Federal Estate and Gift Taxation in a Nutshell
Authors:
McNulty, John K. / McCouch, Grayson M.P.
Edition:
9th
Copyright Date:
2020
19 chapters
have results for Tax
Chapter 2. The Federal Estate, Gift, and Generation-Skipping Transfer Tax Laws in Outline 80 results (showing 5 best matches)
- One subtle but significant difference between the gift tax and the estate tax involves the measurement of the tax base. For gift tax purposes, the amount of a gift is defined as the value of the transferred property, excluding any gift tax imposed on the transfer. Accordingly, the gift tax is said to be computed on a “tax-exclusive” base; there is no “tax on the tax.” In contrast, the estate tax base includes the value of all the property owned at death (including any amount used to pay the estate tax), not just the property that actually comes into the hands of the beneficiaries. The estate tax must be paid from “after-tax” dollars, and the estate tax base is therefore said to be “tax-inclusive.” As a result of this difference in the measurement of the tax base, the rates of the gift tax are lower than those of the estate tax, even though both taxes share the same ...illustrate, suppose that both taxes are imposed at a flat 50% rate. A donor who makes an inter vivos gift of $1,000...
- Like the tax on taxable terminations, the tax on taxable distributions is
- The computation of the gift tax is further complicated by the fact that it is To make the tax cumulative in this way, the tax for the current year’s gifts must be determined in the following fashion. First, total taxable gifts made since the enactment of the gift tax to the end of the current taxable year must be aggregated and a “tentative tax” on that amount computed at current rates. From the tax so determined must be subtracted another “tentative tax,” again computed at present rates, on the total taxable gifts made prior to the beginning of the current year. The difference is the amount of gift tax on gifts made in the current year. . The progressive rates and this cumulative computation of the gift tax result in taxing larger gifts or gifts made in succeeding years at progressively higher rates, up to the maximum rate under the unified rate schedule. Beginning in 2018, the gift tax in effect is imposed at a flat 40% rate on all taxable gifts in excess of the inflation-indexed...
- tax-inclusive
- The result is the estate’s tax liability, which amounts to a tax on the value of the taxable estate, at the progressive rates reflecting not just the taxable estate but also the decedent’s cumulative post-1976 taxable gifts. However, the amount thus ascertained is not the final tax liability, for certain are allowed against the tax otherwise payable. The eliminates the estate tax on taxable transfers up to an §§ 2012 through 2015 for gift taxes paid on pre-1977 gifts that are included in the gross estate, for estate tax paid on prior transfers, and for foreign death taxes. These credits are subtracted from the tax liability determined by applying the rates and computational mechanics of § 2001 against the taxable estate. The amount remaining after subtracting these credits is the tax that must actually be paid.
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Chapter 1. Introduction 78 results (showing 5 best matches)
- Taxation of property transferred by an individual to others at death is one of the oldest and most common forms of taxation, at least in societies where property is privately owned. Death transfer taxes often take the form of an tax, which is an excise tax levied on the privilege of transferring property at death and usually is measured by the size of the decedent’s estate. Or, a death tax can be configured as an tax, an excise tax levied on the privilege of receiving property from the decedent and usually measured by the amount of property received by each particular recipient, rather than by the amount of the total estate, and by the recipient’s relationship to the decedent. The federal estate tax, as its name suggests, is an example of the former; several death taxes are cast in the form of an inheritance tax. Both forms of tax usually, but not necessarily, employ a graduated rate scale; the larger the estate or the larger an inheritance received, the higher the ...tax rates (...
- Since a transfer tax imposed at death can so easily be avoided by lifetime gifts—“inter vivos” gifts, made between living persons—a federal transfer tax is imposed on the making of gifts during life. Some states also impose a gift tax to back up their death transfer taxes. Gift taxes also can be progressive; the rate of tax varies with the amount of taxable transfers previously made during the donor’s lifetime. Gift taxes and death taxes in the form of estate or inheritance taxes are known as “transfer taxes.” Transfer taxes can be combined or integrated so that, for example, the rate of tax on transfers made at death is affected by the aggregate amount of gift transfers made during life.
- As with all other taxes, the basic computation of the estate tax takes this form: the
- The gift tax is a companion tax to the estate tax. For pre-1977 gifts, its rates were lower, three-quarters of the estate tax rates. Now its rates are the same as those of the estate tax, and this is a second aspect of the 1976 “unification” of the two taxes. See . The gift tax applies to all gratuitous transfers of property made during life, since such transfers serve to reduce the estate subject to the estate tax at death. See 2511. However, the two taxes do not fit together perfectly. As a result, some lifetime transfers that were subject to the gift tax are nevertheless includable in the gross estate, but for gifts made before 1977, a credit for gift taxes paid attempts to eliminate any actual “double tax.” See . For post-1976 gifts, this credit is inapplicable, since the gift taxes imposed on lifetime gifts are automatically taken into account in the unified estate tax computation. See ..., gaps or conflicts may arise from the lack of complete “integration” of the two taxes...
- The U.S. Constitution requires that all “direct taxes” be apportioned among the several states according to their respective populations. (After the income tax was held to be a direct tax, the Sixteenth Amendment was passed to exempt the income tax from this apportionment rule.) The federal estate and gift taxes are not viewed as direct taxes. They are excise taxes, imposed on an event or a transaction (a gift or transfer of property at death), as distinguished from direct taxes, which are imposed on a person (a “poll tax”) or on property itself (whether or not it has been transferred or otherwise made the subject of a transaction or an event). Consequently, the federal estate and gift taxes fall outside the apportionment requirement.
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Chapter 5. Transfers During Life: Application of the Estate and Gift Taxes 80 results (showing 5 best matches)
- The gift tax will apply to an inter vivos transfer that is complete for gift tax purposes. But even though gift tax rates are nominally the same as those of the estate tax, it is necessary that the estate tax itself apply to a transfer made during life if that transfer is the functional equivalent of a testamentary transfer and would provide too easy a means of avoiding the estate tax. This potential avoidance results from the gift tax annual exclusion, from the different valuation dates under the two taxes, and from the fact that the estate tax base, but not the gift tax base, includes the assets used to pay the tax. These continuing advantages (even after the 1976 “unification” of the gift and estate taxes) of
- If a donor makes a completed transfer of property during life, the gift tax will apply pursuant to its own rules, even though the same transfer may also give rise to an estate tax at death by virtue of or some other provision pertaining to transfers not complete for estate tax purposes. To mitigate the burden of overlapping taxes, a credit or equivalent offset is allowed against the estate tax for gift taxes previously imposed on such transfers. For pre-1977 transfers, the basic rules of the credit for gift tax paid are spelled out in and the regulations under that section. The amount of the credit is limited so that it cannot exceed the amount of the gift tax paid on the transfer or, if less, the amount of estate tax attributable to the same transfer when it is later included in the gross estate. The statute and regulations should be consulted for more detailed rules pertaining to the credit.
- Overall, it appears that a retained power or interest, of the kind the estate tax is concerned with in §§ 2036–2038, may render a gift incomplete for gift tax purposes as well, but will not necessarily do so in every case. In other words, the gift tax and the estate tax are not mutually exclusive or perfectly coordinated. Some transfers will be treated as complete when made for gift tax purposes even though they are incomplete until death for estate tax purposes.
- Just as the gift and estate taxes are not perfectly correlated, differences may arise in the application of the gift tax and the income tax or the estate tax and the income tax. For example, in , the court held that a taxable gift had been made when a wife set up a short-term trust for her husband, even though for income tax purposes the transfer was regarded as incomplete and the wife was taxed on the trust income each year during the term of the trust.
- Since a transfer tax solely on property owned at death is easily avoided by making gifts shortly before dying, the federal estate tax, ever since its enactment in 1916, has contained a provision to bring some such gifts into the estate tax base. The federal gift tax, enacted in 1932, while limiting the scope of potential avoidance, did not entirely remove the need for special treatment of deathbed gifts, because of its lower rates, separate deductions and its fresh start up the rate schedule. Although the 1976 “unification” of the gift and estate taxes eliminated the most glaring disparities in the tax burden on inter vivos
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Chapter 15. A Few Fundamentals of Estate Planning 45 results (showing 5 best matches)
- The second general tax advantage of making lifetime gifts is that the “tax-exclusive” gift tax base includes only the value of the transferred property (not including any gift tax imposed on the transfer), while the “tax-inclusive” estate tax base includes the entire value of property transferred at death (including any funds used to pay the estate tax). Thus, if a donor makes a gift more than three years before death, the amount of the resulting gift tax will never be subject to transfer tax. (If the gift is made within three years of death, the amount of the gift tax will be subject to the gross-up provision of estates. For example, assuming a flat 40% tax rate, a person starting with $28 million can make a $20 million gift and pay the resulting gift tax of $8 million. In contrast, a transfer of $28 million at death will incur an estate tax of $11,200,000, leaving only $16,800,000 for the recipients after tax. Thus, the transferor can save $3,200,000 simply by making the transfer...
- Estate or Gift Tax as an Alternative to the GST Tax.
- Marital deduction planning under the federal transfer taxes can occasionally be complicated by estate or inheritance taxes at the state level, if the state tax does not follow the federal model. For example, if the estate tax threshold under state law is less than the federal exemption equivalent, a credit shelter bequest may generate a state estate tax liability but be completely sheltered from federal estate tax. In that event, it may make sense to leave a portion of the credit shelter bequest in a form that qualifies for an elective marital deduction for state (but not federal) tax purposes, if this is permissible under state law.
- Tax planners often recommend structuring wills and trusts so that the share of property passing to a surviving spouse (and in a form qualifying for the unlimited marital deduction) will be of sufficient size to eliminate estate tax liability at the death of the first spouse. However, this approach may actually increase the amount of estate tax on the surviving spouse’s estate by an amount that exceeds the tax saving in the first spouse’s estate, if the credit shelter bequest is not adequately funded. (This might occur, for example, if the couple held all of their property in joint tenancy with a right of survivorship.) In a system with graduated tax rates, some tax planners have recommended an alternative approach of equalizing the taxable estates of the married couple in order to allow each spouse not only to use his or her unified credit but also to obtain a separate “ride” up the rate ladder. However, the advantages of splitting estates between spouses have been severely... ...tax...
- Traditionally, estate planners have weighed the benefits of a fresh-start income tax basis for inherited property against the burden of a countervailing estate tax liability. That calculus has shifted significantly in recent years, however, as a result of dramatic increases in the taxable threshold for estate taxation. In effect, estates below the inflation-indexed $10 million estate tax threshold face an effective estate tax rate of zero while obtaining a tax-free basis step-up for all appreciated property owned at death. With no countervailing estate tax liability, the advantages of eliminating potential capital gains tax by holding appreciated property until death will become irresistible as a basic planning strategy for many individuals of moderate or even substantial wealth.
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Chapter 14. Credits Against the Estate and Gift Taxes: Liability and Payment of the Taxes 37 results (showing 5 best matches)
- The separate gift and estate tax exemptions under prior law were worth more to high-bracket taxpayers than to those in lower brackets. For example, under the old estate tax rate schedule, the $60,000 estate tax exemption resulted in a tax saving of $9,500 for a $60,000 estate at the bottom of the rate schedule, compared to a $46,200 tax saving for an estate in the top rate bracket. In other words, the exemptions, acting as deductions, came “off the top,” and thus eliminated tax on $30,000 (gift tax) and $60,000 (estate tax) of taxable transfers at the taxpayer’s
- The mechanics of the unified credit in the estate tax context are somewhat complicated, due to the cumulation of lifetime gifts into the estate tax base. Section unified credit (reduced only by 20% of any exemption allowed under prior law for post-September 8, 1976 gifts) to be applied against the estate tax liability, seemingly regardless of whether any or all of the available credit has already been taken against the gift tax during life. In spite of appearances, however, this does not amount to a double allowance of the credit, since the estate tax is computed under § 2001(b) as the excess of (1) a tentative tax on the sum of the taxable estate taxable gifts made after 1976 (other than those already includable in the gross estate), over (2) the gift tax “payable” with respect to gifts made after 1976. The unified credit is then applied against this amount. To the extent that the unified credit was used during life, the gift tax “payable” will have been reduced, resulting in a...
- In many instances, no tax will be payable even though an estate tax return must be filed; even if the may well be equal to or less than the exemption equivalent due to various deductions. (Moreover, any tax computed on the taxable estate may be offset in whole or in part by other credits against the estate tax. See § 73,
- Credit for State Death Taxes.
- Credit for Gift Tax.
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Chapter 16. Reform Proposals and Fundamental Alternatives to Present Transfer Tax Systems 63 results (showing 5 best matches)
- Proposals to achieve complete integration of the estate and gift taxes have focused on two main issues. The first issue involves the definition of the transfer tax base. Under current law, the gift tax is computed on a “tax-exclusive” base, since the amount of a taxable gift does not include any gift tax incurred by the donor. In contrast, the estate tax is computed on a “tax-inclusive” base, which includes all property owned at death, including any funds used to pay the estate tax. Thus, notwithstanding the unified rate schedule, a lifetime gift is taxed more lightly than a similar transfer at death because the gift tax is payable with pre-tax dollars while the estate tax must be paid with after-tax dollars. For example, assuming a flat 40% tax rate, a person with $28 million can make a gift of $20 million and pay the resulting gift tax with the remaining $8 million. If the person transfers the same property at death, however, the estate tax would be $11,200,000, leaving only $16,...
- If the estate and gift taxes were fully integrated, the choice of a particular timing rule would become considerably less important. In general, if the tax rate remains constant, and the tax base is consistently defined and increases over time at the same rate as the general after-tax rate of return on investments, it can be demonstrated that the tax will have the same present value regardless of whether it is imposed immediately or at some later time. To see why this is so, suppose that both the gift tax and the estate tax are imposed on a uniform tax-inclusive base at a flat 40% rate, and that all property appreciates at an annual rate of around 7%, so that the dollar value of any asset will double in value every ten years. Under these (admittedly stylized) assumptions, a donor with $28 million could make a gift of $16,800,000, after paying a gift tax of $11,200,000. (Remember, in computing the tax on a tax-inclusive base, the amount given to the donee must be “grossed up” by the...
- For a sampling of reform proposals concerning the integration of the estate and gift taxes and related matters, see Staff of Joint Committee on Taxation, Options to Improve Tax Compliance and Reform Tax Expenditures 392–424 (2005); Task Force on Federal Wealth Transfer Taxes, Report on Reform of Federal Wealth Transfer Taxes, 58 Tax Law. 93 (2004); U.S. Treasury Dept., Tax Reform for Fairness, Simplicity and Economic Growth (1984); ABA Section of Taxation, Task Force Report on Transfer Tax Restructuring, 41 Tax Law. 395 (1988); Gutman, A Comment on the ABA Tax Section Task Force Report on Transfer Tax Restructuring, 41 Tax Law. 653 (1988); and Dodge, Redoing the Estate and Gift Taxes Along Easy-to-Value Lines, 43 Tax L. Rev. 241 (1988). For earlier proposals, see U.S. Treasury Dept., Tax Reform Studies and Proposals, House Comm. on Ways and Means, Senate Comm. on Finance, 91st Cong., 1st Sess. (1969); American Law Institute, Federal Estate and Gift Taxation: Recommendations and...
- Consequences of Taxing Recipients Instead of Transferors.
- Equity, with respect to transfer taxation as in many other areas of tax policy, is largely in the eye of the beholder. In terms of horizontal equity, the present transfer taxes are open to criticism on the ground that they favor consumption relative to saving—a person who manages to consume all of his accumulated wealth will never incur a transfer tax, whereas a person who consumes little and accumulates a fortune will eventually become subject to tax. In addition, to the extent that the tax bears unevenly on different types of property or forms of disposition, it may be viewed as failing to provide equal treatment for similarly situated taxpayers. In terms of vertical equity, however, the case for the transfer taxes is considerably stronger. From the perspective of , the taxes tend to reduce inequality of inherited wealth and enhance equality of opportunity. More generally, due to the structure ...exemptions, the transfer taxes represent the single most progressive component of...
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Chapter 3. The Estate and Gift Taxes Applied to Transfers at Death and During Life 44 results (showing 5 best matches)
- income tax
- In general, the rules about when a transfer is complete for gift tax purposes do not coincide exactly with the rules about when a transfer is complete for estate tax purposes. Therefore, a transfer that is complete and thus incurs a gift tax may nevertheless be regarded as incomplete for estate tax purposes, with the result that estate tax is payable on the same property or interest at the time of the donor’s death (with a credit for the gift tax incurred during life). See Chapter 5, especially § 39,
- These deceptively simple statutory rules give rise to difficult questions about what is a “gift” for federal gift tax purposes. In the absence of more detailed statutory assistance, regulations, rulings and cases are important aids in construing the statutory rules. The regulations under § 2511 prove especially 25.2511–2. One of the first questions encountered in applying the basic statutory rules is what will be regarded as “property” for purposes of the gift tax. (A “gift” of services is not taxed as a gift by the federal gift tax—which raises serious questions of equity, efficiency and transfer tax (and income tax) policy.)
- If a person makes a gift of cash or other property and conditions the gift on the donee’s agreement to pay the resulting gift tax liability, the amount of the gift is less than the full value of the transferred property. Since the gift tax is primarily a liability of the donor, the donee’s payment may be viewed as consideration received by the donor. In effect, the donor has made a “net gift” of the value of the transferred property less the amount of the gift tax. See . The gift tax computation is complicated by the fact that the amount of the taxable gift depends on the amount of the gift tax, which in turn depends on the amount of the taxable gift, giving rise to a problem of interdependent variables. The net gift rule and a formula to determine the amount of gift tax due on the net gift are set out in
- did not end the controversy surrounding the use of interest-free loans as tax avoidance devices. Such loans remained popular because the $10,000 annual exclusion sheltered some fairly large loans from the gift tax. Even at a 10% implied rate, § 2513 gift-splitting provision could make a $200,000 loan to a child without incurring gift tax on the uncharged $20,000 interest. In addition, any generated from investment of the loan proceeds (e.g., bank account interest) would be attributed to the child and taxed at the child’s (probably lower) marginal income tax rate. This income tax avoidance technique is called
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Preface 5 results
- The book is organized in a way that parallels many courses and teaching materials. It begins with an introduction to the gift tax, the estate tax and the generation-skipping transfer tax as separate components of the transfer tax system. After the introductory chapters, however, the book follows a “transactional” approach, taking up both the estate tax and the gift tax (and, where appropriate, the generation-skipping transfer tax) treatment of particular kinds of transfers, dispositions and situations.
- Very little attention has been given to the matter of filling out required tax returns or forms or to other questions of compliance and administration of the tax laws. These matters fall outside the scope of a short volume of this kind.
- ..., now in its ninth edition, provides an introduction to the federal law of estate and gift taxation in the United States. It is thus a companion to McNulty & Lathrope, Federal Income Taxation of Individuals in a Nutshell (8th ed. 2012), and McCouch, Federal Income Taxation of Estates, Trusts, and Beneficiaries in a Nutshell (2d ed. 2020). It is intended to be used by lawyers, students and scholars from other legal systems, as well as by law students in this country as a supplement to usual law school courses and materials, and perhaps as a refresher or orientation for members of the bar. It attempts to summarize the law, frequently mentioning the purposes of, and sometimes the alternatives to, existing legal rules. Only occasionally does it attempt a critical evaluation, or a history, or full justification, of the existing law. Chapters on some fundamentals of estate and gift and generation-skipping transfer tax planning, and on reform of and fundamental alternatives to the...
- We hope this short book will prove useful as an introduction, review or overview of the subject matter of federal wealth transfer taxation in the United States. We must emphasize that it cannot substitute for, but at best can supplement, a thoroughgoing examination and analysis of the Code, regulations, rulings and cases, which are the principal sources of federal wealth transfer tax law and which must be emphasized in the study of that law by students in law school courses.
- The statutory provisions themselves form the core of the subject matter, and readers of this book should have a current copy of the Internal Revenue Code at hand. Much the same can be said for the Treasury Regulations under the transfer taxes. Frequent references to sections of the Code (often cited as “I.R.C. §” to distinguish them from cross references to other sections of this book) and the Regulations (cited as “Reg. §”) are given throughout the text. Rulings and other administrative pronouncements are cited to the volume and page of the Cumulative Bulletin (abbreviated as “C.B.”).
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Chapter 11. Exemptions and Exclusions: Gift Tax (Gifts of Future Interests and Gifts to Minors) 14 results (showing 5 best matches)
- Prior to the 1976 Act, every individual was allowed a $30,000 lifetime exemption for gift tax purposes and, in addition, a separate $60,000 exemption for estate tax purposes. The 1976 Act consolidated the former exemptions and converted them into a unified credit. The credit is designed to offset the tax that would otherwise be imposed on taxable transfers up to a specified exemption or exclusion amount. Accordingly, it is sometimes referred to as an “exemption equivalent.” Unlike an exemption, however, the credit offsets the tax at the lowest brackets and hence provides a tax benefit that does not vary with the marginal tax rate applicable to a particular transfer. The credit is not refundable; it can only be used to offset tax otherwise due. See § 72,
- The size of the annual exclusion has been changed from time to time. These changes remain relevant in later years by reason of the way the gift tax is calculated. Although the gift tax is payable on an annual basis, each year’s gift tax computation builds on the donor’s cumulative taxable gifts made in prior years. To determine the tax payable for a given year, the total taxable gifts made since enactment of the gift tax on June 6, 1932 to the end of the current year must be aggregated and a tentative tax on such gifts must be computed at present rates. From that amount must then be deducted a tentative tax, again determined at present rates, on the total taxable gifts made in prior years. The amount so calculated is the gift tax for the current year. 2502. Against the gift tax so computed may be offset any unused portion of the unified credit. ...relevant in determining the current year’s tax liability. The excludable amount, originally set at $5,000, was reduced to $4,000 and...
- At least one court has applied “substance-over-form” analysis in the gift tax context. In create gift tax exclusions to avoid paying gift tax on indirect gifts to the actual family member beneficiaries,” and since indirect gifts are subject to gift tax by virtue of § 2511(a), the donor was, in fact, liable for gift tax on the gifts to the ultimate beneficiaries.
- The annual exclusion not only exempts many gifts from tax but also relieves taxpayers of a heavy burden of reporting those gifts by filing tax returns. In general, a donor is required to file a gift tax return for any calendar year in which he or she makes any gift that is not fully covered by the annual exclusion, the exclusion for tuition and medical care, the marital deduction or the charitable deduction. . The return is normally due on April 15 following the close of the calendar year, and the tax is to be paid when the return is filed. may give rise to gift tax liability. Another annual exclusion becomes available only after the turn of the calendar year; an unused exclusion expires at year end and cannot be carried over or accumulated.
- The estate tax exclusion under § 2031(c) involves an income tax tradeoff. To the extent the § 2031(c) exclusion is allowed in determining the gross estate, the decedent’s successors will take a carryover basis (rather than a fresh-start basis) in the land for income tax purposes.
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Chapter 9. Powers of Appointment: Estate and Gift Tax Consequences 18 results (showing 5 best matches)
- Since the mere possession of a post-1942 general power of appointment causes estate tax consequences, some incentive is created to exercise or release such a power during life. By treating a lifetime exercise or release as a taxable event, the gift tax rule of § 2514 backstops the estate tax and prevents easy, tax-free avoidance of
- In many respects, the rules of the gift tax with respect to powers of appointment complement the rules of the estate tax. The general rule of the gift tax, embodied in of such a power shall not be deemed a transfer by the holder for gift tax purposes, if the disclaimer meets the requirements of ). A statutory definition of what is a “general power of appointment” for gift tax purposes can be found in § 2514(c); it is almost identical to the estate tax definition in
- By way of a last word, it should be mentioned that a tax advisor has at his or her disposal a very useful estate planning tool in the form of the non-taxable power of appointment. By steering clear of the inclusionary rules of the property in trust or otherwise within restrictions that would be lost if outright ownership were conferred and without the tax liability attendant on outright ownership, subject only to the tax on generation-skipping transfers.
- § 2514 attempts to spell out when dealings with a power of appointment constitute a transfer, the gift tax consequences of such a transfer must be determined in the light of other gift tax principles as to completion, consideration, disclaimer, and the amount and value of the gift, if any.
- From the nature of a power of appointment, one can easily infer that estate tax consequences may and should be involved. For example, if the decedent held a power of appointment which could have been exercised to make him the owner of property held in trust, and the decedent exercised the power by will in favor of another person, the exercise of the power is functionally equivalent to a testamentary gift of property and will be taxed accordingly. Indeed, the mere possession of such a power, even if it is not actually exercised, may be viewed as approaching beneficial ownership of the property subject to the power.
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Chapter 13. The Marital Deduction and Split Gifts 48 results (showing 5 best matches)
- the consequent need to provide similar tax treatment for couples in separate property states, led Congress in 1948 to enact a marital deduction not only in the estate tax but also in the gift tax. The gift tax provisions set forth in closely resemble the estate tax provisions of § 2056, including a terminable interest rule with enumerated exceptions to ensure that inter vivos gifts which qualify for a marital deduction in the hands of the donor spouse will eventually be subject to gift or estate tax in the hands of the donee spouse. The following discussion will deal mainly with the differences between the marital deduction provisions in the gift tax and those in the estate tax.
- To remove the difference in tax consequences between community property and separate property systems, Congress first attempted to eliminate the estate and gift tax advantages formerly enjoyed by spouses living in community property states. Legislation in 1942 was directed toward this end. The income tax advantages of community property law, however, remained untouched, and several states that historically had operated under the common-law, separate property system changed or attempted to change to community property law, solely because of its federal tax advantages.
- In 1948 Congress enacted the income tax joint-return and split-income rules in order to give essentially the same income tax treatment to separate property spouses as was available to community property spouses. At the same time, amendments were made in the estate and gift tax laws in order to remove the discrepancies in treatment between separate property and community property states. The marital deduction and split-gift provisions originally were enacted in order to grant to separate property spouses the transfer tax advantages that only community property spouses had enjoyed before the 1942 legislation. The starting point for understanding the marital deduction and split-gift provisions is § 2056, the marital deduction provision of the estate tax.
- The marital deduction provides a way of postponing the federal estate tax that otherwise would have to be paid on a married person’s estate, as well as potentially reducing the aggregate tax that ultimately will have to be paid. The marital deduction does this by making it possible for the spouse who dies first to leave some or all of his estate in a manner that makes it deductible for federal estate tax purposes and thus reduces or eliminates the estate tax that must be paid at the decedent’s death. Of course, any property that qualifies for the marital deduction in the estate of one spouse will, if retained by the surviving spouse until death, be taxed in the survivor’s estate.
- In addition to postponing the payment of tax on some or all of the family wealth, the marital deduction may result in payment of a lower aggregate tax on the combined estates of both spouses. By splitting their combined wealth between their respective estates, the spouses can ensure that each of them can make full use of his or her unified credit (and low rate brackets, in a system with graduated marginal tax rates). The advantage of “estate splitting” is greatest for couples whose aggregate wealth does not exceed the spouses’ combined exemption equivalents; for couples with substantially larger estates, the potential tax benefit is less compelling because, under the current compressed rate schedule, once each spouse has exhausted his or her unified credit, any further taxable transfers will be subject to tax at a flat 40% rate.
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Chapter 4. Donative Intent and Consideration 45 results (showing 5 best matches)
- § 1041, the transferor is deemed to be making a gift even if he actually sells the property to his (or her) spouse for cash, and the transferee takes the transferor’s basis even though she (or he) paid the purchase price in cash (or other property). These income tax non-recognition and basis rules flow from the § 1041(b) characterization of the transfer as a gift. But that characterization certainly does not make the transferor taxable under the gift tax, at least if he (or she) receives fair and adequate consideration in return. The transferor then is not making a gift, for gift tax purposes, in the sense of a gratuitous transfer. For gift tax purposes, § 2516 deems qualified transfers pursuant to marital property settlement agreements to be made for a full and adequate consideration in money or money’s worth. For similar rules in the estate tax, see § 2516 exemption into the estate tax. Moreover, the “gift” characterization of ...the income tax, and not Subtitle B, which...
- Donative intent (on the part of the transferor) is not an essential element in the application of the gift tax. Application of the tax is based on the objective facts of the transfer and the circumstances under which it is made rather than on the subjective intent or motives of the donor. Reg. § 25.2511–1(g)(1). Therefore, it will not avail the taxpayer to claim that a transfer otherwise constituting a gift was not a gift because he or she did not have the requisite intent; by the same token, it is not necessary for the Service to prove that the taxpayer did have donative intent in making the transfer in order to impose the tax.
- Underlying the definition of a gift for gift tax purposes are considerations related to the role of the gift tax as a backstop for the estate tax. Thus, a transfer which depletes the estate of the transferor is likely to be regarded as a taxable gift. However, that notion cannot safely be translated into a rule, for many consumption expenditures and other disbursements that do in fact deplete the wealth and hence the gross estate of a person are not transfers subject to gift tax. Support given to a family member whom the taxpayer is obligated to support, such as a minor child or spouse, is not a taxable gift. A transfer by an elderly parent to a child will be scrutinized very carefully, even if it is cast in the form of a purchase or other business transaction, to determine whether it is a gift in disguise. While not every estate-depleting expenditure will be taxed as a gift, a transfer of property that confers a net benefit upon the recipient and is not offset by a benefit flowing...
- Marital Property and Support Rights as Consideration: Estate Tax and Gift Tax
- In other words, this entire area of the law reflects a general policy of protecting the estate and gift tax base from being eroded by marital property settlements that result in artificial estate depletion. Against this policy lies a determination to allow expenditures or transfers that do not result in wrongful estate depletion to be made tax-free. Thus a concept of “artificial” or “wrongful” estate depletion may help to explain the gift and estate tax rules. Another way of viewing the matter is to ask whether the promisee or recipient of an inter vivos transfer ...augmented the transferor’s wealth (and presumably will augment his or her gross estate at death) or relinquished some right or claim that the transferor otherwise could have been compelled to pay without incurring gift or estate tax. This understanding of the underlying policy, however, is not a legal standard or a way in which the Service or the courts generally frame the matter. At best it can serve as a rationale...
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Chapter 12. Deductions: Estate and Gift Tax 30 results (showing 5 best matches)
- In a system with graduated tax rates, a deduction (or an exemption or an exclusion, but not a credit) serves to reduce the rate of tax and thus it has a “wealth-variant” quality. For example, a funeral expense deduction of $1,000 will have a different tax effect in the case of a decedent with a large gross estate than it will in the case of a decedent with a small gross estate. The $1,000 deduction will reduce the tax liability of the estate by an amount equal to $1,000 times the marginal rate of tax payable “at the top” by the estate. Thus, a $1,000 deduction for an estate in the 40% bracket would save $400 in tax, but a deduction of the same amount for a smaller estate in the 20% bracket (i.e., a taxable estate over $10,000 but not over $20,000) would save only $200 in tax. This “wealth-variant” (or more properly, “estate-size-variant”) effect of the deduction is perfectly proper in a tax system with a graduated rate schedule. A larger net estate pays tax at a higher rate and...
- 2054 both on its estate tax return and on its income tax return. No double deduction is permitted; in order to obtain an income tax deduction for such items (or to offset expenses of selling property against the sales price in determining gain or loss for income tax purposes), the executor must waive the right to claim an estate tax deduction under 2054. As a result, the executor often has a choice to deduct all or part of an item (e.g., an administration expense or a casualty loss) against either the estate tax or the income tax, whichever will produce the greatest tax saving, but not against both. A similar rule applies to deductions for items described in 2622(b) of the generation-skipping transfer tax. The rule against double deductions does not apply, however, to deductions in respect of a decedent described in
- Any income taxes on income received after the death of the decedent, or property taxes not accrued before his death, or any estate, succession, legacy or inheritance taxes, are not deductible under . On the deductibility of taxes in general, see
- against his tax of some percentage of the amount he contributed to charity. Then, the dollar-for-dollar benefit of a charitable contribution would be the same for very wealthy decedents and for not-so-wealthy decedents. (Such a credit could even be made to be refundable to the extent it exceeded the tax payable.) Or, the deduction might be geared to a percentage formula so as to provide a tax benefit that did not vary with the size of the estate. More radically, the tax benefit could be made to vary or to phase-out with the size of the estate, so that a greater tax saving per dollar of contribution would be afforded to poorer taxpayers than to richer ones. All in all, whether the deduction should remain in the Code or should be repealed or should be converted to some other form of tax allowance is a question that merits further analysis; the existing structure need not be taken for granted. Similar rethinking led to the unification of gift and estate tax rates and the enactment of...
- Estate Tax Deductions for Expenses, Debts, Taxes, Losses: §§ 2053 and 2054
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Chapter 10. Inclusion and Valuation 39 results (showing 5 best matches)
- Preceding chapters of this book have dealt with the extent of inclusion or with the determination of which interest is to be included under the various rules of the estate tax. Similarly in the gift tax area, the question has been what property or interest is the subject matter of the gift and thus includable in the base for the gift tax. This chapter turns first to the question of how property or an interest in property that is admittedly includable in the gross estate shall be valued for
- § 2032A are labyrinthine. In addition to the internal complexity of the provision, problems can arise relating to its interaction with other aspects of the transfer tax system, for example, the marital deduction. Other trouble spots involve its application in a corporate or partnership context, the continuing requirement of qualifying use, and the transfer tax and income tax consequences of a subsequent transfer within the recapture period. In appropriate circumstances, special use valuation can produce substantial estate tax savings that outweigh the concomitant increase in administrative costs.
- 2702 forecloses such tax avoidance opportunities by treating the grantor’s retained interest as having no value for gift tax purposes, with the result that the value of the transferred interest will be correspondingly increased. In the above example, Mother’s retained income interest would be deemed to have a value of zero, and Son’s remainder would accordingly be valued at $1 million. Therefore, Mother would be subject to gift tax on the entire value of the trust property. The rationale for this approach is similar to that offered for the analogous provisions of rules to remove the opportunity and the incentive for tax avoidance.
- The original purpose of an alternate valuation date was to soften the impact of the estate tax when property held by the decedent at death plummeted in value shortly thereafter and before the due date for payment of the estate tax. In particular, the stock market crash in 1929 and the subsequent drop in property values were responsible for the enactment of the relief provision in 1935.
- The alternate valuation date can be elected only if the election has the effect of reducing both the value of the gross estate and the total amount of estate and generation-skipping transfer taxes payable (after allowable credits) with respect to property includable in the gross estate. . This restriction was added in 1984 to prevent the election from being used to increase the estate tax value, and hence the income tax basis, of appreciating property without a corresponding increase in the amount of transfer tax payable.
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Chapter 7. Life Insurance: Estate Tax and Gift Tax 18 results (showing 5 best matches)
- § 2042 as part of a comprehensive revision of the Code in 1954. As a result, a taxpayer now may plan his affairs so as (a) never to hold the incidents of ownership or (b) to dispose of them at least three years before death; thus he can avoid an estate tax on life insurance proceeds which become §§ 2035–2038. Along with other tax and non-tax features of life insurance, the estate tax rules of
- As indicated by the regulations, the time when a transfer of a life insurance policy is complete for gift tax purposes is when the donor has divested himself or herself of all dominion and control (i.e., all incidents of ownership) over the policy. 25.2511–1(h)(8). If the donor retains the power to name the beneficiary of the proceeds at the death of the insured person, no gift tax will be imposed at the time of transfer. If the donee surrenders the policy for its cash value, however, a completed gift will be deemed to take place at that time. (If the donee does not surrender the policy and the donor-insured retains the power to designate a beneficiary until his death, the proceeds will be included in the donor’s gross estate at that time under § 2042. In this way, the regulations seek to coordinate the gift and estate tax treatment of transfers of life insurance policies.)
- Life insurance is often used in a business context, for example in order to provide funds for the redemption or purchase of a decedent’s interest in a closely held corporation or partnership. Great care must be used in planning such life insurance arrangements in order to minimize taxes and also to maximize the non-tax utility of insurance. One pitfall to watch for is the danger that the gross estate might include not only the business interest owned by the decedent, but also the insurance carried on his life in order to enable the surviving shareholders or partners to purchase the decedent’s business interest.
- When a donor makes a gift of a life insurance policy, valuation of the policy for gift tax purposes is determined under the principles set forth in the regulations. In general, the valuation of a policy is determined by its cost or by the price of comparable contracts issued by the same company. If the policy Reg. § 25.2512–6(a). (The formula for determining the value of an insurance policy transferred inter vivos for gift tax purposes is essentially the same as the formula for determining the value of a policy owned by a decedent on the life of another person for estate tax purposes. See
- Proceeds of Life Insurance— Estate Tax Treatment: § 2042
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Outline 65 results (showing 5 best matches)
- .Marital Property and Support Rights as Consideration: Estate Tax and Gift Tax
- .Incomplete Transfers: Application of the Gift Tax and the Gift Tax Credit
- Life Insurance: Estate Tax and Gift Tax
- Annuities and Employee Death Benefits: Estate Tax and Gift Tax
- .Estate Tax Deductions for Expenses, Debts, Taxes, Losses: §§ 2053 and 2054
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Index 138 results (showing 5 best matches)
Chapter 6. Jointly Owned Property and Community Property 12 results (showing 5 best matches)
- . In that case it was held constitutional even as applied to joint tenancy property that had been acquired before the enactment of the estate tax. The Supreme Court said that the tax did not operate retroactively in an impermissible manner merely because some of the facts or conditions upon which the application of the tax depends came into being prior to the enactment of the tax.
- Estate Tax.
- In fact, the 50–50 inclusionary rule for spousal joint tenancies will have only a negligible impact on the estate tax liability of a decedent’s estate, since any interest passing to the surviving spouse by right of survivorship will automatically qualify for the unlimited estate tax marital deduction (unless the surviving spouse is not a U.S. citizen). See (d)(1). As a practical matter, the real significance of the 50–50 rule lies in its effect on the basis of the joint tenancy property in the hands of the surviving spouse for income tax purposes. Since only one half of a qualified joint interest is includable in the decedent’s gross estate, only one half of the value of the property at the date of death is eligible for a stepped-up basis under .... Thus, for example, if H and W acquired property for $100,000 in 2010 and the property appreciates in value to $200,000 at H’s death in 2020, W will take the property with an income tax basis of $150,000—a stepped-up basis of $100,000 in...
- Gift Tax.
- Jointly Owned Property and Community Property—Estate and Gift Tax: § 2040
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Chapter 8. Annuities and Employee Death Benefits: Estate Tax and Gift Tax 16 results (showing 5 best matches)
- In the absence of a specific statutory provision, the application of the gift tax to inter vivos transfers of annuities is governed by general gift tax principles. For example, a taxable gift may occur if one person purchases an annuity solely for the benefit of another. (Of course, it is possible that such a transaction involves compensation for services or the purchase of property, with potential income tax, but not gift tax, consequences to follow.) Also, if one person purchases an annuity that will benefit both himself and someone else, at once or later, a gift may be involved, since the purchaser is making a transfer in part to or for the benefit of the other person. Further information must be obtained to ascertain when the transfer is complete, what offsetting consideration, if any, has been received, whether the transfer is at arm’s length and in the ordinary course of business and, altogether, what amount must be included in the gift tax base. Also, a problem may arise with...
- sets forth the basic estate tax rules for the taxation of annuities. Section 2039 is not exclusive, however, and the possibility remains that some other estate tax section will apply. (That possibility will be discussed briefly after an examination of
- § 2039 confines its rule of estate tax inclusion to survivor annuities, whereby a beneficiary receives one or more payments by surviving the decedent, and it applies to such arrangements only if the decedent had a right to or was in fact receiving annuity payments at his death. Thus, § 2039 is aimed at refund or survivorship annuities, and it taxes only the value of payments to be made to the estate or the survivor. In fact, the simple refund-to-the-estate annuity is covered by
- § 2039 and the problem to which it is addressed, one must understand something about the nature of an annuity and how it can present matters of interest to an estate tax system. An annuity is defined as one or more payments or the right to receive such payments, for a period of time, such as for life or for a term of years or for some other period. Sometimes an annuity is purchased by the person entitled to receive payments under it, sometimes the annuity is received as a gift, and sometimes it is provided by an employer to an employee as a form of compensation. For estate tax purposes, the purchased annuity provides the best illustration. Thus, if a taxpayer transfers property to an annuity company (or any other person) in return for a promise by the transferee (called the issuer) to pay $8,000 a year to the taxpayer (called the annuitant), the taxpayer has purchased an annuity
- A single-life, non-refund annuity does not present an estate tax problem and is not taxable upon the death of the annuitant. It resembles a life estate which expires upon the death of the person who purchased it. Nothing passes to any other person at that time and no taxable transfer has been made. So to speak, the decedent “used up” the property during life.
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- Publication Date: December 16th, 2019
- ISBN: 9781684674541
- Subject: Taxation
- Series: Nutshells
- Type: Overviews
- Description: This comprehensive guide can serve either as a course supplement or as a refresher for members of the bar. Expert commentary summarizes the law and offers critical perspectives on the estate, gift, and generation-skipping transfer taxes, including lifetime and testamentary transfers, joint-and-survivor tenancies, life insurance, annuities, and powers of appointment; inclusion and valuation; exemptions and exclusions; deductions; and tax liabilities. Additional chapters cover basic tax and estate planning concepts, reform proposals, and fundamental alternatives to the current transfer tax system.