Exam 2 : Estate & Gift Tax 1. ) Determination of an estate tax by applying the steps involved in determining the estate tax and showing all work 2. ) Determination of gift tax owed by applying the steps in determining a gift tax and showing all work 3. ) Credit on prior transfers * A credit is allowed against the estate tax for all or a part of the estate tax paid with respect to the transfer of property to the present decedent by or from a person who died within 10 years before, or within 2 years after the decedent * The purpose of this credit is to prevent successive taxes on the same property within a brief period. If the transferee was the transferors surviving spouse, no credit is allowed with respect to property received to the extent that a marital deduction was allowed. * If the transferor died within two years before or within two years after the transferee’s death, the credit allowed for the tax on the prior transfer is 100 percent of the maximum amount allowable. * If the transferor predeceased the transferee by more than two years, the credit allowable is reduced by 20% for each full two years by which the death of the transferor preceded the death of the decedent. (see table on pg. 287) 4. ) Estate tax deductions Allowable deductions include the deduction for charitable, public and similar gifts and the marital deduction. 5. ) Administrative expenses * To be deductible, administration expenses must be actually and necessarily incurred in the administration of the estate. * They include those expenses incurred in the (1) collection of assets, (2) payment of debt, and (3) distribution among the persons entitled to share in the estate. (Includes executors commissions, attorneys fees and misc. expenses. ) * Administration expenses incurred for the individual benefit of the heirs, legatees, or devisees are never deductible. Expenses incurred in obtaining from the probate court the award of a support allowance for the widow during administration of the estate are not deductible. 6. ) Funeral Expenses * Deductible funeral expenses are those amounts actually expended by the executor or administrator. * Expenses must be payable out of the decedents estate. * If they are an expense of the community estate, only one half the amount expended is deductible * If the expenses are allowable against the estate of the decedent, they are deductible to the extent so allowable. 7. ) Outstanding debts and claims The amounts that are deductible as claims against a decedents estate are those that represent personal obligations of the decedent existing at the time of his death. * Deductions of such claims exceeding the value of assets available for payment are disallowed to the extent they exceed the value of the property subject to the claims. Deductible Claims: 1. Alimony decreed by a court but past due (if payments are to continue after decedents Death) 2. Commissions owed to trustee for services during decedents lifetime 3. The commuted value of support payments due a decedents wife for her release of her
Support and maintenance rights under a valid separation agreement 4. Amounts due on judgments against the decedent, including tort liabilities 5. Amounts due under guarantees executed by the decedent and not collectible from Primary obligor 6. Amounts due on notes 8. ) Casualty and theft losses * Casualty and theft losses that occur during settlement of the estate are deductible to the extent they are not compensated by insurance. * Casualty and theft losses are not deductible for estate tax purposes if, at the time the return is filed, they had been claimed as in income tax deduction on the individual 1040. Losses with respect to an asset are not deductible if they occur after distribution of the asset to the beneficiary. * Depreciation in value of intangibles, even though occasioned by destruction, damage or theft of underlying physical assets, is not deductible. * Losses in value of intangibles can serve to reduce the taxable estate, but only if they occur within 6 months after death so that the intangibles may be included in the estate using the alternate valuation method of 6 months after date of death. 9. ) Charitable deductions * Charitable deductions are claimed on schedule A of the estate tax return 10. Marital deduction An estate tax marital deduction is available if the following general rules are met: 1. The decedent was married at the time of his or her death 2. The decedent was survived by his or her spouse 3. The surviving spouse was a U. S. citizen or the property interest transferred passed through a qualified domestic trust. 4. The property interest was included in the decedent’s gross estate 5. The property interest passed from the decedent to the surviving spouse 6. The property interest is not a non-deductible terminable interest. 11. ) Terminable interest rule A terminable interest is non-deductible if: An interest in the same property has passed (for less than adequate and full consideration in money or money’s worth) from the decedent to any person other than the surviving spouse or other than the estate of the surviving spouse. 12. ) Survivorship provisions * Surviving spouse must outlive the decedent by at least 6 months in order to claim the marital deduction. * If an interest in property passes from the decedent to a person who was the decedents spouse, but who was not married to the decedent at the time of death, the interest is not considered as passing to a surviving spouse. Status as a surviving spouse cannot be established by a will provision that treated the first spouse to die as a surviving spouse for purposes of the marital deduction. 13. ) QTIP * An estate or gift tax marital deduction is allowed for the value of qualified terminable interest property if the executor makes the election * Qualified terminable interest property is property passing from the decedent to a spouse who is entitled to all income from the property (or a portion thereof) for life, payable at least annually. The QTIP rule is an exception to the general rule that transfers of terminable interests such as life estates do not qualify for the marital deduction * Under the QTIP exception, if all requirements are met, a life interest granted to a surviving spouse will not be treated as a terminable interest. * The entire property subject to such an interest will be treated as passing to the spouse and the entire value of the transferred property will qualify for a marital deduction. 14. ) Charitable Remainder vs. Charitable Lead Trusts
Charitable Remainder Trust – A tax exempt irrevocable trust designed to reduce the taxable income of individuals by first dispersing income to the beneficiaries of the trust for a specified period of time and then donating the remainder of the trust to the designated charity. Charitable Lead Trust – A trust designed to reduce beneficiaries taxable income by first donating a portion of the trust’s income to charities and then after a specified period of time, transferring the remainder of the trust to the beneficiaries. Both Trusts reduce the gross estate and therefore reduce estate tax liability. 15. ) Medical expenses of decedent * Medical expenses resulting from a decedents last illness are a deductible claim against the estate. * Can elect to deduct on the final 1040, or on the estate return, but the estate return will most likely provide the most benefit * Estate tax rates are significantly higher than individuals * Medical expenses are fully deductible on estate return and only deductible to the extent that they exceed 7. 5% of AGI for the individual return. If the decision is made to deduct medical expenses on the decedent’s last income tax return, a statement that such amount has not been claimed as a deduction on the estates form 706 and that the estate waives any right to do so in the future must be filed. 16. ) Pre – 1982 marital deduction formula clauses * For estates of decedents dying before 1982, the maximum estate tax marital deduction for property passing from the decedent to the surviving spouse was equal to the greater of one half of the decedents adjusted gross estate, or $250,000.
Example: Spouse died in 1981 with adjusted gross estate of $395,000 and had passed $250,000 in property to his surviving spouse that qualifies for the marital deduction. This left a net estate of $145,000 subject to estate tax. The Unified credit exemption equivalent for 1981 eliminated any estate tax liability. 17. ) Determination of taxable gifts * A gift is a voluntary inter vivos transfer of property by one person to another without consideration or compensation therefore. It is a gratuity that requires the fulfillment of three essential elements: 1. ntent on the part of the donor to make a gift 2. delivery by the donor of the subject matter of the gift 3. acceptance of the gift by the donee 18. ) Prepaid state tuition plans 19. ) Gifts of medical and educational costs * If the gifts are paid directly to the medical or educational facility, then they can avoid gift taxation * If paid to an individual to use for medical or educational costs then they will have to pay gift tax on the amount receive to the extent that it exceeds the annual exclusion amount. 20. ) Gifts with respect to joint tenancy with rights of survivorship When a joint tenancy with rights of survivorship is created in property, other than a joint bank account, the transaction constitutes a gift if the contributions of the joint tenants are unequal. The amount of the gift is a fractional share or shares of the amount by which the contribution of one joint tenant exceeds the contributions of each of the others. * The creation between husband and wife of a tenancy by the entirety or joint tenancy with right of survivorship in real property is not a taxable gift if the tenancy is created after 1981. 21. ) Due date of gift tax returns April 15th or due date of the original individual return. * Form 4868 grants you an extension on both 1040 and 709 thru October 15th. * Form 8892 grants an extension just on the 709. 22. ) Under what circumstances is a gift tax return required to be filed * Spouses who elect to split post December 31, 2002 gifts must, regardless of the amount of the gift, file form 709. * Generally you must file form 709 any time you make a gift that exceeds $13,000 or $26,000 if MFJ, or for any transaction with a family member over the exclusion amount even if it is not considered a gift. 3. ) Criteria to qualify for the gift tax annual exclusion In order to recognize it as a gift of a present interest, the code requires a substantial present economic benefit by reason of: * Use, * Possession, or * Enjoyment of the property itself or income from the property 24. ) Income tax rules regarding sale of property received as a gift The recipient of a gift does not pay any taxes or report any income when the gift property is received. Instead, the new owner of the property will report any gain or loss on the property.
Capital gains or losses on property received as a gift are calculated with respect to the original owner’s cost basis in the property. In other words, when property is given, the recipient receives both the property and the property’s cost basis. The recipient also receives the donor’s holding period in the property for determining whether a gain is long-term or short term. The basis of gift property is the original owner’s cost basis, plus or minus any adjustments.
Typical adjustments that increase basis are substantial repairs and improvements, along with any expenses for selling the property (such as broker’s commissions). Typical adjustments that reduce basis are depreciation the previous owner claimed for renting out the property. The recipient’s gain or loss on the gift property will be the selling price minus this adjusted cost basis. 25. ) Requirements for making a qualified disclaimer (Pg. 353) A qualified disclaimer is an irrevocable and unqualified refusal to accept an interest in property that satisfies the following four conditions. . The refusal must be in writing 2. The written refusal must be received by the transferor, his or her legal representative, or holder of legal title, no more than nine months after the later of the day on which the transfer creating the interest is made or the day on which the person making the disclaimer reaches age 21. 3. The person making the disclaimer must not have accepted the interest or any of its benefits prior to the disclaimer. 4. The interest must pass to a person other than the person making the disclaimer as a result of the refusal to accept the property. 26. Differences between the gift and estate tax The due dates are different: Gift – April 15th, vs. Estate tax – 9 months after the date of death. Deductions and exclusions are different. 27. ) What is a split gift? (pg. 358 & 389) A gift given from husband and spouse. The election of a split gift as the effect of doubling the annual exclusion available for each done and allows for the possibility of utilizing both spouses unified gift tax credit. 28. ) Effect of the donee paying the gift tax (pg. 370) When it is agreed upon that the donee will pay gift tax, these gifts are alled net gifts in which the value of the gift is reduced by the amount of tax liability. The U. S. Supreme Court rule that to the extent that the gift tax paid by the donee in a net gift situation exceeds the donors basis in the transferred property, the donor recognizes gain on the transaction for income tax purposes. 29. ) Disclaimers: (Pg. 353) **See example on pg. 237 for qualified disclaimer** * A person who is a beneficiary, heir, or next of kin may refuse to accept ownership of property that would otherwise pass to him or her without being subject to the gift tax. The refusal to accept the property must be made in the form of a qualified disclaimer. * A qualified disclaimer of property may be made by a third person so that the property may pass to the decedent’s surviving spouse and qualify for the marital deduction. 30. ) Gift Tax Exclusion: $13,000 filing single; $26,000 MFJ 31. ) Form used to file gift tax 709 32. ) Executor elections: (Pg. 281) 1. Alternate valuation 2. Special use valuation 3. Installment payment of tax 4. Deferred payment of tax attributable to certain remainder and revisionary interests. 33. ) Transfers in settlement of support obligations: (pg. 356)
An exclusion from the gift tax is provided with respect to certain transfers in settlement of support obligations. The exclusion applies to transfers of property that are made under a written agreement between spouses in settlement of their marital and property rights or for the purpose of providing a reasonable allowance for the support of their children. Such transfers will be treated as having been made for full and adequate consideration, and will be exempt from gift tax under one condition- the divorce must occur within the three year period beginning on year before the property settlement is entered into. 4. ) Gift tax planning and considerations: * Determine whether or not your estate will be taxable. If so, you want to decrease the estate by offering gifts up to the exclusion limits to avoid gift tax. Other items he mentioned not on the study guide: Crummy Trusts (pg. 397) A Crummey trust is a trust for the benefit of a minor into which gifts are made in a manner qualifying them for exclusion from the unified gift and estate tax. Normally, gifts to minors are subject to parental / guardian control until the age of majority.
In order to delay the transfer of control beyond the age of 18, the funds must be placed in trust. However, the annual gift exclusion ($13,000 per individual and $26,000 per married couple as of 2011) from the gift tax is only available for gifts of so-called current interests. Normally, a gift into a trust that comes under control of the beneficiary at a future date does not constitute a current interest. A Crummey trust achieves the desired treatment by offering the recipient a window of time (often 30 days) to take immediate control of the gift. The control offered only applies to the current gift–by assumption, an amount no greater than the annual exclusion amount–not the entire trust. ) If the recipient fails to do so during that window, the gift becomes part of the trust, and is subject to the trust’s distribution conditions. However, since the recipient had the opportunity to receive the funds outside of the trust, the gift is deemed to be a current interest, subjecting it to the annual exclusion. 2503 (C) Trust: Not considered a future interest therefore does not qualify for the gift tax exclusion.
Must meet the following conditions to be a 2503 (C) Trust: 1. Both the property and its income may be expended by or for the benefit of, the minor done prior to his or her attaining the age of 21 2. In the event of the donee’s death prior to reaching 21 years of age, the property and income not expended will pass to the donee’s estate or to persons appointed by him or her under the exercise of a general power of appointment. 2503 (B) Trust: Internal Revenue Code 2503(b) and 2503(c) expressly permit gifts in trust for the benefit of a minor – which also qualify for the annual gift tax exclusion.
With the 2503(b) trust, the trust is required to make annual (or more frequent) distributions to the child but the assets of the trust do not have to be distributed when the child reaches age 21. With a 2503(c) trust, the assets must be distributed when the child is age 21. Uniform gifts to minors: The value of the property transferred under the uniform of the model act may be includible in the gross estate of the donor if the donor appoints himself as custodian of the property and dies while serving in that capacity before the minor done attains majority.
The income from such property, to the extent it is used for the support of the minor done, is includible in the gross income of any person who is legally obligated to support the minor done. Problems: Problem 1 – Compute Estate tax; know the steps (2009) Look over example given on handout Problem 2 – Gift tax (2009) – Unmarried, gift to 4 different children * Gift tax rates – pg. 11 * Add back previous year taxable gifts. Problem 3 – Credit on prior transfers – Death within 2 years (Calculate tax) Pg. 287