Indiana Estate , Gift And Use Tax

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Pass through - Business entities: Rule

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The pass through business entity pays :
- No tax

- at entity level

Examples: general partnerships, limited partnerships, limited liability companies, subchapter S corporations

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PARTNERSHIP RULES

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1. partnership itself pays no income tax

2. each partner reports his or her distributive share of partnership income/loss

3. formation of partnership not a taxable event

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SUBCHAPTER S CORPORATIONS

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eligible corporations may elect to be treated as subchapter s for tax purposes

eligibility requires

i. no more than 100 members

ii. shareholders are individuals

iii. no more than 1 class of stock

iv. all shareholders consent to the election

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CORPORATE TAX

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The corporate tax is a

* double tax

1st: pays income tax upon profits

2nd: Shareholders pay tax upon dividends received from the corporation.

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CORPORATION: GAIN / LOSS RULES

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GAIN: there is no gain to a corporation upon the receipt of property upon formation/incorporation

SHAREHOLDERS: there is no gain or loss to the shareholders uponrming fo where

1. shareholders contribute property

2. shareholders receive stock in exchange for contribution

3. shareholders areo in contrl immediately after exchange (control =80% of outstanding stock)

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Basis rule: when a corporation receives a contribution of property from its shareholders what is its basis?

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The corporations basis: is the same basis that the shareholder had in the property plus any gain that the shareholder was required to recognize

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Basis rule: what is a shareholders basis in stock received in from the corporation upon formation

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The shareholders basis: is the same basis they had in the property when they contributed it

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corporate distributions RULE

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RULE: shareholders are taxable on dividends they receive.

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what is a dividend?

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A dividend is a corporate distribution out of the corporations earnings and profits

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If a dividend is NOT made out of the corporations earnings and profits is it taxed?

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It is treated as a TAX RECOVERY of the shareholder's basis in her stock

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to the extent that a distribution is NOT made out of corporations earnings and profits and EXCEEDS the shareholders basis in her stock

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It will then be treated as gain from the sale of a capital asset

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is the corporation taxable upon distributions of appreciated property to its shareholders?

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yes

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LIQUIDATION AND REDEMPTION

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RULE: when a corp. distributes property to its shareholders in complete liquidation or termination of an INDIVIDUAL shareholders interest, the shareholder is treated as having sold her stock to the corporation

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SALE OF CORPORATE BUSINESS - describe

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Purchase of a corporate business can be structured as either a

stock or an

asset aquisition

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SALE OF CORPORATE BUSINESS - asset sale

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asset sale results in two levels of tax:

1. corporate level of tax on the asset sale itself

2. a shareholder level tax upon subsequent distribution of proceeds (generally immediate)

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SALE OF CORPORATE BUSINESS - Stock sale

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stock aquisition: results in only 1 immediate tax

1. tax to shareholders on the sale of their stock

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Federal Income taxation of trusts, estates and beneficiaries

BASIC TAXATION PRINCIPLE:

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Rule: trusts and estates are taxable entities, which are liable to pay federal tad

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Income taxation of TRUSTS and their BENEFICIARIES

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Gen. Rule: beneficiaries are subject to federal income taxation on amounts distributed to them from trust

*at the same time; the TRUST is entitled to DEDUCT distributions made to beneficiaries.

The practical effect of these rules is no TAX to the trust on distributed income . The trust will be subject to tax however on ACCUMULATED income.

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INCOME TAXATION OF AN ESTATE

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Rule: an estate will be subject to federal income taxation on any income generated by property held during administration of the estate

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INCOME IN RESPECT OF A DECEDENT

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Rule: payments that were owed to a cash basis decedent, but not yet paid AT TIME OF DEATH are TAXABLE to the estate, assuming that the estate is entitled to receive payment

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GRANTOR TRUSTS RULE : if a grantor transfers property to a trust

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retaining certain "strings attached" the grantor will still be regarded as the owner of the property for income tax purposes.

Thus

Any income generated by the property will be taxed to the Grantor and NOT to the trust

ex: a revocable trust with instructions = strings attahced

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FEDERAL ESTATE and GIFT TAX : General Rule

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Rule: The estate and gift taxes imposed on the donor upon transfer of wealth to another.

These are distinct form federal income tax

Th estate and gift taxes apply a UNIFIED rate structue and generally adopt similar tax priciples

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Federal Gift tax:

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Note: Indiana does not impost its own tax at state level gift tax

RULE: a gift tax is imposed on any completed or irrevocable transfer by gift

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Definition of a gift

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A gift for tax purposes is a transfer for less than full adequate consideration

*note: divorce prop. settlements are not considered to be gifts

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Examples of gifts include

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- Bargain sale of property to a family member

- an interest free loan to a family member

- purchase or ownership of property with joint title (where partly gift)

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Powers of appointment : Rule - gift or not?

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Rule: a transfer of property pursuant to a general power of appointment may be subject to a gift tax

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EXCEPTIONS: transfer of a power of appointment will not be subject to a gift tax if :

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it is limited to conditions related to:

1. health

2. education

3. support or maintenance

or

it can only be exercised with consent of the grantor

or it can only be exercised with consent of another with an adverse interset

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EXCLUSIONS and DEDUCTIONS

1. annual exlucsion rule:

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Rule: each taxpayer may exclude the first 13K in gift transfers per year per donee

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can the annual exclusion apply to gifts of future interest?

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No the annual exclusion generally cannot be used for a gift of future interest

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what are some exceptions to the future interest restriction ?

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1. transfer for the benefit of a minor who is going to turn 21

2. in the event of death of the minor, the property and income is payable to the minors estate

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What is a "CRUMMEY TRUST"

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where there is a crummey trust , the transforer can still use the annual exclusion for the gift of a future interest in property if the trust instrument gives the beneficiary the power to demand immediate withdrawal of amounts contributed to the trust.

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what is "gift splitting"

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Rule: Spouses can effectively "double" the annual exclusion by electing to treat the gift as a "split gift"

meaning: if each spouse gives than both can get 13K exclusions for gift purposes

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Exclusion for tuition and medical expenses???

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Rule: Amounts paid for tuition or medical expense on behalf of another are excluded from taxable gifts

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Charitable Contributions Deductions??

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Rule: Gifts to qualified charities are deductible for gift purposes. BUT a gift of services is not considered a taxable gift

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Marital Deductions ok?

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Rule; A gift transfer between spouses is eligble for an unlimited martial deduction

so long as it is only between spouses

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What is the terminable Interest Exception? (between spouses)

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Rule: unless taxpayer makes a QUALIFIED terminable interest election (often referred to as a Q-TIP) No marital deductionis allowed for transfers to a spouse if the transforers property or interest may ultimately be received by someone OTHER than the spouse.

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EXEMPTIONS RULE for Estate Tax purposes?

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Rule: Taxpayers are entitled to a 3.5 million exemption for estate tax purposes.

However the exemption for lifetime gifts is limited to 1 million. The the extent that the taxpayer has used any of the lifetime gift exemption, it will reduce form the available estate tax exemption

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FEDERAL ESTATE TAX

* who is responsible for filing the estate tax return on someone who dies?

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the executor is responsible for filing the estate tax return within 9 moths of the decedents death

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What happens to decedents GROSS ESTATE:

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The gross estate includes the value of all assets beneficially owned at the time of death as well as certain lifetime transfers ...

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difference between PROBATE ESTATE and GROSS ESTATE

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gross estate: is defined and govern by Internal revenue code

probate estate : is defined and governed by INDIANA LAW

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Joint interest in property: What happens with a Tenancy in Common?

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the decedents estate simply includes the proportionate share of any property held by tenancy in common at the time of death

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joint interest in property: what happens with joint interest of spouses

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joint interest of spouses: the estate of the first spouse to die will include 1/2 of the value of a qualified joint interest. this includes any interest in property held by spouses as tenants in the ENTIRETY or as JOINT TENANTS with right of survirorship.

for purposes of this rule: The source of the funds used to acquire is irrelevant

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LIFE ESTATES AND FUTURE INTEREST

what the rule ?

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Rule: since death terminates the decedents life estate interest, the value of a life estate measured by the decedents own life generally is NOT INLCUDED IN THE GROSS ESTATE.

exception: if the decedent himself created the life estate

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Life time transfers: RULE

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Even though the decedent transferred title to assets during lifetime , certain lifetime transfers will be (SWEPT BACK) and included to the gross estate

Ex:

1. transfers with a retained life interest

2. transfers with a retained power to alter or revoke

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LIFE insurance policies owned at death RULE

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Proceeds of LI policy on decedents own life are included in the gross estate if either

1. proceeds are receivable by executor

2. or decedent posessed any any incident of ownership at time of death

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what are incidents of ownership at time of death?

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1. right to change beneficiary

2. right to cancel , or revoke policy

3. policy with a cash surrender value

4. right to pledge or borrow against the policy

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what is the 3 year rule:

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A life ins. policy that would have been included in the decedents gross estate if he or she had retained it will be swept back into the gross estate if he decedent transferred the policy within 3 years prior to death

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marital deduction

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Rule; the portion of the estate that passes to the surviving spouse is entitled to an unlimited 100 % martial deduction

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what is the Terminable Interest Exception?

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unless the executor makes a QUALIFIED terminable interest election (Q-tip) no marital deduction allowed for transfers to a surviving spouse if the decedent spouse's property or interest may ultimately be received by someone else

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charateristics of a Q-TIP

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i. election irrevokeable

ii. the interest with respect to which a valid Q-tip election is made will be included in the surviving spouses gross estate.

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to be eligible for q-tip election the interest must meet the following requirements:

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1. property must pass from the decedent to the surviving spouse

2. surviving spouse must be entitled to all the income from the property for life; payable annually or more frequently

3. no person can have a power to appoint any part of the property to anyone else

4. the executor must make a q-tip election on or before the date for filing decedents federal estate tax return

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what is the general rule on valuation of assests:

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generally the gross estates assets will be valued at their FMV at the time of decedents death

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Indiana Tax : key distinction of Indiana

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Indiana generally does not permit a deduction for state. Thus deductions must be added back in to federal adjusted gross income to arrive at indiana adjusted gross income.

Indiana AGI - flat rate 3.4%

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Indiana : real and personal property tax rule

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Indiana imposes a property tax on real and personal tangible property.

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Sale and Use tax

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Indiana imposes a 7% sales tax on retail sales within indiana and similar use tax on transactions not in indiana but if property is stored , used or consumed in indana

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Sales exempt

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food for human consumption

drugs from a pharmacist

Purchases and sales by non -profit organization

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indiana Death tax

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indiana imposes its own inheritance tax. items included in the estate for purposes of this tax parallel the federal estate tax in most respects

decedent resident estates are subject to an indiana inheritance tax: on real and tangible property

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what are the exemptions and rates:?

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class A: transferees (lineal ancestors or descendants) = 100K (1-10%)

Class B: transferees (brothers/sisters nieces/nephews) = $500.00 exemption (7-15%)

Class C: transferees (in-laws) a $100.00 exemption (15-20%)