Transcript Week 2- Estate Tax Overview

Overview of Estate/Gift Tax
Unified Rate Schedule
Single unified transfer tax applies to
estates/gifts (post 12/76) – until 2003 why?
Rates range from 18% to 45% on cumulative
lifetime transfers (see table on inside flap)
Rates scheduled to decrease until 2010
What about repeal?
Unified credit essentially results in the
minimum out of pocket rate of 45%.


Refer to the Unified Rate Schedule in the flap of
the CCH Estate & Gift Taxes Explained
Do you know how this 45% minimum was
determined?
Unified Rate Schedule - Gifts
Gift purposes




Calculate lifetime (cumulative) taxable gifts
Compute tax using the unified rate schedule
Subtract tax on cumulative gifts prior to current
year.
Result in current years gift tax
Why is this method used? Why not simply do
it on a year by year basis using the table?
Unified Rate Schedule Estates
Apply rates schedule to estate tax base


Estate tax base = taxable estate + all taxable gifts
made after 1976 (other than gifts included in the
gross estate)
Why do we add the previous taxable gifts?
Estate tax before credits =


Tax on the estate tax base
Less: gift tax payable on the gifts included using
the current rate structure
Credits (unified credit/foreign tax credit) are
subtracted to arrive at estate tax due.
Unified Credit
One time credit against taxes paid on wealth
transfers both in life and at death.
Applies to cumulative life transfers
The credit is not a refundable credit. What is
a refundable credit?
Credit will be increased to $1,455,800 over
the next 8 years = $3.5 Million exclusion. In
2008 it is $780,800 for a total exclusion of
$2,000,000.
Filing Requirements - Estates
and Gifts
When is the estate and gift tax returns
(Form 706 and 709) due?
Does every person who dies have to file
this form?
What triggers the need to file a gift tax
return?
What is the essence of the generation
skipping transfer tax?
Gift Tax Returns- Must be filed
IF:

The donor gave taxable gifts to any donee other
than the donor’s spouse
 What are taxable gifts?

The donor gave gifts to charity unless the donor
transfers entire interest and the property is used
for a charitable purpose only
 Is this the only place charitable gifts are recorded?


Election of Gift splitting / Gift of terminable
interest to spouse.
Gift taxes not scheduled for repeal
Estate and Gift Tax Returns
Returns - Forms Required




What form is used to report and pay the estate
tax of U.S. Citizens or residents?
Form 706-NA - used for nonresidents, non citizens
Form 706-A - used to report recapture of tax
benefits previously enjoyed under Sec. 2032A
elections
When must the estate tax return be filed?
Who must file an estate tax return?
Do Non-resident aliens need to file an estate
return?
Gift Tax
What is the gift tax?
In general what is a gift?
On whom is the gift tax levied?
In general how is the gift tax calculated?
When is the gift tax due?
How are gifts reported?
How does the unified credit apply to gifts?
Gift taxes (continued)
What is a disclaimer?

What is the essence of a disclaimer – see
page 311.
Does a gift exist when a joint tenancy
with right of survivorship is created?

Does it matter if the joint tenancy is between
spouses or is created as a tenancy by the entirety
Gifts (continued)
What are taxable gifts?
How does the annual exclusion factor into the
calculation of taxable gifts?
Do transfers in Settlement of Support
Obligations constitute taxable gifts?
How are gifts valued? Is there an alternate
valuation date available for gifts?
What is gift splitting and how is it
operationalized?
Gift Taxation (continued)
What amounts reduce the amount of gifts
subject to tax?
What are the steps involved in calculating gift
tax? Why do these steps make sense?
If a married couple gives $24,000 to their
child, do they have to file a gift tax return?
What documentation must be included to
support the valuation of property?
Gifts - valuation
How are gifts valued?



Real estate? / Business Interests? / Mortgages?
Stocks and Bonds?
Household effects? / Other property?
How are reversionary interests treated for gift
purposes?
How are gifts of life insurance contracts
valued?
Gifts - Annuities
What are net gifts?
Are transfers for consideration
considered gifts?
Are transfers in settlement of marital
rights considered gifts?
Taxable gifts
What are the elements of a gift?
Go over the list of specific types of transfers
that are classified as gifts – page 331.
Are gifts to political organizations gifts.
What about inter-spousal transfers?
How are below market rate loans treated?


What are the gift tax implications?
What are the income tax implications?
Gift Taxation (continued)
How are annuities valued for gift tax purposes?



Gratuitous purchase of an annuity contract is a gift if the
purchaser retains no rights in the contract.
Creation of an annuity in a trust or other property
constitutes a taxable gift.
A taxable gift is also made when a person establishes an
annuity for his or her own benefit and irrevocably names
another to receive certain benefits that may be payable after
the annuitants deaths
U.S. savings bonds - Simply naming beneficiary for
post death is not a gift.. A gift does exist when you
buy the bond in someone else name.
Gifts (continued)
What is required to have a completed gift?
What is dominion and control – see page 340?
How does dominion and control impact whether a gift
exists?
Give some examples where dominion and control
impact the timing of a gift? What estate tax
provisions does this sound like?
Do gifts for medical and educational purposes qualify
for the $12,000/$13,000 gift tax exclusion.
When does a gift tax return not have to be filed?
Gift-Splitting
Must be elected annually on form 709
Gift splitting requires that each spouse file a separate
709 – Go over example on page 340
Equalizes the difference between separate property
and community property in community property
states.
Donor must be married at the time of the gift.
Each spouse must a citizen or resident at the time of
the gift.
Annual Exclusion ($12K per
donee) $13K per donee - 2009
What gifts does it apply to?
How many exclusions can a donor take per donee?
Under what conditions does it not apply to
educational and medical expenses? What qualifies as
medical expenses? What about QTP (page 349?)
Gifts by check may be a problem, why?
What are future interests – pg. 351
Gifts of income that commence immediately, are gifts
of a present interest. What are Crummey trusts?
Gifts to a minor are not a future interest if the
property and income as long as property & income
will be dist at 21.
Deductions and Exemptions
Gifts to qualified charities are deductible for gift tax
purposes see page 357.
 Special rules exist for the Sec. 507 private
foundation termination tax.
 Similar treatment for charitable deductions when
dealing with remainder interests.
Marital Deduction - unlimited for non-terminable
interest property


Special rules for alien spouses (128K)
annually
Special rules for TIP - exception QTIP – p
360
Generation Skipping Tax
What is the purpose of the Generation Skipping Tax?
GST only applies to direct beneficial interests. What
are direct beneficial interests? What interests are
excluded?
What is a generation skipping transfer (Sec. 2611)?
On what transfers do these provisions apply? (Sec.
2612) – Page 373-75
 Taxable distribution
 Taxable Terminations
 Direct Skips
GST (continued)
What is the general definition of a skip
person (Sec. 2613)?
Who is a skip person for purposes of a trust?
How are non-lineal descendents assigned to
generations for GST purposes (Sec. 2651)?
What is the special rule in the case of
deceased parents?
Return Requirements
Lifetime direct skips - reported on form 709 gift tax return - due April 15
GST occurring at death - GST calculated as
part of the form 706.
If from a trust - File form R-1.
Generation skipping trusts must file forms
706GS to report trust distributions that are
subject to the GST.