control and the gift will be complete
Metzger Case: (relates back doctrine) Noncharitable gifts made by check in previous year, deposited on Dec. 31 of that year but not paid by bank until next year. IRS says State law usually says gift not complete until donor’s bank honors it. Holds: Gift was made in previous year because once bank clears check it relates back to the date deposited and the only reason for the delay was the Holiday period.
· Revenue ruling 96-56: Codified relates back when gifts by check are complete
o Date of Gift relates back until date of deposit.
o Requirements:
§ Donor must be alive when deposited (if dead no gift because part of estate)
§ If bank paid check
§ Intended to make gift
§ Check deposited in year gift treatment sought.
