Estate & Gift Tax
§ This class is about ch. 12, 13, 14 of IRS. How to read code – Title 26, subtitle A, Ch., Section, sub section, paragraph, subP, clause, subclause
A. Estate taxation – how fed gov taxes estates of individuals who die
B. These taxes are totally separate from income tax.
C. Gift taxation for Ch. 12 is overlapping system w/estate taxation.
– Backdrop to estate taxation
D. Generation-skipping – Ch. 14 – to get at very large estates where they skip generations.
E. 2010 – Estate taxation will be repealed, come back in 2011
F. Taxation of Estates
§ Estate taxation imposed on transfer of prop’y at death.
§ Any testamentary or intestate distribution can get hit. Differs from an inheritance tax (which taxes receiver of the prop’y) where estate (E) taxation taxes the decedent.
§ Why E tax? Brings about 1% of total amt collected.
Don’t want people to have large blocks of wealth going on in the future. Try to break up those concentrations of wealth. If just estate tax & no gift tax, people would give it away right before they die. Or they can give away prop’y but have life estate (no prop’y interest).
Gift tax is only there as a backstop for estate tax.
Income tax – to give a gift need detached & disinterested generosity of the donor.
Donee of a gift doesn’t include it in GI b/c of 102(a).
Holding period gets transferred under 1223(2).
I. Gift for the gift tax not defined the same as a gift for the income tax.
Gift definition – 2512(b) – where prop’y is transferred for less than adequate and full consideration in money or money’s worth, then the amt by which the value of the prop’y exceeded the value of the consideration shall be deemed a gift, & shall be included in computing the amt of gifts made during the calendar year.
– Transfer prop’y for less than received.
– Need to have donative intent.
– But generally 2512(b) where you give something for less consideration than received it is treated as a gift.
§ For the GT, the donor pays the GT.
§ For the basis & holding period of the prop’y, you go to income tax.
J. Estate taxation –
Imposed by 2001(a) – A tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.
Taxable estate defined in 2051 – For purposes of the tax imposed by 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate (GE) the deductions provided for in this part.
– Take value of gross estate & reduce it by deductions.
– E.g. § 1 tax liability is base x rate.
Base for estate tax is taxable estate (gross estate minus deductions).
Rate – 2001(c)
(1) Rates are progressive. As your taxable estate increases, your rate increases.
– You can throw out the 18 to 39% brackets b/c there’s a unified credit in 2010(a) (it eliminates tax for this bracket).
How to compute tax:
2001(b) – Tax imposed by this section
Applicable credit amt, found in 2001(c), continually increases till 2009.
Rate of Taxation – Problem 1
(1) 1992 – G created a trust, income to be paid to G’s child T for life, Rm to T’s child R.
2002 – T made taxable gifts of $2m
2006 – T died, leaving a taxable estate of $3. The Rm interest of the trust corpus, valued at $500,000, was paid over to R.
(a) T’s gift tax liability for 2002
G = Grantor
Anybody in the top is who has the power (e.g. trustee).
Going through time, T will have the life estate interest
R = Remainder
2501 – Imposes GT on any transfer of prop’y by gift
2501(a)(1) – A tax, computed as provided in 2502, is hereby imposed for each calendar year on the transfer of prop’y by gift during such calendar year by any individual, resident or nonresident.
2) of prop’y,
3) by gift
If we have a transfer of prop’y by gift then rate of taxation is 2502.