Taxation of Gratuitous Transfers Outline

Taxation of Gratuitous Transfers- Calfee-Spring 2015

Outline

I. Overview: The Gift and Estate Tax:

The GE is generally comprised of prop D owned or effectively owned at death, prop D transferred inter vivos in a gratuitous manner BUT over which D retained some degree of dominion and control, and prop D transferred inter vivos, but in an essential testamentary manner.

Computation of Estate Tax liability for federal purposes:

Ascertain the total value of D’s gross estate
Ascertain the value of Fs taxable estate (aka the gross estate minus deductions)
Ascertain the amount of the D’s post-1976 taxable gifts not included in the D’s gross estate (generally but no always, this figure is the same amount that is reported for such gifts on the Ds prior tax returns.
Compute a tentative tax on the aggregate of steps 2 and 3 at the Section 2001(c) rates
From this subtract the amount of gist tax payable on all post 1976 gifts at the Section 2001(c) rates in effect at the date of the D’s death. This calculation yields the gross (before credits) estate tax.

The Unified Credit

The total amount of basic exclusion is 5M (5.34M for 2014 since it is adjusted for inflation)
The credit not only affects tax liability, but also indirectly affects the reqs to file an estate tax return.

Credit for Gift Taxes

If D has paid taxes on lifetime gifts, but under the code sections these are brought back into the measure of the estate tax, the gift payment is treated as part payment of the estate tax.
So here the gifts that are over 14k (whatever is over this amount) will be brought in.

However this only applies to PRESENT transfers of prop (e.g. cannot accumulate 14k/yr exceptions).

NOTE: You only get unified credit (for both estate & gift) and you get credit for GST.

Estate tax:

Deductions for funeral and administration expenses
Some post-death losses
Charitable deductions
Marital deductions
State death taxes: Provides some relied when D’s estate is subject to both fed and estate taxes.

Gift Tax:

Charitable deductions
Marital Deduction

1) The Gift Tax

The gift tax, like the estate tax, is effectively imposed at a flat 40% rate.This is so because the interrelationship of 2505 unified gift tax credit and 2502 rates result in a flat 40% gift tax.

A transfer for full money and value generally is a neutral event for purposes of either tax.

imposes a tax on “TAXABLE GIFTS”. What is that? To determine what it is, look at 2503.

2502 (a)(2): Tentative tax on all taxable gifts for prior years.

Taxable gifts is the total amount of gifts made during the calendar year, less the deductions

– annual exclusion is $14,000

Gift tax works after the 14k level (you can give as many X people up to 14k).
Your spouse also allowed $14k.Therefore, a married couple could give anyone they want $28k w/o gift tax. 2513 gift splitting can say that the two split the gift.
Only applies to present interest in prop. Ex G creates trust income to be paid to B for life and remainder to C. Only one present interest, thus only B’s 14k will be excluded.
If it is over 14k you get taxed on it as a gift (when calculating your GE you bring back your gifts, but later take them out that way they’re not taxed twice, the only reason for including them is to drive the rates up).

Only two deductions for Taxable Gifts:

Charitable Deduction and Marital Deduction

Unified Credit for Gift Tax: Look at pg 1-31 and 3-12 on book

If US citizen/resident there shall be a credit as allowed in 2010(c) Unified Credit against gift tax.
The credit in (a)(1) will be reduced by amounts of credit allowable in preceding years.

2010 (c): Gives you the exclusion amount 1) 5.34M which is the basic exclusion and 2) Spouse exclusion amount

2001(c): Gives you the tax rates (TAX RATE TABLE)

Basis in gift

Basis concept

I buy asset for 50, I have basis of 50 and sell for 100, I have made 50 for income tax purposes
I buy a $50 gift and give it to son. He sells at 100. He has made 50 for income tax purposes
I buy $50 gift die, and bequeath to son.Since testamentary gift, son get FMV basis.

– Donee has same basis as donor unless there is a built in loss (FMV basis then)

authorizes the assignment of income of prop
Lucas v Earl: Assignment of income ALLOWED but NOT from services.

– Increase in basis up to the amount of FMV for the amount of gift tax paid

2) The Estate Tax

2051: The taxable estate is the GE minus deductions

Inter Vivos transfers attempt to avoid this estate tax, however Gift tax prevents this avoidance.

In order to determine the Taxable Estate we will have to see what “gifts” we bring back into it.

Deductions (covered later on):

Expenses, Indebtedness, and Taxes: You can deduct from GE.

For Funeral Expenses; Administration of Estate; Claims against estate; Debts in existence at death;

2054 Losses: You can deduct from GE losses incurred during the settlement of estates arising from:

Fire; Storms; Shipwreck; Theft: When these losses are not compensated by insurance or otherwise.

2056 Marital Deduction: Deduct from GE an amount equal to the value of any interest in prop which passes or has passed to the surviving spouse.
Charitable Deduction

: The estate tax works after the 5.34 million level.

2010 (c): Gives you the exclusion amount 1) 5.34M which is the basic exclusion and 2) Spouse exclusion amount

2001(c): Gives you the tax rates (TAX RATE TABLE)

3) The Taxable Estate

HYPO: In 2013 D makes a taxable gift of $6M. In 2015 D dies with a taxable estate of $5M.

FIRST STEP: Determine the Gift Tax:

: Imposition of Tax Says what is deemed a taxable transfer
2502 Rate of Tax (tells you where to look) (a)(1) Tentative tax on all taxable gifts for current calendar yr plus tentative tax on gifts in prior years over
2502 (a)(2): Tentative tax on all taxable gifts for prior years. In this instance since no prior gifts, tax stays same.
2001(c): Gives you the tax rates (TAX RATE TABLE)
Current gift: 6M: taxed at $345,800, plus anything over 1M taxed at 40%

So first 1mil taxes at 345,800 the remaining 5 mill taxed at 40% which equals 2,000,000
Thus total tax: $2,345,800

Credit: 2505(a)(1) (Unified credit against gift tax): If US citizen/resident there shall be a credit as allowed in 2010(c) which is the Unified Credit against estate tax.
The credit in (a)(1) will be reduced by amounts of credit allowable in preceding years.
2010 (c) Find out exclusion amount: which is 1)Basic exclusion: 5M 2)Spouse exclusion amount: 0
2001 (c): Gives you the rate tales. (so do the tax for the exemption amount)

Tax on the first 1M is 345,800
Remaining 4M taxed at 40% which is 1,600,000

You can only work with 5M and still need to follow the rules.

Add them together 345,800+1,600,000 = 1,945,800 this is our 2505 credit (Remember that taxes on the first 5M are EXEMPT thus deduct this from the total tax)
Total tax (2,345,800)- exemption (1,945,800)= 400,000
Or the easy way: Since you know 5M is the max exemption, anything above that 5M exemption will be taxed at the highest possible rate which is 40%!

SECOND STEP: Determine the Taxable estate:

Tentative tax 2001c on the 5M (BUT DON’T start calculating yet, you have to make sure if you have to include adjusted taxable gifts)
Adjusted taxable gift (gifts made during life can come back to estate). Thus 5M(estate)+6M(gift)= 11M

Do the 11M w/ the 2001c table: First 1M is taxed at 345,800, the remaining 10M is taxed at 40% you add 4,000,000+345,800: 4,345,800
Next subtract the 400,000 gift tax that you got from step 1: 4,345,800-400,000= 3,945,800
Tentative estate tax: 3,945,800

credit amount (unified credit) 2010(c) – Sets amount of the applicable exclusion.

Then subtract the credit or the exemption which is 5M and we figured out from above that it 1,945,800
-1,945,800 AND got 2,000,000

I had 11M and had 5M of exemption, that left me w/ 6M subject to tax at 40% which is 2,400,00 and I paid 400,000 on gift tax so, I subtract that in so I won’t pay it twice and I end up with an estate tax of 2M.

Why do we do all of these adding if we’re going to subtract again? So you can push rates up.

You can give away 5M (adjusting w/ inflation dependent on Congress) w/o paying any tax

Brief Overview of Generation-Skipping Transfers

: Amount of tax imposed by 2601 tell you GST tax (determined in Sub-Ch C) multiplied by applicable rate.
2641 – Applicable rate – is the product of (1) max fed estate tax rate, (which is 40%) and (2) the inclusion ratio with respect to the transfer (1 transfer)
$4,000,000 (trust corpus) x 40% = 1,600,000
– GST exclusion amount is = to the applicable basic exclusion amount for fed estate tax purposes (which is 5M)

Example grandpa want to transfer to grandkids, if grandpa wants to transfer 14,000 to each grandchildren, plus 5M to be split between his grandkids and that would not trigger the federal GST tax

II. What Makes up the Gross Estate?

The fed estate tax is imposed by 2001(a) on transfers (term of art defined by 2051) made by Ds who are US residents.

1) 2031: Definition of the Gross Estate

2031 Definition of Gross Estate:

Gross Estate: Includes the value at the time of T’s death the value of prop held at death, both real and personal (even if not probate estate- example life insurance/joint prop would be treated as GE but not probate prop).
Provides (asset ID, time ID, method ID) Time and Method Valuation.
assigns the