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Estate and Gift Tax
South Texas College of Law Houston
Siegel, Mark R.

Estate and Gift Tax

Fall 2013

Professor Siegel

Wealth transfer tax involves the following: Gift tax, Estate Tax, GST Tax.

State law—Create property rights

Fed. Law tells you how to tax those rights

Tax inclusive vs. Tax exclusive

Suppose a 50% tax rate is applicable for gift and estate tax purposes.

Donor makes a $50k gift to donee. What result?

Donor’s tax consequences:– tax liability of $25,000 so gifted 50K and 25K in tax so it costs 75,000 to transfer 50,000

Donee does have income (Glenshaw Glass), but there is an exclusion under section 102.

Suppose Decedent died with 100k. What result?

50,000 goes to government and 50,000 goes to beneficiary

100k to transfer 50,000.

Estate tax is tax inclusive—taxed full amount not just what beneficiary received.

Gift tax is tax exclusive— taxed only amount beneficiary received

102(a) extends to gift, devises, inheritances, bequests

Applicable exclusion amount– $5.25MM for 2013

Will be adjusted for inflation on going.

2502(b)—annual gift exclusion. For 2013 it is $14,000

First 14,000 is a taxable gift. Anything beyond that is a taxable gift (but there is a lifetime gift exclusion)

Wealth Transfer calculations—Alice Jones , Pg. 36

Section 2502—accumulative of all yrs. Gift is given.

Section 102—

In current year P transfers land to D. The land has the following characteristics:

50k AB and 80k FMV. $10k gift tax paid on the transfer by P. What are the tax consequences to D

Form 709—gift tax form

Form 706—Estate Tax form

Section 2001—rate schedule

Section 2010—creates the unified credit, which is the lifetime exclusion * highest tax rate

Portability—2010(c)(4)

Pg. 32 portability illustration with multiple deceased spouses. Know the different scenarios.

What is w has $8mm total from an exemption amount and then gets remarried and she dies first—According to the code 2010(c)(4)(B)(i), H2 will get the remaining exclusion of W only, not H1. Legislative history says H2 would get the full exclusion that W had which would include the portion of H1.

See Alice Jones pg. 36 problems

**2001(g) has impact of applying current rate to gifts given in prior years in configuring the estate tax.

Section 102—general rule is that gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.

Bequest- testate gratuitous transfer

Devise- testate gratuitous transfer

Inheritance- intestate gratuitous transfer

Texas Probate codes deal with separate property passing and with Community property—- 3 different sections

Gift tax paid—increase in basis

Adjustment to basis= gift tax paid * (Net Appreciation-(FMV-annual exclusion))

What is gift tax consequence if FMV

1015(a) says use FMV when determining a loss if basis is less

If less than 80—– use 80 as FMV

If more than 80 but less than 100—- neither gain not loss

More than 100——-use 100 as FMV

Is there a gift tax if donee gives a gift that has a FMV less than its basis? 2512(b)

I. Introduction

A. Determining transfers and ownership of property- the applicability of state law

i. Commissioner v. Estate of Bosch—Eerie Doctrine of Tax

1. *state law determines the property interest, federal law determines the tax consequences

2. When are state court decisions binding on federal courts? Depends on the court…

a. Supreme Court decisions of the state and statutes are binding on Federal courts for property related questions

b. Intermediate courts are not binding, but federal courts should give proper regard to what the State Supreme Ct. would have ruled. Proper regard is not binding precedent.

c. Fed. Court can make a state law decision and only must follow state law case precedent from the Supreme Court of that State

B. In TX, if a trust instrument does not specify whether the trust is revocable or irrevocable, the trust is presumed to be revocable

C. The $5 million unified exemption is good through 2012

D. Basis in Gift Transfers §1015(d)(6)

i. The general rule applicable to gift transfers is that the donee takes the donee’s basis for income tax purposes §1015(a)

ii. The donee is permitted to increase the donee’s basis by a portion of any gift tax paid by the donor with respect to the transfer

1. Find net (unrealized) appreciation: FMV – AB

2. Find the taxable gift: FMV – §2503(b) amount

3. Divide 1) by 2) to get a percentage

4. Can increase basis by this percentage of the gift tax paid

E. *The gift tax cannot apply unless the transferor makes herself poorer while making the transferee richer*

F. It is more expensive to make a testamentary transfer

i. Gift tax is exclusive (paid)

ii. Estate tax is inclusive (taken out)

G. Go over Form 709

H. File by:

i. Estate tax return: 9 months after date of death

ii. Gift tax return: April 15

Intro to Gift Tax—

1. The Unified Credit—

2. Portability of the Unified Credit

3. Exclusions- annual gift tax exemption is $14,000 for 2013

4. Deductions

5. Mechanics of the gift and estate taxes

6. Gifts by expatriates— 2801; 2503(b);

a. “Covered expatriate”—section 877A— pertains to gifts given by people who relinquished citizenship within 10 years of gift to us citizen

7. Basis in Gift Transfers

a. 1015(a)—carryover basis for property acquired by gift

b. 1014—basis equals FMV on date of death

c. Special rules if FMV= less than donor’s basis— Reg. 1.1015—1(a)(2)

d. Gifts to spouses—1015(e) and 1041(b)—done spouse takes donor spouses’ basis in all cases

e. ***1015(d)— increased basis for gift tax paid—see page 38 for sample problem

Gift Tax

II. WHAT CONSTITUTES A GIFT

A. A tax…is hereby imposed for each calendar year on the transfer of [property] by gift during such calendar year by any individual, resident or nonresident. §2501(a)

i. No gift tax on services (not property)

B. The tax imposed by §2501 shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. §2511(a)

C. Where property is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift. §2512(b)

D. Is donative intent necessary?

i. Donative intent on the part of the transferor is not an essential element in the application of the gift tax to the transfer. §25.2511-1(g)(1)

ii. Transfers reached by the gift tax are not confined to those only which, being without a valuable consideration, accord with the common law concept of gifts, but embrace as well sales, exchanges, and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money or money’s worth of the consideration give therefor. However, a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent), will be considered as made for adequate and full consideration in money or money’s worth

iii. Commissioner v. Wemyss

1. Moore’s deceased husband had set up a trust for her; she was entitled to its income as long as she did not remarry

2. new husband Wemyss agreed to transfer stock to Moore to replace her forgone income….gift tax consequences?

3. Wemyss argued his consideration was either:

a. Moore’s forgone trust income

b. Marriage

i. Either of these would have been consideration per state law contract principles

4. SC said Wemyss did not give adequate consideration in money or money’s worth

a. Detriment to donee is not adequate consideration because money does not flow back to the donor

b. The gift tax was created to plug a loophole in the estate tax system; depletion of estate à gift

iv. *You can have a gift transfer even if there is an absence of donative intent*

1. However…absence of donative intent might show that the transfer occurred in the “ordinary course of business”

v. This case exposed loophole where no tax to gift but tax on estate thus avoid taxes

vi. Consideration needed to go to donor of money or monies worth. If not do it this way it opens the door for avoiding estate taxes

vii. Invter vivos transfers simultaneous triggering estate tax and gift tax analysis

viii. What is required for a transfer from A to B to be treated as a gift for income tax purposes?

1. Duberstein case where gifted Cadillac was not excludeable because definition of 102 was not met

a. Elements/definition of a gift for income tax?

i. The transfer must proceed out of detached and disinterested generousity, out of affection, respect, admiration, charity, or like impulses.

ii. IF MEET INCOME TAX DEFINITION WILL MEET ESTATE AND GIFT DEFINITION which does not require dontative intent. WHAT DOES IT REQUIRE?

1. Absence of donative intent goes along way to establish an ordinary business transaction

REG 25.2511-1 (g)

Other Reg mentioned?

What if family sale, B agreed to sell to A for $180,000. What if after transaction govt. comes in and says

ore such agreement is entered into, any transfers of property or interests in property made pursuant to such agreement…shall be deemed to be transfers made for a full and adequate consideration in money or money’s worth

b. Elements:

i. Written agreement

ii. Divorce (order not matter)

iii. Beginning one year before agreement lasting not more than 3 years. Example agreed in 2000. window would start in 1999 and go until 2003

iii. Discharge of support obligations

1. Donor receives full and adequate consideration in the form of discharge of a support obligation à so there is no gift

2. When parents provide food and shelter for a minor child, there is no gift

3. A divorcing husband does not make a taxable gift when he transfers funds to his wife in settlement of her support rights

iv. Adequacy of consideration

1. If the consideration received has less value than the consideration given, the difference will be taxable as a gift

2. Consideration must be reducible to money or money’s worth

3. Even if the consideration is not objectively equal in value to the property transferred, the IRS will not assert gift tax liability if the transfer was made in the ordinary course of business

v. Payment of gift tax as consideration

1. Net gift = the difference between the value of the property transferred and the amount of the donor’s gift tax obligation discharged by the donee

vi. Gifts of encumbered property

III. WHEN A GIFT OCCURS

A. Retained Control

i. The Control Concept

1. A gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title to the property in himself. §25.2511-2(c)

2. A gift is also incomplete if and to the extent that a reserved power gives the donor power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed or ascertainable standard. §25.2511-2(c)

3. Donor can be trustee of trust and still make a complete gift (as long as he has relinquished control)

4. Donor can be a remainderman in a trust and still make a complete gift

5. Revocable trust à gift not complete

a. The gift is not complete at the time money is put in the trust. The gift is completed when distribution is made

6. A gift is not considered incomplete, however, merely because the donor reserves the power to change the manner or time of enjoyment. Thus, the creation of a trust the income of which is to be paid annually to the donee for a period of years, the corpus being distributable to him at the end of the period, and the power reserved by the donor being limited to a right to require that, instead of the income being so payable, it should be accumulated and distributed with the corpus to the donee at the termination of the period, constitutes a completed gift. §25.2511-2(d)

7. Estate of Sanford v. Commissioner

a. Donor first relinquished the power to revoke the trust. Second, donor relinquished the power to change beneficiaries. When did the gift occur?— not when gave up power to revoke, but occurred when no longer has power to change beneficiaries (when no more beneficial enjoyment)

b. Taxation is not so much concerned with the refinements of title as it is with the actual command over the property taxed, and that a retention of control over the disposition of the trust property, whether for the benefit of the donor or others, renders the gift incomplete until the power is relinquished whether in life or at death

i. i.e., there is no gift until the power to revoke and the power to determine beneficial enjoyment (including the power to designate beneficiaries) is relinquished

Should ask: Has the transferor of the property relinquished control of beneficial enjoyment of the property—not just of the guarantor?