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Ethical Lawyering
University of Toledo School of Law
Chapman, Douglas K.

1)     Introduction
a)      Federal Estate tax is an excise tax levied on the privilege   of transferring property at death
i)       Progressive – vary with size of estate
b)      State taxes are often Inheritance tax is defined as privilege  of receiving property from the decedent
c)      Gift tax is a back stop for death taxes
i)       Imposed on gift taxes made during life time
ii)     Sometimes known as wealth transfer taxes
d)      History
i)       At one point treated as income, before held to be unconstitutional
ii)     Under present law, § 102a doesn’t include the value of property acquired by gift, devise or inheritance
(1)   This doesn’t include the income from any property where the gift or devise consists of income from property
iii)   Wealth transfer taxes emphasize who as the donor and how much they transferred
(1)   If the recipient is a spouse or a qualified charity, whether it is an estate tax or a gift tax
(2)   Whether it is leaving the hands of the donor, or at the lifetime
iv)    At the moment they are integrated –
(1)   Includes the transfers during lifetime and at death
v)      1916 tax was enacted for two reasons
(1)   raise revenue
(2)   deal with concentrations of wealth
(a)    constitutional : NY Eisner
(i)     no apportionment
vi)    1924:  credit against the federal tax for state death taxes paid
(1)   if a state collects a tax, it is creditable
(2)   Pick up or soak up state taxes: if no state tax is imposed, the state tax “soaks up” – to bring their rates up to the max.
(3)   repealed in 24, repealed in 26, than put in 1932
(4)   rates were about ¾ of the estate tax rates on the amount of an equivalent transfer
(5)   1976:  unified tax structure
(a)    federal estate tax is made to transfers made during death
(b)    the federal estate tax applies to a person who is a citizen or a resident at death
vii)   this rule applies regardless of whether the property is located
(1)   (doesn’t include territories)
viii) domicile is defined as living somewhere with no present intention of moving
e)      progressivity
i)       in the old way, each one was separate, in that it used its own graduated rates
ii)     imposed on a rate that grew higher if it was larger
iii)   if the taxpayer/donor had made other gains in their lives
(1)   if it was the taxable gifts made during their lifetime
(2)   the federal estate tax was progressive, and it was a higher rate,
iv)    important to distinguish between marginal tax rates and what are called effective or average tax rates
f)      community property issues
i)       under community property laws, if the law provided that each spouse owned ½ of the property, the estate would include only ½
(1)   would mean that the first spouse to die was different
(2)   1942:  Husband’s taxable estate would include all of the cp
(3)   1948:  “marital deduction”
(a)    treatment of common law decedents that would be similar to common law property
(b)    property that was not cp, could be given to surviving spouse without tax on up to ½ of the value of the decedent’s separate property
ii)     In a common law property state, if all of the husband’s property were in his name, it would be deemed to be transferred.
g)      Under the gift tax:  ½ of of any non-community property could be given by one spouse to the other, without a gift tax
i)       If there was a case where one spouse was the earner of any income without any property
ii)     Before the 1976 restructuring the separate restructuring could create a strong transfer ta

    1976-86:  3rd federal transfer tax (generation skipping)
(1)   generation skipping transfer tax for 10 years that was retroactively appealed in 1976
(2)   both taxes, on generation skipping transfers were designed to counteract a technique of estate planning
(a)    For example family dispositions that don’t skip a generation. GM transmits wealth to daughter.  At her death transfer wealth to GD – to the extend that the wealth in each state exceeds the exemption amount, the transmission of the wealth will be taxable to each generation
(b)    generation skipping transfers might be made to reduce the income
(i)     the simplest form of generation skipping transfer – this would mean that it would skip the death of the granddaughter
(ii)   would be taxed a separate time at the death of the granddaughter
(iii) it means that the daughter would not have the benefit of the wealth during life
(iv)  it means that they would not have the benefit of ill health, old age, or dependence
(v)    in order to combine the estate tax advantages of generation skipping, it would mean that they are combing the things from grandmother, to daughter, to granddaughter
1.      GM could pass the wealth at her death into a trust, and the income could go to the daughter, and at death, the rest to granddaughter – but there wouldn’t be any estate tax applied, because the daughter didn’t own the property, she only had an income interest