“Gift and Estate Tax Outline
A. In general
a. Purpose of estate tax: break up large estates
b. Tax is imposed on the prop that will be used to pay the tax, nonprobate and probate prop
c. All US citizens owning prop are subject to fed estate tax (imposed on decedent estate)
i. Beneficiaries of estate may have to pay tax if estate doesn’t do it
A> Must be paid before any distributions can be made
ii. A small percent actually pay though
d. Rate of tax depends on val of taxable estate with some exemptions
B. Tax Exemptions
a. Applicable exclusion amount
i. Currently in 2009 it is 3.5M, in 2010 taxes are to be repealed
b. Unlimited marital deduction which permits benefits left to a surviving spouse to be transferred free of taxes
i. Before 1981, only 50% of what was left to a spouse was exempt.
A> QTIP- prop will qualify under marital exclusion if it is left in a trust such that surviving spouse receives all of the income from estate and then dictates where it goes at time of surviving spouse’s death
1. Provisions can be made and a trustee can get into the principle of trust when it is needed for health, maintenance, etc.
c. Prop given to recognized charities
C. Gross Estate
a. All prop in which one has an interest at the time of death, which include:
i. One-half interest in community prop
A> All prop acquired by spouses during their marriage is regarded as owned in equal shares by the spouses
B> Must be under Community Prop system (Az, Wa, Id, LA, Ca, NM, Tx)
1. Will continue even if taxpayer moves to non-CP state
C> Each spouse can acquire prop sep by gift or inheritance
D> At death of 1 spouse: ONLY ½ comm. Prop and all sep acquired prop is incl in taxpayers gross estate
ii. Jt Interests
A> Entire Val of prop held as jt tenants with a right of survivorship is incl
1. Val can be reduced if shown that surviving jt tenant
i. Had an orig ownership interest never transferred for full consideration to decedent
ii. Made an orig contribution to cost of acquiring prop (unless contrib. came from decedents funds)
B> If jt tenants are spouses, and US citizens, only 1/3 of val of asset is incld in deceased spouse’s gross estate at death, regardless of who furnished orig consideration
iii. Annuities (retirement benefits)
A> Included if val of retirement accts or annuities have residual val after death
1. Ex) one which is payable to a beneficiary
2. Includes: payments from qualified pensions, stock bonus or profits sharing plans, tax-deferred annuities, indiv retirement accts (IRA’s), and certain military retirement plans
B> Amt incld is proportionate to annuity attributable to decedents contrib. to purchase price
1. Contrib made by employer or former employer are deemed to be contributed by decedent if made by reason of employment
iv. Prop subject to general power of appt
A> Any prop over which Dec. had general power of appt at time of death is Included.
B> Gen power of appt allows appt of prop to oneself or to ones estate, ones creditors, or the creditors of one’s estate
C> Power of appt is NOT general and NOT included IF it can be exercised only in favor of specific persons or a limited class of persons
v. Life ins proceeds
A> Proceeds of ins policy on DEC life, whether payable to estate or to other beneficiaries, are INC
B> If at time of death DEC retained no incidents of ownership in ins policy and proceeds were not payable to estate or used for benefit of estate, then NOT INC.
1. Ex) life ins owned by an irrevocable life ins trust
vi. Life interest in prop for which a QTIP or other marital deduction was previously elected
A> Val of all prop in which surviving spouse receives lifetime qualifying income interestà marital deduction allowed.
1. Qualified Terminable Interest prop (QTIP)
2. Inc in gross estate if estate of first spouse takes a marital deduction with respect to this prop
vii. Prop gifted during lifetime (Unless meeting special conditions)
A> Gross estate includes:
1. Transfers effective only on decedents’ death
i. Reversionary Interests.
1. Right to receive the prop back at some future date
2. INC entire val of prop transferred as gift if donor has retained a reversionary interest in prop if
i. Val of such right immediately before death is in excess of 5% of val of entire prop
3. Ex) DEC creates trust to pay income to his brother for his lifetime. Upon death of Bro, brothers son is to receive principal of trust. If son is not living at time of the bro’s death, trust principal reversts back to DEC. If there is >5% chance that DEC will outlive bro’s son, trust principal is INC in DEC gross estate.
i. To determine chance, look at ages and health of all significant parties (actuarially evaluated under IRS tables)
2. Transfers with a retained life estate (unless mtg special condit)
i. INC val of all prop, to extend to DEC interest, which DEC transferred at any time, by trust or otherwise (unless by sale for full consid), and in which DEC has retained an interest for life or for a term of years.
ii. Retained interests are the poss, enjoyment, or right ot income of prop, or the right to designate persons who will possess or enjoy the prop or the income from it
iii. There are special trusts that can create exceptions to this rule!
iv. Ex) DEC creates a trust to pay income to his descendants during lifetime. In trust, DEC retains power to determine from yr to yr which descendants’ will actually receive income and in what proportions.
1. This retained power causes entire trust prop to be INC in DEC gross estate.
3. Revocable transfers
i. INC any val of any interest in prop transferred to another person for less than full and adequate consider, if DEC possesses at time of death power to alter, amend, revoke, or terminate transfer in favor of anyone
1. Ex) power to change a beneficiary
4. Gift taxes paid within 3 years of death
i. Val of prop transferred as a gift PRIOR to death is NOT INC in gross estate BUT may be subject to gift tax
ii. Ex) Gifts of life insurance
iii. Qualified State Tuition Programs
1. Gross estate includes excess contributions. 529(c)(4)(C).
losely held biz that allows prop to be val at its farm or biz use val rather than at its fair market val
i. Ex) §2032A- allows us to use val at its current use not to val prop at highest and best use like under 2031
d. Val and Beneficiary’s Basis
i. Once determined what prop to include in gross estate, then a val must be est.
ii. Beneficiaries basis in inherited prop is its fair market val on the val date, except for prop that constitutes income in respect of a DEC.
iii. In Comm Prop states, surviving spouse half of Comm Prop receives a step up in basis in addition to DEC half.
iv. Prop inherited is deemed to have a holding period in excess of 6 months, regardless of when DEC acquired prop
E. Property in which Dec had an interest § 2033
a. Val of gross estate shall incl val of ALL prop to extent of the interest therein of the dec a the time of death
b. Beneficial Interest: interest must be a beneficial interest; burden is on the estate to prove that it is not a beneficial interest
i. State Law
A> State law creates legal interests and rights. Fed Revenue acts designate what interests or rights, so created, shall be taxed
B> St law would govern the relationship of the remainder person to the trust prop; but whether the relationship fixed by local law amt’d to an interest in the prop that would present a purely fed question.
ii. State Decrees:
A> Fed ct may decide whether the DEC had title to prop only as trustee or whether instead had a beneficial interest in the prop.
1. It will apply st statutory and common law principles in the decisions of that underlying issue
B> Beneficial interest Q can be re-litigated in fed ct
c. Routine Inclusions
i. Real prop solely owned by DEC
ii. Tangible personal prop solely owned by DEC (factual issue of whether item was actually owned by DEC can be troublesome)
iii. Intangible items raising no questions such as:
A> Currency in DEC’s safe-deposit box
B> Balance in DEC’s checking or savings acct (does not incl jt accts)
C> Any credit from one’s brokerage acct
D> Stocks, Bonds, CD’s owned solely by the DEC
E> Amts due to the DEC on notes arising out of DEC’s lifetime loans or deferred payment sales
d. Income Items
i. Income rights of the DEC at death must be treated as property in which DEC had an interest within the scope of §2033
ii. Salary due at death (taxed as income to DEC estate and incl in estate under 2033)
iii. Bonuses payable to DEC at time of death