Estate Planning Outline

CDs (certificate of deposit)?
Have to leave money in for entire duration, but get higher interest rate (penalty if withdraw early).
Is it a gift?
No, not the same rights as ownership of land of alienable property. Gift is incomplete for
federal gift taxes. Distinctive form of bank account. Not beyond recall (penalty only
discourages, but does not remove the right, hence, a power to revoke).
BUT after A dies – then consideration first test applied.
Here full amount of CDs included in A’s gross estate (she made the deposits). What about interest
income? Still subject to estate tax even though already, subjected to income tax.

1/20
Tentative Tax $512,800 (but gets exemption reducing to $292,250 b/c of $220,550 unified credit under s. 2010)
Federal Decision to give estate tax to states before Great Depression, later changed minds, and tried to get it back
from the states. States created their own tax to maintain part of the tax they were losing.
States still get Revenue from the s. 2011 tax credit.
State Inheritance Tax simplified from 30 pages to 2 pages. Piggy back on the feds by getting Federal
Estate Tax Return submitted with the Inheritance Tax form, done to absorb the s. 2011 credit
-Some States add more than the s. 2011 credit (so may owe more), but most are less than the
s. 2011 credit.
Pg. 457 to compute the credit for state death taxes. Wouldn’t we first have to compute
the state succession tax to get the amount due? NO, if inheritance tax is less than credit allowed, sponge tax picks up the difference (Supplemental Estate Tax). But if Inheritance Tax is more, no benefit allowed by Fed. can only take up to the s. 2011 limit. (TOO BAD – talk to your state government). Don’t have to look to state inheritance tax returns.
Result?
Adjusted Taxable Estate = $1.34 million ($1.45 million – $50,000 (s. 2053)
– $60,000)
$38,800 + 6.4% of excess of $1.04 million ($19,200) = $58,000 Credit for State
Death Taxes

$512,800
– $220,550 Unified Tax Credit (s. 2010)
– $58,000 Check to the State for State Death Taxes (s. 2011) (pg. 457 – may be different if in state like
Indiana)

Gifts – starts making $50K to each of her children ($100K total)
-Will have to file estate gift tax return
-Gets $10K annual exclusion for each child (hence, taxable gifts only = $80K)
-Federal Estate Tax rates match Federal Gift Tax rates – will be adding the $80 K back into her Taxable Estate
-Taxes for gifts are Cumulative – don’t get to start at the bottom of the rung for each year
Hence, Gift Tax on taxable gifts for year 2000 = $80,000 à $18,200 (but none of this is paid to the Federal
Government, because simply reduces the Unified Tax Credit (s. 2010))
If none paid, why fill out?
Law requires it
Next Year (2001), Gifts given again
Same process, ($80K in taxable gifts (2x$50K w/ $10K annual exclusion)
New result, tentative tax is CUMULATIVE life time taxable gifts (bring back in all taxable gifts in prior
years)
New computation of tax, gift tax on $160K = $38,800 + $3,200 (32% of $10K) = $42,000
Subtract gift tax paid on taxable gifts of prior years ($18,200) = $23,800 (pushing money up the
tax ladder)
Still doesn’t write a check (won’t until cumulative gift tax exceeds exemption amount) – few people exceed

Net Results of Gifts on AA’s Estate
Estate is lower by $1.25 million (assuming, unrealistically, other assets did not change in value)
Administration Expenses (s. 2053) = $50K
Net Estate = $1.2 million
BUT adding back in $160K for Adjusted Taxable Gifts à Estate = $1.36 million
Hence, tax is $448,300 + (43% of $110K)$47,300 = $495,600 (substantially lower than the $512,800)
Reduced by s. 2010 Unified Tax Credit of (from pg. 3-1) $220,550 (leaving $275,050)

Does AA pay gift tax?
Does not pay transfer tax YET…
What is brought back is the date of gift value of the property
What if gave securities or stock?
If stock went up in value – date of gift value still rules, regardless of whether capital has appreciated
-post-gift appreciation is excluded from the gift.
-Carryover basis governs
-No tax cost up front, until cumulative gifts exceed unified credit shelter
Net effect of the 4 gifts is only to take advantage of 4 annual exclusions (net reduction in tentative estate tax base by
$40K)
If we were actually there, advise to make gifts children, children’s spouses, and grandchildren, in amounts within
annual exclusion (reduces taxable estate base at a greater rate, AND no gift tax return needs to be filed, number of people defines the number of annual exclusions that can be taken if she has the inclination of donative intent with the people)
Incentive to do so: money stays in the family rather than going to TAX Service
Even after gifts, gets full unified credit (because gifts are added back in – did not use up any portion of the unified
credit – only had to check to see how much of unified credit shelter was remaining – if exceeded would pay gift tax on excess)
If lives on, credit shelter continues to go up (until 2006 – when reaches $1million effective exclusion).

BUT what about gifts made within 3 years of death (s. 2035)
Prevention of more bucolic transfers – eliminated separate gift tax – only certain transfers are includable
-life insurance policies, interests in revocable trusts
However, most transfers removed from gross estate, but considered date of gift transfer for gift tax
Purposes
-only benefit of death bed gifts are annual exclusions
-in general, don’t include in gross estate, but added back in by gift tax transfers
-benefit of immediate benefits to donee, reduction in donor’s estate (benefit of annual exclusion)
So what does the 3 year limit apply to?
Life Insurance policies (given within 3 years) – tax included for full amount (included in his gross estate)
-otherwise, only gift is CSV (cash surrender value) with annual exclusion, which would avoid
inclusion of full amount of policy in gross estate
Gift Tax Paid on Gifts within 3 years of death – saving the estate tax on the gift tax
“DuPont Scam” – made gifts of $36 million near death – generated $21million in gift taxes
-when died 2 months later – $36 million reincluded, but not the $21 million (saved almost
$16 million in taxes)
-any gift tax that is paid within 3 years is brought back into the estate
-no longer gets a credit for tax already paid
-today lower incentive b/c lower tax rates

What about prepayment arrangements for private schools (tuition)?
Non-refundable (then revocable and not a completed gift)
Takes huge chunk out of estate

Problem 4, pg. 17-4
Daughter given life estate in trust distributions, grandson given vested indefeasible remainder
Grandmother made $200K for trust principal
Exclusion?
-only $10K for daughter (if worth that much), only get exclusion for present interests, not future
interests.

1/26
Present interest is a donative transfer (must report gift of $200K)
How many annual exclusions can she take?
Only 1 (future interests are irrelevant) – with no annual exclusions for future interests for grandson
Next year, trustee distributes $14K to daughter –
a.) No present interest given if D only gets at the trustee’s discretion
-Daughter is not a minor, therefore no 2503
-No gift to daughter (it’s a future interest) and NO annual exclusion
-G only had one choice to make a gift, once trust established, G no longer has control
-relinquished control when created terms of the trust
-to whom is the income taxed?
-weird issues of trust income taxation
Later, Daughter Dies, income principal distributed to grandson, original gift to trust was the only
gift made and for which she gets an exclusion.
b.) What if D was age 13?
s. 2503(c) trust for a minor (Congress dictates the terms of the trust)
-must use Congressional language in structure
gifts for annual exclusion for minor children w/o need for guardianship
beneficiary gets proceeds at age 21
proceeds must be used for benefit of beneficiary
beneficiary must have general power of appointment (including