Fiduciary Taxation
RYAN
Fall 2013
INTRODUCTION TO FEDERAL WEALTH TRANSFER TAX SYSTEM
1. Federal Wealth Transfer Taxes
a. Estate Tax (Ch. 11) – 1916
b. Gift Tax (Ch. 12) – 1924/1932
c. Generation-skipping Transfer Tax (“GST tax”) – 1976/1986
2. Features of Gift/Estate Taxes Pre-1976
a. Rates
i. Progressive
ii. Estate – max 77%
iii. Gift – max 75%
b. Lifetime Exemption
i. Estate – $60k
ii. Gift – $30k
c. Annual Exclusion
i. Gift Tax Only – annual exemption (in addition to applicable exclusion amount)
ii. $3k per year per person
3. TRA of 1976 – Unification/GST
a. Unified = Estate and Gift Taxes
i. Single rate schedule
1. §2001(c)/ §2502
ii. Single Lifetime Exemption Amount
1. In form of credit against tax (“Unified Credit”)
2. §2010(c)/ §2505
b. Enacted = new tax on generation-skipping transfers (“GST tax”)
i. Separate GST tax exemption
4. ERTA of 1981 – Reduction in incidence of taxation
a. Unlimited martial deduction
b. Increase unified credit
c. Increase annual exclusion
d. Reduce top rates
5. EGTRRA (2001 Act) – De-Unification & Repeal
a. De-unification of SGT
i. Different applicable exclusion amounts
1. Gift – $1m – §2505(a) – Anything over a 1m will be subject to gift tax
2. Estate and GST – $1m – $3.5m – §2010(c)
ii. Single rate schedule – §2001(c)(2) = max rate 45%
b. Convert State Death Tax Credit into Deduction (§2058)
c. Repeal of Estate & GST taxes (Dec 31, 2009) §2210
i. Gift tax remains in effect w/ $1m applicable exclusion amount & 35% flat rate
d. Repeal of §1014 – see §1022 (modified carry-over basis)
i. Tax-Free step up
1. Non-spousal = $1.3 m
2. Spousal = additional $3m
3. Rest: gets a carry-over basis = lessor of D AB or FMV
e. Sunset – Dec 31, 2010 – repeal for 1 yr only (2010)
i. Jan. 1, 2011: reverts to pre-2001 Act form – $1m applicable exclusion amt., 55% max rate
6. 2010 – Reunification
a. Re-unified EGT
i. Unified credit – $5m (adj. for inflation)
ii. Unified rate = 35%
b. Introduced portability
i. Each spouse had a lifetime exemption amt
1. Goal of estate planning = max unlimited marital deduction and the exclusion amounts
2. Maximize tax-free amounts (lifetime exemption amts)
3. Use both of them first, whatever is left over gets qualified for unlimited martial deduction.
ii. The first spousal that dies, doesn’t use it, can give to the surviving spouse
1. Blow to estate planning
c. 2010 decedents – choice:
i. No estate tax – limited step-up (2010 per 2011 Act)
ii. Estate ta – unlimited step-up (2011 law)
d. Expires Dec. 31 2012 – what happened?
i. American Taxpayer Relief Act 2012
1. Permanent – no expiration date
a. 40% unified (Gift and Estate) rate
b. $5m (adj. for inflation) unified applicable exclusion amount
i. = $5,250,000 in 2031
1. Can transfer up to this amount during lifetime and not subject to EGT.
2. Used for either one.
3. Accumulative process
4. Whatever is left is available to shelter gifts at death
c. Portability
7. Gift Tax – Ch 12
a. Gift Tax Base – Post-76’ Taxable gifts (§2503)
b. Gift Tax Rate – 40%
c. Gift Tax applicable credit amount – §2505(a)
i. = estate tax applicable credit amount in §2010(c)
1. = $5m (adj. for inflation = $5,250,000 in 2013)
d. Return must be filed annually – §6075(b) when taxable gifts > annual exclusion)
i. Annual Exclusion – §2503(b) $10k/adj. for inflation in $1k increments
1. = $14k (2013)
2. per donee off the top
3. i.e., 20k donation to son – 14k exclusion = 6k (subject to tax)
e. Gift tax due if cumulative lifetime taxable gifts > applicable exclusion amount
f. Pay gift taxes instead of filing a return
8. Estate Tax – Ch 11 (§§2001 – 2058)
a. Estate Tax Base
i. Taxable estate (§2001(a)) = gross estate – deductions (§2051)
1. Marital deductions and charitable deductions
ii. Estate Tax Rate (§2001(c)) = 40%
iii. Estate Tax basic exclusion amount (§2010(c))
1. Basic exclusion amount = $5m (adj. for inflation)
a. $5,250,000 in 2013
iv. Return must be filed w/in 9 months after DOD – §6075(a); §2018(a) when estate tax base > basic exclusion amount
9. GST Tax – Ch 13
a. Base = Generation-Skipping Transfers (§2601)
b. Rate = Maximum estate tax rates (§2641(a)) = 40%
c. Exemption = estate tax basic exclusion amount (§2631(c))
i. $5,250,000 – 2013
ii. Additional exemption: In addition to the amounts from the EGT
d. Example:
i. 2002: Gpa dies, leaves $10m to son; son puts money in bank account and lives off interest.
ii. 2008: Son dies, leaves $10m to grandson.
1. Congress wanted to levy the tax once every generation
2. Gpa dies, $10m – subject to estate tax
3. Son dies, $10m – subject to estate tax
iii. If son doesn’t need interest, give the underlying acct to grandson?
1. Transfer directly from grandfather to grandson
a. Put the trust in death, give son a life interest (right to receive inc.), at son’s death, the trust should be given to grandson.
b. Gpa controlled it, so there is only one tax on gpa
10. Federal Estate Tax v. State Inheritance Tax
a. Estate Tax
i. Imposed on donor
ii. Single uniform exemption to donor on total transfers
iii. Single rate schedule applied to total transfers
b. Inheritance Tax
i. Imposed on each donee
1. Each donee has their own exemption amount
2. The closer in relationship to descendent, the lower the tax consequences
ii. Multiple exemptions – varies based on relationship to donor
1. Closer relations – bigger exemption
iii. Multiple rate schedules
11. Applicable Credit Amount – §2010(c) (Unified Credit)
a. Applicable Credit Amount (§2010(c))
i. Tax credit ($ for $ reduction in estate tax payable) equal to amount of estate tax due on applicable exclusion amount.
b. Applicable Exclusion Amount
i. Effective exemption amount
ii. Basic exclusion amount ($5m, adj. for inflation) + If surviving spouse (SS) elects to use the deceased spousal unused exclusion amount (portable)
1. Over $10m to shelter on the second death
c. Example:
i. D dies (not a SS) in 2013 w/ $5,250,000 taxable estate (no prior gifts)
1. Taxable estate = $5,250,000
2. Tentative Tax – §2001(c)
a. = $345,800 + (0.40*$5,250,000)
i. $2,045,000 = $345,800 + $1,700,000
3. Apply applicable credit amount – ($2,045,800)
4. Tax after Credit = 0
5. CHH shortcut – see p 8 of the Codes
a. Chart that has the applicable credit amount from 1987 – 2013
6. Result: Effectively the same thing,
a. Either get a $5,250,000 deduction; or
b. A $2,045,0800 credit
c. Still zeros it out
12. Annual Exclusion (want to max)
a. §2503(b) – $10k (adj. for inflation) gift tax exclusion
b. 2014 = $14k
c. per donee/ per year exclusion
d. does not use up any basic exclusion amount
e. How to maximize?
i. Give property w/ low valuation
1. If worth 14k, try to get a valuation of 10k
2. Transfer property via the annual exclusion
a. There is no estate tax, out of estate after gifted
b. Exclusion for both purposes
13. Annual Exclusion v. Basic Exclusion Amount
a. 2009 – Donor makes 1st gift ever of $213,000 to son
i. Exclude $13k – §2503(b) annual exclusion
ii. $200k subject to gift tax BUT no tax due bc sheltered by basic exclusion amount, must file gift ta
ty in which the Decedent had an Interest
a. The value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.
b. §20.2033-1(a) concerned w/ property interests beneficially owned by D.
6. Example #1
a. D transferred property to trust, naming Tom (T) as trustee, w/ income payable to Lou (L) for life, remainder to Ron (R) or Ron’s estate. T dies. Inclusion?
i. No inclusion. Nothing related to the trust gets included to their estate.
1. No beneficiary ownership under §2033.
2. Has no control. D gets to say who gets the property
ii. Notes: After it is executed, D no longer owns the property. Legal ownership is vested in the trustees. Equitable ownership is vested in the beneficiaries.
1. When legal and equitable interests is vested in a single person, they are the outright owner of the property.
7. Morgan v. Comm (SC 1940)
a. State law creates legal rights and interests and federal law designates how those legal interests or rights so created shall be taxed.
i. Look to state law to say what they owned, how they owned it, and their rights in property.
b. Estate of Bosch (SC 1967) [applies Erie]
i. Federal court only has to respect and follow the judicial followings of the highest state court, absent that, the federal cts only has to give due regard to lower state court. (not law to follow)
1. While the decree of the lower state cts should be attributed some weight the decision is not controlling where the highest ct of the state has not spoken on the point.
2. An intermediate appellate state court is not to disregarded by a federal ct unless it is convinced by other persuasive data that the highest ct of the state would decide otherwise.
c. To lower estate taxes: Have state ct say decedent did not have any beneficial ownership in the trust.
8. How expansive is the reach of §2033?
a. Safe Deposit and Trust Co. of Baltimore (SC 1942) – limited
i. Facts. X gave interest to D for life and gave D a GPOA. The holder of the beneficial interest enjoys all the income interest for life, and had the power to say who gets the power after his death.
ii. Holding an unexercised GPOA will NOT be included in Gross Estate under §2033
1. D had control, but never exercised it, so it did not rise to the level of interest.
2. Under state law, if you only have a GPOA, you do NOT have an interest.
3. If you die and exercise the GPOA, it is not enough to be under §2033.
iii. Added §2041(a), if you have a GPOA, and exercise it, you are taxable.
iv. Only property subject to exercised powers are included in GE.
b. First Victoria National Bank (5th Cir 1980) – expansive
i. Facts. Fed program gave out rice allotment based on prior rice production, the more you produce, the more allotment you get. D dies and transfers the rice acreage history production to kids at death.
ii. Issue. Is the rice acreage history property under state law that can be taxed under estate? (Similar to goodwill)
iii. Ability to transfer something of economic value creates new property interests.
