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Wills and Estates
University of Mississippi School of Law
Weems, Robert A.

Estate and Gift Tax Outline
I.       Introduction
A.     In General
1.      Estate tax was designed to break up large estates. (Inherited economical power is like inherited political power.)
2.      Who pays the estate tax?
a.       24 billion was paid in estate tax, more than half of which came from 3600 estates (smallest being 5 million). This is a tax being paid by the wealthiest individuals.
b.      The 3600 was .0015% of the people who died in 2000.
c.       52,000 were required to file estate taxes.
d.      This truly applies to only a small amount of tax payers.
3.      Promotes Charitable Giving
a.       One of the good things about the estate tax is that it forces the wealthy to decide if they are going to give their estate to the government or to a charity.
b.      When we repeal this tax will they still leave their money to charities? Many who have done this in the past were motivated by this tax.
c.       These charities may provide jobs for their families, but the IRS watches these carefully to ensure that there are a requisite disbursements made
B.     Nature of the Tax We Have
1.      Estate Tax
a.       this is imposed on the decedent’s estate (as opposed to an inheritance tax imposed on the heir)
b.      This must be paid before there can be a distribution
c.       Before 1981, only 50% of what was left to a spouse was exempt. This changed in two ways:
i          It is unlimited
ii        before you had to give it outright or you had to put it into a trust (power of appointment) in which the spouse had the general power of appointment –
Ø We created the Q-Tip trust – property will qualify for the marital exclusion if it is left in a trust such that the surviving spouse receives all of the income from the estate and then dictate where it goes at the time of the surviving spouses death. We can make provisions to this such that the trustee can go into the principle of the trust when it is needed for health, maintenance, etc.
d.      Gross Estate
i          Property owned at time of death passing through the will.
ii        Testamentary Substitutes
Ø Life Insurance
Ø Pension/Retirement
iii      Trusts – we will spend a lot of time on this (§§ 2036, 2037, 2038)
Ø Raise questions of a gift being given in the lifetime of the decedent
Ø Raise questions of whether or not this is part of the estate
Ø Will there be a double tax?
v When the Grantor gives the right of the income of the trust it is a gift. § 2036 – estate will include the right that is transferred in the trust (all of the property is included in the estate).
v This is not double taxation, it gives the government the opportunity to tax the appreciated value of the property. We back this out when we credit the Tentative Tax for all gift tax payable.
v In the Estate Tax we are trying to tax the transmittal of wealth at death – so we do not want to limit to what the decedent leaves in his will. We will also tax the appreciation on the property you gifted previously.
e.       Estate Tax is due 9 months after death and you can get an automatic 6 month extension (this does not extend the time for payment). There are some things that let you extend the payments over years – an estate with a closely held business. The interest rate on this payment schedule is as low as 2%.
2.      Gift Tax
a.       Necessary back up to the estate tax (wealthier individuals were giving their assets away to avoid the estate tax)
b.      This is imposed on the donor, the donee is secondarily liable if the donor does not pay
c.       Cumulative form of taxation – the calculation is a cumulative process, you have to add all prior gifts when you calculate the current years tax rate (you credit what you pay by what you paid in previous years)
d.      How do we get to taxable gifts?
i          What is subject to a gift tax?
ii        When is the Gift Tax applicable? Concept of completed gift – the gift tax is imposed when the gift is complete. When is the gift complete for gift tax purposes? When has the transferor given up dominion and control over the property?
Ø Ex. Grantor puts property into a trust and provides that all of the income will go to Y for Life and then to X. This is fine. (Note> there are two gifts in this situation: Gift of Income and Gift of Remainder. Each of these gifts would be taxed separately and can be completed and thus taxed at different stages.)
Ø There are problems when there is a power to revoke. If there is a right to revoke, a gift will occur at the first distribution to Y. Then if he gives up his power to revoke, then the gift is complete.
Ø What if the Grantor retains only the power to change who receives the income? The gift of the remainder will be complete, but the income gift will not be.
iii      What is the value of the property transferred (we will spend very little time on this in this course, but know that this is very important in practice)?
Ø Do we have a transfer that is for less than adequate compensation? What was the FMV of the amount transferred and what was given in exchange for this FMV?
v When we are dealing with third parties, there will be a tendency to find that it is not a gift, but when it is a family member, there it will be more likely to be found a gift.
iv      Exclusions
Ø Charitable Donations
Ø Marital Deductions – no gifts given from one spouse to another included
Ø Annual per Donee Exclusion – $11,000. This is available to us in the computation of the taxable gift.
v ***You want to take this out when we compute taxable gifts****
v If you use gift splitting between you and your spouse, then you can get $22,000.
Ø Tuition or medical payments made on the behalf of another directly to the institution providing the service. No Limit on this!!! (Note> this cannot be an exclusion if the child does not go to school there.)
e.       Gift Tax is filed with your income tax return. You do have to file a return if you make gifts hire than the per donee exemption. If you do not do this then the SOL will not run.
Note> Audits in estate and gift often take place when you have limited partnerships and what not in the estate
3.      Generation Skipping Tax
a.       Who pays this depends on the nature of the generation skipping tra

able 9 months after death, Direct Skip and Taxable Distribution are both files with the income tax
C.     Estate and Gift tax have an important connection (needed for the calculation of the estate tax)
1.      Up until the Tax reform of 1976 there was no connection between these two – but then we adopted a unified system for the purpose of estate and gif tax
2.      If he makes any taxable gifts prior to 1976, we have to add to the estate all taxable gifts. The tax paid on the gifts will be credited to the amount you pay, this is just used to calculate the tax rate
3.      Work off of the same rate schedule for gifts and estates
4.      Unified credit against the estate tax and Unified credit against gift tax (§ 2505) – this can be applied to either gift tax liability or to estate tax liability. The code has kept the same credit for gifts taxes, but it has gone up on estate taxes.
5.      Estate Planning involves both gifts made prior to death and testamentary dispositions
a.       Gift programs giving the exclusion of 11K per donee per year (this can avoid the 41% tax rate of the first taxable rate)
b.      Every person has an $1mil exemption – the husband and the wife. So with spouses with at least $2mil you want to draft the will that will not waste the $1mil exemption for. So you would will $1 mil to someone else and then the rest going to the spouse.
i          Bypass trust – keeps the first mil out of the first spouse who dies out of the estate of the other. (have to make sure the spouses keep separate accounts)
c.       Always preserve the exemptions of spouses in estate planning
6.      The Unified Credit §§ 2010, 2505 – is available for either estate or gift tax computation.
a.       Why a credit instead of an exclusion – because the exclusion benefits the highest tax brackets, the other takes it off at the lower
b.      How is the credit computed? P. 93 of appendix. An estate has a credit equal to the amount of the tentative tax from the applicable exclusion amount based on the applicable tax rate for that year.
c.       For Gift taxes this is frozen at the $1,000,000 applicable exclusion.
II.    Estate Tax
A.     § 2001 – Definition of the Gross Estate and Valuation
1.      § 2031 – Definition of Gross Estate
a.       Includes the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.
b.      Fair Market Value – the value spoken of in § 2031
FMV – the price at which the property would change hands