Table of Contents
Problem A: Elderly Single Person…………………………………………………………………………………………. 2
A-1: Basics of the Federal Estate Tax………………………………………………………………………………………………………………….. 2
A-2: Lifetime Gifts in Estate Planning…………………………………………………………………………………………………………………. 4
Valuation……………………………………………………………………………………………………………………………………………………………………… 4
Filing the Gift Tax Return…………………………………………………………………………………………………………………………………………. 4
Annual Exclusion……………………………………………………………………………………………………………………………………………………….. 5
Unlimited Exclusion for Tuition & Medical Expenses §2503(e)……………………………………………………………………… 7
End of Year Gift Checks to Secure AE……………………………………………………………………………………………………………………. 7
Transfers Within 3 Years of Death §2035…………………………………………………………………………………………………………….. 8
Lifetime Gifts for Large Estates………………………………………………………………………………………………………………………………. 8
A-3: Gifts of Residences, Vacation Properties………………………………………………………………………………………………… 9
§2036(a)(1) Transfers in which Grantor retains rt to income/enjoyment………………………………………………….. 9
A-4: Special Valuation Rules—GRITS, GRATs, and GRUTs……………………………………………………………………… 12
Basic Valuation Rules……………………………………………………………………………………………………………………………………………… 12
Estate Freeze Options…………………………………………………………………………………………………………………………………………….. 13
Grantor Retained Interest Trusts (GRITS) §2702…………………………………………………………………………………………….. 14
Grantor Retained Annuity Trusts (GRATs)………………………………………………………………………………………………………… 16
A-5: The Generation Skipping Transfer Tax (Ch 18)…………………………………………………………………………………. 18
Skip Person……………………………………………………………………………………………………………………………………………………………….. 18
Amount Subject to GST…………………………………………………………………………………………………………………………………………… 19
Payment of GST……………………………………………………………………………………………………………………………………………………….. 20
GST & Trusts……………………………………………………………………………………………………………………………………………………………… 20
A-6: Qualified Personal Residence Trusts……………………………………………………………………………………………………… 25
QPRT………………………………………………………………………………………………………………………………………………………………………….. 25
Sale of Remainder (Property already owned by parent/seller)…………………………………………………………………… 26
Split Interest Purchase (property not yet purchased by parent)………………………………………………………………….. 27
Income Tax Problems in Estate Administration (A-9 & 11)…………………………………………………………………… 27
§642(g) Election……………………………………………………………………………………………………………………………………………………… 27
Income in Respect of Decedent (IRD) §691………………………………………………………………………………………………………. 28
Acceleration of Tax on IRD b/c of sale, exchange or other disposition……………………………………………………….. 30
Deduction in Respect of Decedent (DRD) §691(b)………………………………………………………………………………………….. 31
Problem B: Estate Planning for Spouses…………………………………………………………………………….. 31
Qualifying for MD…………………………………………………………………………………………………………………………………………………….. 31
Problem A: Elderly Single Person
A-1: Basics of the Federal Estate Tax
· Step 1: What is includable in Gross Estate
o §2033 Property Owned at Death
o §2035 Transfer of Life Insurance w/in 3 years of death
o §2036 Transfers with Retained Life Estate/Control (See A-3)
§ (a)(1) = Retained life estate
§ (a)(2) = Retained power to control beneficial enjoyment
o §2037 Transfer Taking Effect at Death
o §2038 Revocable Transfers
o §2039 Annuities & Employee Death Benefits
o §2040 Property Passing by Right of Survivorship
§ Between Spouses
· (b) Qualified Joint Interest Rule = ½ includable with joint tenancies b/t spouses (irrespective of who paid $)
§ Survivorship estates between persons other than spouses §2040(a)
· Gift Tax: Look at how interest is created. If A purchases house but then takes title as “A and B, joint tenants” then A has made a gift of ½ purchase price to B
· Estate Tax: Consideration furnished test – all property passing by ROS is includible in GE to extent that decedent furnished the consideration for property’s acquisition
o Burden of proof on executor to show that any of the amount on deposit was survivor’s $ (full value included until he does so)
o Basis – be careful! Only fraction attributable to decedent gets a stepped-up basis at death
§ With lifetime gifts, there is a carryover basis. Donee gets donor’s basis in gift
interest
o If testator makes QTIP election
o If using some of GST exemption credit
· §6019 No return need be filed to extent gift qualifies for:
o §2503(b) AE; [§6019(1)]
o §2503(e) Unlimited exclusion for tuition & medical payments; [§6019(1)]
o §2523 Unlimited Gift Tax Marital Deduction [§6019(2)]
§ Caveat: must file to make MD QTIP election§2523(f)(4)
o §2522 Charitable deduction but only if: [§6019(3)]
§ Gift is of donors entire interest in property & not in trust, [(3)(A) & (B)]
· File on/before April 15th of following year
o Gifts made in year of death = due when estate tax return due (9 months after death) [§6075(b)]
· Incomplete Gifts: When is a gift complete for FGT purposes? [15-8,9]
o Donor cannot
§ Retain power to revoke
§ Retain power to name new Bs
§ Retain power to change interests of Bs b/t themselves
o Transfer in trust is complete if the trust is
§ Irrevocable &
§ Grantor does not retain power to shift beneficial enjoyment among Bs
§ [See Sanford & Treas. Reg. §25.2511-1]
o Note: If you want to make incomplete gift, give B a special testamentary PoA
o ***When donor dies, the amount of gift which he still retains control over is includible in GE!!
o See also, End of Year Checks below
· How Split Gifts are Reported §2513
o Community Property States
§ If CP gift & doesn’t exceed AE ($26K), no gift tax return need be filed
· If does exceed, both spouses must file returns
· Note: Every asset presumptively CP ® can be overcome only by clear & convincing E
§ If SP gift, both spouses can consent to split gift but both must file gift tax return indicating they are doing so
o Common Law States
§ Spouse must show consent by signing gift tax return.
§ If gift exceeds AE, both spouses must file gift tax returns
· 3 Year Statute of Limitations
o Doesn’t start to run unless gift tax return filed disclosing all relevant info
o Service can say this was a bargain sale: part gift/part sale
§ Qualified appraisal is valuable but doesn’t preclude service
§ Clients may get annoyed at extra costs
o Note: May want to file gift tax return to start clock if have gift that has problematic valuation even if w/in AE
Annual Exclusion
o 2002 AE = $11K
o 2006 AE = $12K
o 2009 AE = $13K
· Annual Exclusion not available for gifts of future interest! [§2503(b)(1)]
o If income from trust & distribution is discretionary (trustee may distribute trust income), there is no present interest so no AE
§ If trust gives income to B the trustee must be required to distribute income to B for the grantor to get AE the year trust is created (“trustee shall distribute income…” NOT “trustee may distribute income…”)
