Federal Gift & Estate Tax 2013

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Federal Estate

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• Federal Estate Tax grants a $5.25 million EXEMPTION for estates of decedents dying in 2013
• For an estate UNDER $5.25 million NO estate tax return has to be filed
• The $5.25 million is sometimes referred to as the CREDIT SHELTER

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Federal Estate & Gift Tax

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• No Gift Tax has to be paid UNLESS and UNTIL cumulative lifetime taxable gifts exceed $5 million
• NO Estate Tax has to be paid unless (i) cumulative lifetime taxable gifts PLUS (ii) taxable estate exceeds $5.25 million

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Federal Estate & Gift Tax--Unlimited Marital Deduction

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• Is given under BOTH Gift Tax and Estate Tax for qualifying gifts to a spouse
• Allows gifts WITHOUT diminution of the estate tax
• To Qualify for marital deduction, the property MUST be left in a form that will cause it to be taxed in surviving spouse's estate at his or her death
• Thus, the marital deduction does NOT save taxes it just defers the estate tax until the spouse's death

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Federal Estate & Gift Tax--Marital Deduction Formula Clause

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• Gives the surviving spouse outright "the smallest amount that will produce the largest taxable estate that will result in no estate taxes being payable by my estate, taking into account the value of other gifts to my wife that qualify for the marital deduction."
• Thus, $5.25 million should be in Decedent spouse's estate while the rest goes to spouse through marital deduction

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Federal Estate & Gift Tax--Bypass Trust

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• A beneficiary (spouse or child) can be given a life income interest and LIMITED powers over trust principal, all without causing the property to be taxed in the beneficiary's estate on her death.
• The trust will not be taxed in the beneficiary's estate as long as she is NOT given a power of General Appointment, she MAY have Special Power of Appointment
• Surviving spouse MAY invade/demand trust principal for Health, Education, Maintenance, and Support and NOT be a general power of appointment (if it was for spouses "comfort," "well-being", or "benefit" then it WOULD create the power of appointment)

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Federal Estate & Gift Tax--Marital Deduction QTIP Trusts

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• Qualified Terminable Interest Property (QTIP) election: Congress has permitted the use of certain trust to qualify for the marital deduction
• To be eligible for a QTIP election as a qualified terminable interest trust
(1) Income must be payable to spouse annually for life. (If the income interest terminates on the spouse's remarriage the trust is NOT QTIP)
(2) During the spouse's lifetime, no other person can be a permissible beneficiary of the trust (even in cases of emergency for the spouses children CANNOT make any distributions of principal)
(3) Executor must make a QTIP election on estate tax return

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Federal Estate & Gift Tax--New Basis on Death Rule

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• Interest owed by a decedent receives a new basis equal to the asset's date-of-death value
• The ENTIRE COMMUNITY PROPERTY receives a new basis equal to its date-of-death value, even though only 1/2 was decedent's estate

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Federal Estate & Gift Tax--Estate Tax Charitable Deduction

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• For a remainder interest passing to charity, there is NO charitable deduction under the income tax, gift tax, or estate tax, UNLESS the gift takes the form of:
(1) Charitable Remainder Annuity Trust (CRAT)--a stated dollar amount, which can be NO less than 5% of the initial trust corpus, is payable to the individual beneciary for life
(2) Charitable Remainder Unitrust (CRUT)--a stated percentage (which can be no more than 5%) of the trust corpus, valued annually, payable to individual beneficiary for life

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Federal Estate & Gift Tax--Annual Exclusion

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• There is a $14,000 PER DONEE annual exclusion under the gift tax.
• The exclusion is available for gifts of present interest, but NOT for gifts of future interest
• The Annual Exclusion does NOT count against the $5.25 million Gift Tax exemption equivalent

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Federal Estate & Gift Tax--Exclusion for Tuition and Medical Payments

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• There is an UNLIMITED exclusion for tuition and medical payments if BUT ONLY IF the payment is made DIRECTLY to the SERVICE-PROVIDER.

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Life Insurance Issues -- Single Insured

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The policy proceeds are included in the decedent's estate for estate tax purposes because decedent owned the policy.

*but is excluded from gross income

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Life Insurance Issues - Married Insured CP

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1/2 is includible in decedent's estate for federal estate tax purposes

as for the other 1/2: living spouse has made a gift to the decedent spouse

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Revocable trusts are "incomplete" gifts

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* incomplete for gift tax purposes
* no gift tax return needs to be filed with respect to the transfer
* the trust principal will be included in decedent's (settlor's) gross estate for federal estate tax purposes