Quick Review of Federal Estate and Gift Taxation
Author:
Willbanks, Stephanie J.
Edition:
4th
Copyright Date:
2023
28 chapters
have results for Tax
Appendix A Calculation of the Gift and Estate Taxes 81 results (showing 5 best matches)
- The gift tax is tax exclusive; that means that the donor pays the gift tax separate from the amount of the gift. The estate tax is tax inclusive; that means that the estate tax is calculated on a tax base that includes the amount that is ultimately paid as the estate tax. In other words, there is a tax on the tax.
- Although all taxable gifts are included in the tax base when calculating the estate tax, these transfers are not taxed twice. Section 2001 provides that both the gift tax paid and the full amount of the § 2010 unified credit are subtracted from the tentative tax to reach the estate tax due.
- There is one rate structure that applies to both the gift and estate taxes. §§ 2001, 2502. The gift tax exemption amount is coordinated with the estate tax exemption amount. §§ 2010, 2505. There is no “double-tax” when a transfer is both a completed gift and included in the gross estate. § 2001.
- Prior to 1981, the tax rates were progressive, beginning at 18 percent and extending to 70 percent. In 1981, Congress lowered the top rate to 55 percent but phased out the benefit of the graduated rates and unified credit for estates greater than $10 million. In 2001, Congress lowered the top tax rate to 45 percent. If an individual made taxable gifts over the $1 million exemption amount, the tax rates were graduated from 41 to 45 percent. Estates over $3.5 million were taxed at a flat rate of 45 percent. In 2012, Congress again lowered the top marginal tax rate, this time to 40 percent. The 2017 Tax Act did not alter the rate of tax. As a result, all taxable gifts and estates over the applicable exemption amount are taxed at a flat rate of 40 percent.
- The exemption amounts for the gift and estate taxes are expressed as credits against the tax. The credit amount on $10,000,000 is $3,945,800 and not $4,000,000 because the rate schedule in § 2001(c) is graduated below taxable transfers of $1,000,000. Taxable transfers above the $10,000,000 exemption amount are taxed at a flat rate of tax. (This was also true when the exemption amount was $5,000,000.)
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Chapter 13 Expenses, Debts, Taxes, and Losses: §§ 2053, 2054, and 2058 43 results (showing 5 best matches)
- Not all taxes are deductible on the estate tax return (form 706). Gift taxes as well as some income taxes and property taxes are deductible under § 2053. State death taxes are only deductible under § 2058. Other taxes, such as property taxes due and payable after decedent’s death, may be deductible on the estate’s income tax return. The federal estate tax is not deductible at all. See section G.4. of chapter 8 for a discussion of tax inclusivity.
- There are two categories of taxes. The first category includes those taxes allowed as deductions by § 2053 as claims against the estate. These are decedent’s income taxes, property taxes, and gift taxes. The second category is state imposed death taxes that are deductible under § 2058.
- Prior to 2001, there was a credit for state death taxes. As a result, every state imposed some form of a death tax, either an estate tax or an inheritance tax. The 2001 Tax Act replaced the § 2011 credit for death taxes with the § 2058 deduction. Currently, only 18 jurisdictions have some form of state death tax. As long as that tax is a liability of the decedent’s estate, is actually paid by decedent’s estate, and paid within four years after the filing of estate tax return that amount is deductible. There are no monetary or percentage limits on this deduction.
- Some expenses may be deductible on more than one tax return. For example, the expenses of the decedent’s final illness may be deducted as a § 213 medical expense on the decedent’s final income tax return or as a claim against the estate on the estate tax return. Even though other expenses must be paid before death to be deductible on the decedent’s income tax return, § 213(e) allows the executor to claim these expenses on this return. Casualty losses may be deducted either on the estate tax return or the estate’s income tax return. The executor must balance a number of considerations in deciding on which return to claim an expense, such as the marginal rate of tax, any monetary or percentage limitations, and who would benefit from the tax savings. The decedent’s will may specify how the estate tax burden is to be allocated (pro rata from beneficiaries or from the residue), but it rarely indicates how other claims and expenses are to be paid.
- The estate tax is imposed on the transfer of property from the decedent to others as a result of their death. In calculating the estate tax, there are two types of deductions allowed. The first type is designed to ensure that only the of the property transferred to others is taxed. These are the deductions for: (1) expenses, debts, claims, and certain taxes (§ 2053); (2) casualty losses (§ 2054); and (3) state death taxes (§ 2058). These deductions are described in this chapter and only apply to the estate tax. The second type of deduction is designed to promote specific policies. These are the deductions for: (1) charitable contributions (§§ 2055 and 2522) and (2) transfers to spouses (§§ 2056 and 2523). The second category of deductions is described in subsequent chapters and applies to both the gift and the estate tax.
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Appendix C Calculation of the Generation-Skipping Transfer Tax 26 results (showing 5 best matches)
- The effective tax rate is 96 percent because (1) there are two separate taxes imposed on this one transfer; (2) there is a gift tax imposed on the amount of the generation-skipping transfer tax; and (3) no exemption amount was allocated to this transfer either in the calculation of the generation-skipping transfer tax or the gift tax. If the top marginal rate was 50 percent or more, the effective tax rate on this transfer would have exceeded 100 percent.
- The examples are simplified to highlight the nature of the GST tax. They assume an applicable exemption amount of $10,000,000 and a maximum tax rate of 40 percent. Each transfer is a direct skip and an outright gift. As a result, the amount of the GST tax is an additional gift by the transferor. § 2515. In the examples, the transferor has already used their gift tax unified credit on prior gifts to their children and has already made gifts that year to this particular donee that qualify for the gift tax annual exclusion.
- The total tax paid on this transfer is $9,600,000 ($4,000,000 GST tax plus $5,600,000 gift tax), and the effective tax rate is 96 percent.
- The total tax paid on this transfer is $4,000,000, and the effective tax rate is 40 percent. Although Troy allocated his entire GST exemption to the transfer, it is also a gift. So there is a gift tax due of $4,000,000.
- The generation-skipping transfer (GST) tax is imposed on the taxable amount multiplied by the applicable rate. The examples are direct skips so the taxable amount is the value of the property received by the transferee. The applicable rate is the maximum federal estate tax rate multiplied by the inclusion ratio.
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Overview 98 results (showing 5 best matches)
- A tax system should have more than one tax base. The federal system currently includes an income tax, transfer taxes, and various consumption taxes. A tax system with multiple components is less vulnerable to changes in the economy or individual behavior. It also is better at taxing individuals based on their ability to pay because there are different measures of that ability.
- The federal estate, gift, and generation-skipping transfer taxes are excise taxes on the transfer of property, not taxes on property. The focus of these taxes is on the value of property being transferred from a donor or the decedent to others. The donor or the decedent’s estate is liable for payment of the tax. The federal gift, estate, and generation-skipping taxes are transfer taxes.
- death tax
- The gift tax had its own exemption amount and rate structure. It included an annual exclusion that was initially set at $5,000 but then lowered to $3,000. The 1976 Tax Act unified the gift and estate taxes with one exemption (the unified credit) and one rate schedule. The 1981 Tax Act increased the gift tax annual exclusion to $10,000 and indexed it for inflation. In 2023, the gift tax annual exclusion was $17,000.
- The 2001 Tax Act did not repeal the gift tax. Fearing erosion of the income tax, Congress retained the gift tax. The 2010 Tax Act reunited the gift and estate taxes and the 2012 Tax Act made that permanent. The applicable exemption amount became $5 million and was adjusted for inflation, and the maximum tax rate was 40 percent. The 2017 Tax Act again increased the exemption amount to $10 million (in 2023 it was $12,920,000), but provided that amount would decrease to $5 million (as adjusted for inflation) after December 31, 2025. The gift tax and estate tax exemption amounts are coordinated so that an individual can only transfer that amount, either during life or at death, before paying one of those taxes. This is explained in chapter 16, section B. 5. and Appendix A.
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Chapter 16 Credits and Calculation of the Gift and Estate Taxes 29 results (showing 5 best matches)
- The gift tax and the estate tax are transfer taxes imposed on the transfer of property from the donor or the decedent to others. Since 1976, the gift and estate taxes have been calculated under the same rate structure. §§ 2001, 2502. The unified tax rate schedule was designed to impose an increasingly higher rate of tax on each successive taxable transfer. Subsequent tax acts have lowered the top marginal tax rate and increased the estate tax exemption amount but retained the existing tax tables in § 2001. As a result, the estate and gift taxes have become flat taxes. See Appendix A for calculation examples.
- Many tax systems have a , an amount that is not subject to tax. In the transfer tax system, the zero bracket amount is created by the unified credit in §§ 2010 and 2505. There is also a generation-skipping transfer tax exemption in § 2631 that is equal to the estate tax exemption amount.
- The most important credit is the unified credit because it establishes the amount that each individual can transfer free of tax. Remember that the gift tax and estate tax credits are unified by the calculation in § 2001 so that an individual cannot transfer the full amount sheltered by the gift tax unified credit the full amount sheltered by the estate tax unified credit.
- A deduction reduces the size of the taxable estate. A deduction, thus, saves the taxpayer the amount of the deduction multiplied by the marginal rate of tax. A credit reduces the amount of tax due. A credit saves $1 of tax for every $1 of credit. For this reason, credits are often limited in amount or to a certain percentage. A credit treats all taxpayers equally while a deduction saves more tax for a higher bracket taxpayer than for a lower bracket taxpayer. Under a flat tax, the distinction between a deduction and a credit has little, if any, relevance.
- Prior to 1976 the gift tax and the estate tax each had its own separate exemption (zero bracket) amount. In 1976, Congress unified the taxes and converted the exemption to a credit. The unified credit is simply the amount of tax on the , which is the amount of property sheltered from tax. Reference is almost always to the applicable exemption amount (sometimes called the “exemption equivalent amount”) rather than the amount of the credit.
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Chapter 17 The Generation-Skipping Transfer Tax 48 results (showing 5 best matches)
- The Smith Family pays a tax of $10 million on the transfer to the first generation, a tax of $5 million on the transfer to the second generation, a tax of $2.5 million on the transfer to the third generation, a tax of $1.25 million on the transfer to the fourth generation, and a tax of $625,000 on the transfer to the fifth generation, leaving $625,000 in that generation. The Brown Family pays a tax of $10 million on the transfer to the first generation and no further tax as each generation has only a life interest in the trust. The fifth generation has $10 million.
- There are three taxable events subject to the generation-skipping transfer tax: (1) a direct skip, (2) a taxable distribution, and (3) a taxable termination. A direct skip will incur a gift tax or an estate tax in addition to the generation-skipping transfer tax. The creation of a trust will incur a gift tax or an estate tax and then distributions from that trust or the termination of an interest in that trust will incur the generation-skipping transfer tax.
- Grandparent devises $35 million to Grandchild. This is also a direct skip. Grandparent’s estate will pay both an estate tax and a generation-skipping transfer tax. The estate tax is tax inclusive, , it is calculated on the amount that is eventually paid as the estate tax. This is also true of the generation-skipping transfer tax imposed at death. There is no additional “gift” when the estate pays the generation-skipping transfer tax because the property has already been subject to both the estate tax and the generation-skipping transfer tax.
- The maximum federal estate tax rate has changed over time. At one point it was 70 percent. Prior to the 2001 Tax Act it was 55 percent. The exemption amount in those years was significantly less and there was a graduated rate of tax. In those days, it made no sense to incur the generation-skipping transfer tax. In 2023, the exemption amount was $12.920 million and the maximum tax rate was 40 percent, producing a flat rate of tax on all estates over $12.920 million. As a result, the difference between paying the generation-skipping transfer tax and the estate tax has disappeared, except for allocation of the respective exemption amounts.
- Since 1976, a fundamental principle of the transfer tax system is to tax the transfer of wealth once at each generation. The failure to tax wealth at each generation allows those with greater wealth to avoid tax by transfers that skip generations or that skip the tax at a particular generation.
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Chapter 8 Retained Interests 31 results (showing 5 best matches)
- The gift tax is
- Assume there is a $10 million exemption amount and a maximum tax rate of 40 percent. Tanya makes gifts equal to the amount of the gift tax annual exclusion each year to her two children. In year 1, she also gives them each $5,000,000. No gift tax is due because of the unified credit in § 2505. In year 2, she gives them each $5,000,000 in addition to the annual exclusion gifts. She pays the $4,000,000 gift tax due on April 15 of year 3. She dies on March 1 of year 4. Even though none of the gifts are brought back into her gross estate pursuant to § 2035(a), the $4,000,000 gift tax paid will be included in her gross estate pursuant to § 2035(b).
- In the prior example, Tanya transferred $20 million to her children and paid a gift tax of $4,000,000. Assume instead, that she had owned that $24,000,000 at the time of her death and, also assume a $10 million exemption amount and a maximum tax rate of 40 percent. The estate tax due would be $5,600,000. So, her children would have received only $18,400,000 instead of $20,000,000. The difference of $1,600,000 is exactly equal to 40 percent of $4,000,000; in other words, the amount of estate tax imposed on the $4,000,000.
- Note that only gift tax paid on gifts within three years of death is included in the gross estate by § 2035(b). For the gift and estate taxes to be truly unified, the gift tax on all gifts would need to be included in the gross estate. Congress has not yet gone that far.
- Decedents, therefore, structure these transfers to avoid that result if at all possible. Decedents also structure these transfers to avoid the gift tax issues. See, chapter 2, section E.4. for a discussion of the gift tax issues. To avoid gift tax, decedents will often create a
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Chapter 4 Completion 27 results (showing 5 best matches)
- The primary purpose of the gift tax is to prevent evasion of the estate tax. Both tax the gratuitous transfer of property. Although the gift tax and the estate tax are
- The gift tax is imposed on the transfer of property. The donor is primarily liable. If the donor does not pay the gift tax, the beneficiary must do so. It would be unfair to make a beneficiary pay the gift tax if the donor could then turn around and give the property to someone else.
- Although the gift tax also prevents evasion of the income tax, there has been no significant attempt to coordinate these two taxes. The rules in §§ 671–691 dictate when an individual will be taxed as the owner of the income generated by a trust. In some situations, the transfer of property does not relieve the donor of income tax liability and the gift is an incomplete gift. The revocable trust example, above, is one such situation. Don will be taxed on the income from the trust (§ 676), even if it is distributed to someone else. That distribution, of course, will be treated as a completed gift because Don has no power to change the disposition once that income has been paid to another beneficiary. In other situations, the transferor is treated as the income owner even though the transfer is complete.
- Coordination with the Estate Tax and the Income Tax
- If a transfer is incomplete, the property interest will be included in the gross estate. There is symmetry between the gift tax and the estate tax in these situations.
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Chapter 3 Definition of a Gift 57 results (showing 5 best matches)
- will not avoid the gift tax, Aubrey decides to transfer Skyacre to their child, Shannon, on condition that Shannon pay the resulting gift tax. What Aubrey did not realize is that the gift tax is a tax on the transfer of property, so they, the donor, are primarily liable for payment of the tax. Regulation § 25.2511–2(a). The payment of that obligation by someone else, in this case their child, Shannon, enriches them.
- Frankie owns stock in MNO, Inc. and transfers it to their niece, Nancy, on condition that she pay the gift tax. Assume that the stock had a value of $1,000,000 and the gift tax on that amount would be $400,000. Frankie has made a to Nancy. The value of the gift is not $1,000,000. If the gift tax on a $1,000,000 gift was $400,000, then the net gift would only be $600,000. But if the gift is only $600,000, then the tax would be $240,000. But if the tax is only $240,000, then the gift is more than $600,000.
- This appears to be a never-ending spiral. It is broken, however, by a simply algebraic formula that says that the gift tax due is equal to the tentative tax (computed on the full fair market value of the property transferred) divided by 1 plus the rate of tax. . Assume a flat rate of tax of 40 percent. The gift tax on the full fair market value would be $400,000. To determine the actual tax, this is divided by one plus the rate of tax,
- The primary purpose of the gift tax is to prevent avoidance of the estate tax. Without a gift tax, taxpayers could give away their property while on their death bed and avoid the estate tax. As a result, the essence of a gift, at least for purposes of the gift tax, is a diminution of the donor’s estate. As the Court in said, “[the gift tax is designed] to reach those transfers that are withdrawn from the donor’s estate.”
- A secondary purpose is to prevent avoidance of the income tax. Section 102 excludes gifts from the recipient’s income. Without a gift tax, donors could shift income-producing property to lower bracket taxpayers without tax consequences.
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Chapter 6 Property Owned at Death 7 results (showing 5 best matches)
- The estate tax, like the gift tax, is a tax on the . It is imposed on all citizens and residents of the United States (§ 2001(a)), and it is imposed on “all property, real or personal, tangible or intangible, wherever situated.” § 2031(a). The executor is required to file an estate tax return whenever the gross estate exceeds the applicable exemption amount. § 6018(a)(1).
- A taxpayer who dies while still employed will usually be owed salary at the date of death. The decedent has a property interest in that salary, and that interest transfers from the decedent to another as a result of their death. That property, therefore, is included in the gross estate under § 2033. That salary is also income and must be reported by the recipient on the recipient’s income tax return. (This is called or IRD. § 691.) The recipient will receive an income tax deduction for the estate tax attributable to that item of income. § 691(c). If the taxpayer dies before receiving their income tax refund, any refund due at the time of death will be in the decedent’s gross estate under
- as the value of all property “to the extent provided in this part.” There is no broad, all-encompassing definition of the gross estate. Instead, sections 2032 through 2046 are specific provisions governing different types of property. Although the estate tax is a federal law, it relies on state law to create the property interests. Reliance on state law, however, does not mean that the estate tax is limited to property interests that are included in the decedent’s probate estate.
- Nature of the Tax
- use of the corporate coffers. The sole object of his bounty was his brother who owned all the interest in the companies. Because the decedent had no interest in being (or intent to be) an owner and was more than adequately compensated for his services, the Tax Court held that he had no property interest and, thus, nothing was in his gross estate under § 2033 or any other section.
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Chapter 12 Qualified Terminable Interest Property: § 2044 12 results (showing 5 best matches)
- Transfers to spouses are not taxed by either the gift tax or the estate tax. §§ 2056, 2523. The married couple is considered one economic unit, and its wealth is not subject to tax until transferred outside that economic unit.
- In this case the court adapted the duty of consistency, an income tax doctrine, to the estate tax. In income tax cases, the duty of consistency applies if (1) the taxpayer makes a representation of fact or reports an item in one year; (2) the Commissioner acquiesces in or relies on that fact or representation; and (3) the taxpayer attempts to change the representation in a future year when the earlier year had been closed by the statute of limitations.
- A fundamental principle of the federal transfer tax system is to tax transfers once each generation. Spouses, no matter what their ages, are considered to be members of the same generation. § 2651(c).
- If property qualifies for the marital deduction, it is not taxed in the estate of the transferor. When property is transferred to a trust that qualifies for the marital deduction under § 2056(b)(7) or § 2523(f), the only requirement is that the spouse have the right to income payable at least annually. Congress enacted § 2044 to ensure that such property would be subject to the estate tax in the surviving spouse’s gross estate.
- ESTATE TAX CONSEQUENCES
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Preface 5 results
- Throughout most of the twentieth century, the federal estate and gift taxes have remained relatively stable. The major changes are noted in chapter 1. In the 1990s, a small but determined group began a campaign to repeal the estate tax. Their most effective strategy was to attach the label “the death tax” to it. As a result, the estate tax became unpopular even among those who will never pay that tax.
- In 2001, Congress enacted a socalled “repeal” of the estate and the generationskipping taxes, leaving the gift tax in place to serve as a backstop to the income tax. The repeal was phased in by increasing the applicable exemption amount and lowering the top tax rate. Total repeal did not occur until January 1, 2010. Budget considerations required Congress to sunset the provisions of the 2001 Tax Act on December 31, 2010.
- This book is designed as a study guide for students taking a course in Estate and Gift Tax or studying that material as part of a Wills and Trusts or Estate Planning course. It does not pretend to be a comprehensive guide to estate planning or the federal tax implications of all gratuitous transfers. There are some references to income tax issues but these references are sporadic.
- Surprisingly, repeal of the estate and generation-skipping taxes became effective January 1, 2010, but that state of affairs did not last long. In December 2010, Congress resurrected these taxes and in 2012 it made the existing rate structure and exemption amounts permanent. Congress, however, was not done tinkering with the transfer taxes. In 2017, Congress increased the applicable exemption amount to $10 million as adjusted for inflation but only temporarily. As of January 1, 2026, that amount will revert to $5 million as adjusted for inflation unless Congress either makes the increase permanent or provides for a decrease at any earlier date. That decision is based on politics and economics, and both are subject to change.
- The gift tax annual exclusion (discussed in chapter 5) is adjusted annually for inflation. The amount for 2023 was $17,000. Reference is made to this number when necessary for clarity. The gift and estate tax exemption amounts in 2023 (at the time this revision occurred) were $12,920,000. In future years these numbers will change either due to inflation or because Congress has revised the exemption amounts. The examples in Appendices A, B, and C use $10 million as the applicable exemption amount for the sake of simplicity.
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Chapter 14 The Charitable Deduction 15 results (showing 5 best matches)
- If there is a gift, bequest, or devise to an organization, determine if the purpose of the gift, bequest, or devise is charitable or public. If so, a deduction will be allowed. Remember that there are no monetary limitations on the gift tax or the estate tax charitable deduction. A lifetime gift may qualify for both the gift tax deduction and the income tax deduction.
- The gift and estate tax charitable deductions are nearly identical. They are similar to, but not always identical to, the income tax deduction in § 170. Section 170 permits some deductions that §§ 2055 and 2522 do not, and it imposes monetary and percentage limitations on the amount of the deduction. In addition, § 501(c) exempts certain organizations from the income tax and its rules are similar to, but not always identical to, the rules in §§ 170, 2055, and 2522.
- There are no percentage or monetary limits on the gift tax or the estate tax charitable deduction. §§ 2055, 2522. The amount of the estate tax deduction cannot exceed the value of the property transferred to charity that is included in the gross estate. § 2055(d).
- , the rules are the same for the income tax, the gift tax, and the estate tax. Donations must be to an organization, not an individual. The organization must be charitable or governmental. There can be no private benefit, no lobbying, and no violation of public policy.
- Both the gift tax (§ 2522) and the estate tax (§ 2055) allow a deduction for transfers to charitable organizations. These provisions permit an unlimited deduction and are, at least with respect to outright gifts and bequests, simple and straightforward. Because of the possibility of manipulation and abuse, the provisions governing transfers of split interests and transfers in trust are detailed and complex.
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Chapter 5 The Annual Exclusion 33 results (showing 5 best matches)
- The exclusion applies per donee. That means that a donor can transfer the amount of the gift tax annual exclusion to as many recipients as they want without filing a gift tax return. A donor could transfer an amount equal to the gift tax annual exclusion to
- did not use § 2513 because he had already used most of his gift tax exemption while his spouse had not done so. The transfer to the spouse was an unsuccessful attempt to utilize her gift tax exemption amount so that the taxpayer would not be liable for any gift tax.
- Blake and Crystal are siblings and each has two children. Each year Blake makes gifts to his children and to Crystal’s two children equal to the gift tax annual exclusion. Crystal does the same. These will be treated as indirect gifts made by Blake to his children and Crystal to her children. . Because the amount of the gifts from Blake to his children and from Crystal to her children exceeds the amount of the gift tax annual exclusion, Blake and Crystal are required to file gift tax returns. They will not owe any gift tax, however, until their taxable gifts, , those in excess of the amount of the gift tax annual exclusion, exceed the exemption amount in § 2505.
- Section 2513 does not double the total benefit of the gift tax annual exclusion. Together the couple can give one donee only twice the amount of the gift tax annual exclusion,
- Assume that Jordan transfers $68,000 to the trust in a year when the amount of the gift tax annual exclusion is $17,000. The entire $68,000 will qualify for the gift tax annual exclusion. Each of the four children has a general power of appointment over $17,000, creating a present interest in each of them to that extent.
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About the Author 1 result
- Stephanie J. Willbanks is a Professor of Law at the Vermont Law and Graduate School where she has taught Estate and Gift Tax since 1983. She has also taught Estates, Estate Planning, Income Tax, Business Tax, Tax Policy, and Torts. She has authored books and articles on Estates, Estate Tax, and Income Tax, including Federal Taxation of Wealth Transfers: Cases and Problems (5th ed.), Federal Estate and Gift Taxation: An Analysis and Critique (3d ed.), and the chapter on Wealth Transfer Taxation in Wills, Trusts, and Estates (8th ed. 2009) by Dukeminier, Sitkoff, & Lindgren, and she continues to consult on estate tax issues for more recent editions. Professor Willbanks is a member of the American Law Institute, the American College of Trust and Estate Counsel, and the Uniform Law Commission.
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Chapter 15 The Marital Deduction 55 results (showing 5 best matches)
- During the first three decades of its existence, the federal estate tax treated each individual as a separate taxpayer. The transfer of property was taxed based on who held title to the property. The same was true of the income tax; whoever earned the income had to pay the tax. Then the Supreme Court held that income earned in a community property jurisdiction was taxed one-half to each spouse. . The same principle applied in the estate tax context; only one-half of the community property was included in the gross estate of the first spouse to die. Taxpayers in common law property jurisdictions quickly realized the advantages of community property, and states began to change from common law to community property. Congress responded by enacting a deduction for transfers between spouses as well as a joint filing system for the income tax.
- Income tax consequences may be more important to most couples than estate and gift tax consequences. The surviving spouse will receive a date of death value as the basis of property acquired from the decedent. § 1014. If no estate tax is due, it may be more important for property to be included in the gross estate to qualify for the increase in basis.
- If Martha owns more than the exemption amount when she dies, her estate will pay an estate tax. Martha could avoid some or all of this tax by making gifts to her descendants that qualify for the gift tax annual exclusion or by making qualified payments of tuition or medical expenses.
- The adoption of a generation-skipping transfer tax (see chapter 17) reflects a policy of taxing property once at each generation. A husband and wife are treated as belonging to the same generation no matter what their ages might be. As noted below, the for the marital deduction is that any property not consumed or given away by the surviving spouse will be taxed in the estate of the surviving spouse.
- for the marital deduction is that the property received by the surviving spouse will be subject to the federal estate tax when they die or the federal gift tax if they transfer the property to others during life. The following requirements ensure that this will happen.
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Appendix B Calculation of the § 2013 Credit 15 results (showing 5 best matches)
- The second limitation, in § 2013(c), is the amount of the federal estate tax that is attributable to including the transferor’s property in the decedent’s gross estate. In other words, it is the amount of the tentative tax on the decedent’s taxable estate without regard to the § 2013 credit minus the amount of tax that would have been due had the transferor not given the property to the decedent. In Dean’s estate, this limitation is calculated as follows:
- Notice that the estate tax due on Dean’s death is $4,880,000. Without the § 2013 credit, it would have been $5,680,000. The difference, $800,000, is the estate tax paid by Toby’s estate.
- The calculation of the § 2013 credit may appear complex and confusing. Remember that there are two decedents: (1) the original transferor (Toby in the examples below) and (2) the “recipient” decedent (Dean in the examples below). The § 2013 credit is allowed in calculating the “recipient” decedent’s estate tax. It does not eliminate the impact of acquiring property from a transferor who dies within two years of the decedent’s death. It does, however, give the recipient (Dean) a credit equal to the estate tax paid by Toby’s estate on the property transferred to Dean.
- Toby (the transferor) dies with a will that devises all of his property to Dean. Toby has a taxable estate of $12,000,000. His estate pays a federal estate tax of $800,000. As a result, Dean receives $11,200,000 from Toby’s estate. Dean (the decedent) dies within two years of Toby’s death. Dean owns other property worth $12,000,000 so his taxable estate is $23,200,000. His estate tax will be calculated as follows:
- The example assumes an applicable exemption amount of $10,000,000 and a maximum tax rate of 40 percent.
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Chapter 2 Valuation 43 results (showing 5 best matches)
- The IRS accepted the reduction for the daughters’ assumption of the gift tax, but disputed the reduction for the potential estate tax liability as too speculative. The Tax Court disagreed, holding that the contingency was whether the donor would survive for three years after the gift and that contingency was simply a matter of actuarial computation.
- The IRS claims that defined value clauses improperly focus on the donor’s intent, which is not relevant under the federal gift tax. The IRS focuses on the donor’s relinquishment of dominion and control over the trust property, which is the date on which the donor becomes liable for the gift tax, rather than on post-gift events that affect the transfer.
- , the donor entered into a binding agreement with her daughters to transfer cash and securities in exchange for the daughters’ agreement to pay any gift tax as well as estate tax imposed by § 2035(b) if the donor died within three years of the gifts. The agreement was the result of several months of negotiation between the donor and her daughters and the daughters were represented by separate counsel. Donor was 89 years old at the time of the transfer. Donor reported only the value of the , the value of the property transferred minus (1) the gift tax to be paid by the daughters and (2) the actuarial value of the potential estate tax liability under § 2035(b).
- Create a flow chart. Step one is to determine which tax applies. Section 2032A special use valuation only applies to the estate tax while § 2701 only applies to the gift tax. Some principles apply to both. Step two is to determine the nature of the asset. Again, some rules only apply to certain types of assets, for example, special use valuation only applies to real property and § 2701 only to interests in partnerships and corporations. Step three is to list the factors for each category. Recognize that certain principles—bona fide transaction and arm’s length agreement—cut across the categories. Use analogous doctrines and always, always use the facts.
- The estate tax return is due nine months after decedent dies. § 6075(a). The value of assets may change dramatically in that time period or before distribution to the beneficiaries. Recognizing this, Congress enacted § 2032 that allows the executor to choose the that is six months after the decedent’s death. The executor may not choose the alternate valuation date unless both the value of the gross estate and the estate tax due will be decreased by the election. § 2032(c).
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Chapter 10 Powers of Appointment: § 2041 12 results (showing 5 best matches)
- Donors create general powers of appointment in powerholders to ensure that property transferred to a trust qualifies for the gift tax annual exclusion. Such powers are usually referred to as , held that such powers were valid in minor children. If the donor gives a powerholder the power to withdraw the lesser of the amount contributed to the trust that year or the amount of the gift tax annual exclusion, the donor will get the full benefit of the gift tax annual exclusion. The powerholder, however, will have gift and estate tax consequences unless there is $340,000 in the trust (assuming a gift tax annual exclusion amount of $17,000).
- The lapse of a general power of appointment is treated as a release of that power, but only to the extent that the property which could have been appointed by the powerholder exercising the power exceeds the greater of (1) $5,000 or (2) five percent of the trust principal. This limitation allows powerholders significant access to trust property without transfer tax consequences. It also allows donors to take advantage of the gift tax annual exclusion.
- Paul creates an irrevocable, inter vivos trust with Friendly National Bank as trustee to pay the income to Art for life and to distribute the trust property at Art’s death to his issue. Paul gives Art the right to withdraw the lesser of the amount contributed to the trust or the amount of the gift tax annual exclusion; the right is non-cumulative. Paul transfers $17,000 to the trust each year. The power of appointment in Art, commonly referred to as a power, ensures that each transfer qualifies for the gift tax annual exclusion.
- Arnie creates a trust with Friendly National Bank as the trustee. The trustee has discretion to distribute trust income or principal to or for the benefit of Arnie’s daughter, Debby. The trust property and any accumulated income will be distributed to Debby when she reaches age 21. If Debby dies before age 21, the trust property will be distributed to any person (including her estate or the creditors of her estate) that Debby designates in her will. If she does not appoint to anyone, the trust property will be distributed to Debby’s cousin, Chloe. Debbie is two years old when Arnie creates the trust. Arnie transfers an amount equal to the gift tax annual exclusion into the trust each year. Because the trust meets the requirements of § 2503(c), each transfer qualifies for the gift tax annual exclusion. It does not matter that Debby does not know about her power of appointment or that she is unable to exercise it because she cannot execute a will. The power is still valid.
- , is included in the powerholder’s gross estate only if the powerholder exercises the power. § 2041(a)(1). The failure to exercise a power created on or before October 21, 1942, or the complete release of such a power is not considered an exercise of that power. § 2514(a). Property subject to powers created after October 21, 1942, is taxed as explained below.
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Table of Contents 98 results (showing 5 best matches)
Index 113 results (showing 5 best matches)
Chapter 7 Jointly Owned Property 8 results (showing 5 best matches)
- Any amount that the surviving joint tenant pays for the acquisition or improvement of the property qualifies as consideration unless, of course, that amount had been gifted to the survivor by the decedent. Paying part of the down payment, making mortgage payments, and paying for improvements on the property qualify. Income earned on the property that is taxed to the survivor as income and then used to purchase additional joint tenancy property qualifies as the survivor’s contribution. The same rule applies to appreciation in value that is recognized by the survivor for purposes of the income tax.
- The one-half interest of the decedent in joint tenancy property qualifies for the marital deduction. It is included in the gross estate of the decedent (§ 2040(b)), and it passes from the decedent to the surviving spouse (§ 2056(c)(5)). As a result, there will be no estate tax on joint tenancy interests passing from the decedent to the surviving spouse.
- Section 2040(a) prevents this blatant attempt at tax avoidance. It excludes consideration that was “received or acquired by the [surviving joint tenant] from the decedent for less than an adequate and full consideration in money or money’s worth.” As a result, the full date of death value of Greenacre will be in Parent’s gross estate.
- Taxpayers can own concurrent interests in property as tenants in common, as joint tenants with the right of survivorship and, in some jurisdictions, as tenants by the entirety. The presumption in most, if not all, jurisdictions is that property deeded, given, devised, or transferred through intestacy to two or more individuals results in a tenancy in common. There must be specific language creating a joint tenancy with the right of survivorship or a tenancy by the entirety. A tenancy by the entirety applies only to spouses, and the transfer tax consequences are the same as those of joint tenancy with the right of survivorship.
- A taxpayer can transfer an interest as a tenant in common by will or through intestacy. The taxpayer’s interest, therefore, is brought into their gross estate by § 2033. When a joint tenant dies, that interest passes automatically to the surviving joint tenant by operation of law. The transfer tax consequences depend on whether the only joint tenants are spouses, in which case § 2040(b) applies, or whether the joint tenants include non-spouses, in which case § 2040(a) applies.
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Chapter 11 Life Insurance: § 2042 9 results (showing 5 best matches)
- If an exam question involves a trust that owns a life insurance policy on the life of the decedent, first consider the possible gift tax consequences. Did the decedent purchase the policy and transfer it to the trust? That transfer will be a gift to the beneficiaries of the trust. Did the decedent pay the premiums during their life? Those premium payments will also be gifts to the beneficiaries of the trust. Unless the beneficiaries have powers, the gifts will be future interests that do not qualify for the gift tax annual exclusion.
- If the decedent owns a life insurance policy on their own life and transfers that policy to another within three years of death, the amount receivable by the beneficiary will be included in the decedent’s gross estate by § 2035(a). This rule applies because the value of the life insurance policy for gift tax purposes might be significantly less than the amount receivable by the beneficiary. Without § 2035(a), decedents could avoid the estate tax through death-bed transfers of life insurance.
- A decedent may create an irrevocable, inter vivos trust and transfer life insurance policies to it. If the trustee is required to transfer insurance proceeds to the executor to pay debts, expenses, or taxes, then the amount so transferred is in decedent’s gross estate under § 2042(1). Regulation § 20.2042–1(b)(1). The same rule applies even if the trustee has the discretion to transfer proceeds to the executor for these purposes if the trustee in fact does so. The same rule also applies to any arrangement where the recipient of the life insurance proceeds is required to pay the decedent’s debts and expenses. To avoid this rule, the decedent should give the trustee (or other person) the power and discretion to purchase assets from the estate. This gives the executor the liquid assets to pay debts, claims, expenses, and taxes without subjecting the insurance proceeds to taxation in decedent’s gross estate.
- . An ILIT is simply an irrevocable trust that owns life insurance. Creating an ILIT requires consideration of gift, estate, and generation-skipping transfer taxes. The complexities are beyond the scope of this book and are usually covered in an estate planning course or seminar rather than an introductory transfer tax course.
- Gift Tax Annual Exclusion
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Chapter 9 Annuities and Death Benefits 3 results
- The first step is to determine the nature of the transaction. Distinguish between (1) a private annuity; (2) a self-canceling installment note; and (3) a transfer with the right to income. If it is not clear or you are not sure, discuss alternatives. The next step is to discuss the gift tax consequences. Compare the value of what was transferred with the value of what was received. Finally, discuss the estate tax consequences. Even if the correct answer is that nothing is in the gross estate, be sure to state that explicitly.
- A private annuity is a stream of payments from an individual rather than a commercial entity. Private annuities are usually made in exchange for other property. So are installment sales. Private annuities also resemble transfers with the retained right to income. The gift and estate tax treatment may be different depending on how the arrangement is characterized.
- Gift Tax
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Part 2 The Gift Tax 1 result
- Publication Date: October 11th, 2023
- ISBN: 9798887864082
- Subject: Taxation
- Series: Quick Reviews
- Type: Outlines
- Description: Designed to make the study of federal estate and gift taxation simple, clear, and convenient, this updated fourth edition provides a basic explanation of the federal gift, estate, and generation-skipping transfer taxes. Written to facilitate an understanding of the overall structure of these taxes, the text discusses critical statutory provisions as well as relevant regulations and important cases. Topics include: valuation, the definition of a gift, the gift tax requirement of completion, the annual exclusion, the gross estate, estate tax deductions, and the generation-skipping transfer tax.