Fall 2013 Professor Mandelbaum
Gift & Estate Tax Outline
Estate tax begins at § 2001.
A tax is imposed on the transfer of the taxable estate of the decedent, a US citizen.
Estate tax = tentative tax(taxable estate – adjusted taxable gifts) – today’s tax on gifts made since 1976. § 2001(b).
Rates are at § 2001(c). Don’t forget the phasedown.
Credits are at § 2010. Tentative tax * exclusion amount. This year, $2M.
Gift tax begins at § 2501.
A tax is imposed each year on the transfer of property by gift by an individual.
Gift tax = tentative tax(total gifts made since 1976) – tentative tax(total gifts made in previous years since 1976). § 2502(a).
Rates are at § 2502. Don’t forget the phasedown.
Credits are at § 2505. Tentative tax * $1M. This year, $345,800.
Tax inclusive vs. tax exclusive.
Estate tax base is “tax inclusive.”
Assume a flat estate tax rate of 50%, and an estate of $5M. Makes for $2.5M in taxes and $2.5M to the donee.
Gift tax base is “tax exclusive.”
Assume a flat gift tax of 50%, and assets of $5M. Makes for $1.67M in taxes and $3.33M to the donee! There is a bias towards gifts.
State and Federal Law Issues
Where state courts’ rulings on state law have a bearing on the application of Federal tax law (for example, whether a couple is married, or whether a general power of appointment was actually disclaimed), Federal courts will give “proper regard” to their rulings. No less, but no more.
Rulings of the highest state court are binding. Erie.
Rulings of lower state courts are merely evidentiary of state law. Factors for weight:
Adversarial proceeding? (If truly adversarial, great weight.)
How adversarial? (Husband vs. wife, probably not so adversarial.)
Consistent with state law?
Savings on the tax bill?
One party preparing the order?
Worth noting that it’s a big deal for a Federal judge to accuse a state judge of fucking up.
Commissioner v. Bosch’s Estate
VERY important case. Sets up proper regard.
The Gift Tax
“Gift” is a Federal (not state) word with very broad scope. § 2511.
In trust or otherwise, direct or indirect, real or personal, tangible or intangible.
For the donor a non-US citizen, gift tax does not apply to property outside US.
3 elements of a Federal gift:
The value of a gift is its FMV at the time of transfer.
So a bond with a face value of $10K not necessarily worth that much.
However, a note subject to modification leads to a gift at time of payment.
When is a gift made, though?
As soon as there is no power to alter, amend, or revoke.
Power to revoke. Imagine a revocable trust is set up for B.
No immediate gift is made, because the settlor could take it all back.
Income actually paid to B is a gift at time of payment, even if the trust itself is still revocable. Can’t take those payments back.
When the settlor no longer can revoke, the original gift is completed and taxed.
Power to alter or amend (usually, to choose beneficiaries).
If the settlor has no power to revoke but can choose to sprinkle payments among a class of beneficiaries, there is no gift unless payments are actually made.
When the settlor gives up his power to choose beneficiaries, a gift is made to the chosen beneficiaries.
Even a power to add to the gift can be a power to alter or amend.
Certain strings can be retained, however, and still have a completed gift!
Right to determine when chosen beneficiaries get the money.
When is a transfer for consideration a gift?
Where property is transferred for less than an adequate and full consideration in money or money’s worth. § 2512(b).
This is a purely objective test! No “donative intent” element.
So a transfer of property in exchange for something that has no market value – like a promise to marry or marital right – will be taxed as a gift. Wemyss, Merrill.
What about discounts on services? Are the lost revenues taxable?
If given for a hard-nosed business reason, not a gift.
If given for family favoritism, a gift.
Examples of gifts:
Zero-interest loans. Dickman, § 7872.
Services owed as part of a contractual right.
Squishy intangible contingent rights. Shaughnessy
A co-author’s share of the roy
e accelerates payment of principal to A. Settlor gets another exclusion! Woot.
Qualified transfers to educational institutions or medical care providers on behalf of an individual. § 2503(e).
Must be directly to the organization from the donor. What Doc did.
Gets around the present/future interest problem with gifts into trust under the § 2503(b) exclusion by forcing a present interest.
Beneficiaries must have the right to demand that the gift into the trust be given to them outright within so many days of the gift being made (a Crummey power).
2 days not enough. 30 days is plenty. Use 30 to be safe.
Power must not be illusory.
Knowledge that the right exists.
No agreement understanding that the demand will not be made.
Persons with the right must have economic substance in the transaction.
Beneficiaries must know that the gift is being made. No writing requirement, but do it anyway for proof. (a Crummey letter)
Dickman v. Commissioner
Court holds that a zero-interest loan is the gift of the right to use money, which itself has a FMV and can be taxed as a gift. Also appears to tax pretty much any intra-family gift or loan, right down to the use of a house or car. IRS says they won’t tax that sort of thing. “Trust us,” I guess.
Bradford v. Commissioner
J.C. Bradford owed $300K to First National Bank. NYSE didn’t like him having that much debt, so he had his wife (who owned $15K in assets) write a note to the bank in exchange for their returning his. IRS said gift! Court said no.
She only has $15K in assets – can’t give a $300,000 gift!
No real transfer of property, so no gift.
Court focuses on the substance of the transaction – a guaranty – rather than the form – a gift.