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Wealth Transfer Tax
Villanova University School of Law
Mullane, Joy Sabino

FALL 2012
I.                    Background
a.      Gratuitous transfer taxes- taxes on the passing of property
                                                              i.      Excise taxes are taxes imposed on specified privileged activities that are made subject to taxation – the estate tax is a tax levied on the privilege of being able to transfer gratuitously title to property at death and, as such, is classified as excise tax
b.      §2001(a) states that “A tax is hereby imposed on the transfer of the taxable estate”
                                                              i.      Because of the excise nature of the tax, the courts, when dealing with other than direct transfers at death, often find it difficult to distinguished privileged, and consequently taxed, activities from similar non-privileged, and consequently untaxed, activities
                                                            ii.      In its original form, §2033 in United States v. Field, was limited to property owned by the decedent in the conventional sense (i.e. property owned within the meaning of the state law of property and estate administration)
                                                          iii.      §2033 was also interpreted narrowly in Helvering v. Safe Deposit and Trust Co. of Baltimore when the Supreme Court held that trust could not be included in the decedent’s gross estate because it was not the intention of Congress to tax under 2033 property subject to a general testamentary power of appointment that went unexercised (no longer good law; Congress changed code after narrow interpretation)
c.       In First Victoria National Bank v. United States, the Court interpreted “property” broadly
                                                              i.      The court held that since the rice acreage history was not only devisable and descendible, but transferable, there could be no doubt that an interest with these attributes must be included in the owner's estate
                                                            ii.      The focus of the estate tax was on the passage of interests at death – intangible asset that had value (and therefore must be included in gross estate)
d.      Goal is to minimize taxes
e.      Steps for gift and estate tax are interrelated but similar
f.        Tax=tax rate * tax base (taxable estate(gross estate minus deductions) or taxable gifts)
g.      Types-
                                                              i.      Estate- chapter 11 – 1916- wanted to raise revenue and break up large wealth
1.       Small part of total revenue and few people pay
                                                            ii.      Gift- Chapter 12- 1930s- backstop the estate tax
                                                          iii.      Gen Skipping – 13- came last- 1976- backstops the estate tax too
h.      History-
                                                              i.      In 1976- Unification of transfer tax system
1.       Keeping tab on what u transfer during life
2.       When you die, tally everything
                                                            ii.      2001 Tax Act-
1.       Provided for one year of repeal of estate tax or gen skipping tax
2.       had sunset provision
3.       Basis rules-
a.      Repealed stepped up or down basis of 1014 dying after 12/31/2009
b.      New 1022 carryover basis- lesser of AB or FMV
c.       Executor election to increase basis
i.        Basic terminology-
                                                              i.      Applicability-
1.       Gift tax- transfers while someone is alive and tax when person is alive
a.      If the tax does not attach until death, apply estate tax
2.       Estate tax- attaches when person dead
3.       Generation skipping tax- can be applied in conjunction with estate or gift tax
a.      If you give a gift to grandchild when alive the gift and GST taxes both apply
4.       Just because transfer of property during life is subject to gift tax, that does not mean it cannot be subject to the estate tax
a.      Usually decedent retains rights that don’t really transfer until death
j.        Integration of Gift Tax with Estate Tax
                                                              i.      Upon the death of an individual, the taxable estate is determined under Chapter 11 (§2051) by including all property owned at death (§2033) and not subject to an exclusion from the estate tax (§§2031(c) and 2032A), and certain additional property transferred  during life under testamatory circumstances (§§ 2035 through 2042), and subtracting certain deductions for administration expenses and debts, casualty losses, charitable gifts, marital bequests and family owned business interests (§§2053 through 2057)
                                                            ii.      Four additional steps are then taken to determine the actual dollar amount of the tax due from the estate:
1.       (1) The taxable estate is then aggregated with all taxable gifts made during the individual's lifetime since the effective date of the integration
2.       (2) A tentative estate tax is computed on the aggregate amount in step 1, using the uniform tax rate provided in §2001(c) [see statutory modifications handout] 3.       (3) From the tentative tax determined under step 2, there is subtracted the total amount of gift tax payable under Chapter 12 with respect to gifts made by the individual after December 31, 1976, using the rate structure applicable under §2001(c) at the time of the decedent's death
4.       (4) The excess of the tentative estate tax computed as in step 2 over the total amount of gift tax computed in step 3 is the estate tax imposed on the estate. Against this estate tax, the unified credit (§2010) is allowed on a dollar-for-dollar basis
                                                          iii.      The benefit of a single unified credit is allowed to each individual for the individual's lifetime and upon death
k.       Rate structure-
                                                              i.      2001(c)
l.        Applicable exclusion amount v. applicable credit amount
                                                              i.      2505
                                                            ii.      2010
1.       Credit is equal to what would be due on the amount excluded
m.    in theory, transfer tax system progressive
                                                              i.      2502(a)
                                                            ii.      2001(b)
1.       Cumulative, so subsequent transfers get pushed into higher brackets
n.      Unlimited deductions
                                                              i.      Marital- No transfer tax consequences in marital unit- report but get deduction that zeroes it out
                                                            ii.      Charitable
o.      Keep in mind-
                                                              i.      Did a gratuitous transfer of property or a property interest occur?
                                                            ii.      When did it occur?
                                                          iii.      What was its value?
II.                  The Estate Tax
a.      Main Estate Tax Provisions
                                                              i.      §2001(a): “A tax is hereby imposed on the transfer of the taxable estate.”
1.       includes rate schedule
                                                            ii.      §2031: Definition of Gross Estate – “The value of the gross estate of the decedent shall be determined by including to the extent provided for in this part (2033 to 2046)
1.       the value at the time of his death
2.       of all property, real or personal, tangible or intangible, wherever situation.”
                                                          iii.      §2033: [Catch-All Provision] “The value of the gross estate shall include:
1.       the value of all property
2.        to the extent of the interest therein of the decedent
3.        at the time of his death.”
                                                           iv.      §2051: Definition of Taxable Estate – “For purpose of the tax imposed by section 2001, the value of the taxable estate shall be determined:
1.       by deducting from the value of the gross estate
2.       the deductions provided for in this part.” (i.e. marital, charitable deductions)
a.      In other words- gross estate minus deductions
b.      Gross estate components-
                                                              i.      Section 2033- D interests
1.       Section 2033 includes in the decedent's gross estate any interest that the decedent had in property at the time of his death
2.       Section 2034 provides that any interest of the decedent's surviving spouse in the decedent's property, such as dower or curtesy, does not prevent the inclusion of such property in the decedent's gross estate.
                                                            ii.      Section 2035-2040 and 2042- artificial interests derived from D
1.       § 20.2031-1(a)
a.      Section 2035 includes in the decedent's gross estate property transferred in contemplation of death, even though the decedent had not interest in, or control over, the property at the time of his death
b.       Section 2036 provides for the inclusion of transferred property with respect to which the decedent retained the income or the power to designate who shall enjoy the income
c.        Section 2037 includes in the decedent's gross estate certai

                                                        ii.      Diff b/n bargained for extinguishment at death provision is the note v. cancellation of debt via provision of the will
1.      Cancellation in will- D has the right to the payment and can transfer, but transfers to the debtor- value of what is remaining in note is included under 2033- could have transferred to anyone but chose to transfer back to debtor
2.      Bargained for extinguishment in note- ownership interest only for a number of years so long as alive- right extinguishes at death -like a life interest
a.      Debtor also paid for the extinguishment provision
f.        Contingent interest
                                                              i.      Under 2033, the proper method of computation in the case of a trust is to determine as of the date of death the values of the decedent's rights in the trust property and to include in the gross estate the sum of such values (In Re Estate of Hill)
g.      Wrongful Death and survival statutes-
                                                              i.      Under the pure wrongful death statute, a right to sue is created in a class of beneficiaries who have statutorily defined familial relationship with the deceased – these parties are allowed a recovery for their economic losses resulting from death
                                                            ii.      Under the survival type statute, the executor or administrator of the estate sues as the representative of the deceased and awarded damages based on the economic loss and pain and suffering inflicted on the deceased
                                                          iii.      Rev. Rul. 54-19 – IRS indicated that damages under a pure wrongful death statute were not includible in the estate of the deceased since under the wrongful death statute, the decedent never possessed any interest in property transferred at his death
                                                           iv.      Where, as in the case of survival statutes, there was no property interest in decedent which passed by virtue of his death, but rather one which arose after his death, such an interest is not property owned at death and not part of the gross estate under §2033 (Connecticut Bank and Trust Co. v. United States)
h.      Employee Death Benefits- Rev Ruling 65-217
                                                              i.      If payable according to pre-existing plan to employee's estate or to employee's designated beneficiary- inclusion under 2033
1.       Property interest and transferable
                                                            ii.      If payable according to pre-existing plan that limits class of beneficiaries to one's designated by employer- no inclusion
1.       Interest but no ability to transfer/designate
                                                          iii.      If payable at discretion of employer post-death to person's of employer's choosing- no inclusion
1.       No interest at all, arises post- death
IV.               Section 2034- Dower and Curtesy Rights
a.      The value of the gross estate shall include:
                                                              i.       the value of all property to the extent of any interest therein of the surviving spouse,
                                                            ii.      existing at the time of the decedent’s death as dower or curtesy, or
                                                          iii.      by virtue of a statute creating an estate in lieu of dower or curtesy
b.      § 20.2034-1(a)
                                                              i.      Thus, the full value of property is included in the decedent's gross estate, without deduction of such an interest of the surviving husband or wife, and without regard to when the right to such an interest arose