Estate Planning Chapter 7

Front 1

Estate and Gift Tax Systems

Back 1

Tax systems in which a tax burden is imposed on transfers made at death and during life, respectively

Front 2

Yearly Gift Tax Exclusion Amounts

Back 2

$14,000/year to an unlimited number of donees

Front 3

6 Advantages of Inter Vivos Gifts

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(1) Annual $14,000 per donee exclusion
(2) Gift made more than 3 years prior to the decedent's death, tax paid on the transfer is not in estate computation
(3) Appreciation between time of the gift death escapes estate taxation
(4) Lowers the person's tax bracket
(5) Mathematical tests for stock redemption, installment payout of taxes, and special use valuation of farms and other business properties
(6) No gift taxes need to be paid until the transferor makes cumulative taxable gifts in excess of the exclusion amount in the year

Front 4

Allowable Reductions for Gifts

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(1) Gift Splitting
(2) Annual Exclusion
(3) Marital Deduction
(4) Charitable Deduction

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Gift Splitting

Back 5

Allows a married couple to treat a gift made by one of them as having been made one-half by each

(1) Requires consent of spouse
(2) Equates common law and community (only in common law states)
(3) Deceased spouse's executor may consent

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De minimis

Back 6

Primarily avoids and lessens administrative record keeping; a level below which the IRS doesn't care

Front 7

Present Interest Gifts

Back 7

A gift to which the donee has an immediate, unfettered, and ascertainable right to use, possess, or enjoy the gift; may include annual trust rents and incomes

The only gift type to which the annual exclusion applies

Front 8

Future Interest Gifts

Back 8

Any interest or estate in which the donee's possession or enjoyment will not commence until some period of time after the gift is made

Not applicable for annual exclusion

Front 9

Crummey Powers

Back 9

Rights granted to the beneficiaries of an irrevocable trust to demand all or a portion of a grantor's contribution to the trust, thereby creating a present interest in the grantor's gift

May demand the lesser of:
(1) The beneficiary's share of the annual addition to the trust or
(2) The maximum annual exclusion for the year for the gift

Front 10

5-and-5 Power

Back 10

Allows the lapse of general powers taking place during the life of the holder to avoid being treated as a taxable gift; the exception is limited to the extent the lapse does not exceed the greater of $5000 or 5% of the value of the property from which the appointment would have been satisfied

For income tax purposes, should the beneficiary not exercise the '5 by 5 Powers', over time the beneficiary could become the owner of the trust and become liable for taxes on the trust's capital gains, deductions and income.

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Cared-for Gifts to Minors Methods

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(1) Sec 2503(b) Trust
(2) Sec 2503(c) Trust
(3) Uniform Transfers to Minors Act
(4) Uniform Gifts to Minors Act

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Sec 2503(b) Trust

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(1) Income must be distributed annually
(2) May exists beyond age of majority or 21
(3 )Distributions may be made to a custodial account
(4) Full amount a gift; taxable amount is PV of income stream (principal doesn't qualify for exclusion)

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Sec 2503(c) Trust

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(1) Income and principal distributed when the minor reaches age 21
(2) Must be able to request distribution at age of majority if trust exceeds age 21
(3) No annual distribution required when a minor
(4) Qualifies for annual gift tax exclusion even though it's not technically a present interest

Front 14

Uniform Transfers to Minors Act

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(1) All income is taxed to the minor
(2) Only for one person
(3) No spendthrift provisions
(4) If donor is custodian and dies, it is part of their estate
(5) Property distributed at age 21
(6) More restrictive than trust
(7) Custodial account with property in custodian's name

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Uniform Gifts to Minors Act

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Like UTMA, but it restricts the type of property that may be held

Front 16

Summary of Rules for Ascertaining the Amount and Availability of the Gift Tax Annual Exclusion

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(1) A gift in trust is a gift to the trust's beneficiaries for determining exclusion amount
(2) The income/rents of a trust qualify for exclusions if it must be distributed at least annually
(3) The gift of an interest that is contingent upon survivorship is a gift of a future interest
(4) A gift is one of future interest if enjoyment depends on the trustee's discretion
(5) A gift must have ascertainable value to qualify for the exclusion

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Gift Tax Marital Deduction

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A deduction allowed for a gift made by one spouse to another, provided it qualifies; an unlimited deduction is allowed

Front 18

Qualifying for Gift Tax Marital Deduction

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(1) Recipient must be spouse at the time gift is made
(2) The recipient must be a US citizen
(3) The property transferred must not be a terminable interest or QTIP

Front 19

Qualifying Terminable Interest Property (QTIP)

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Property that is of a terminable interest that DOES qualify for the unlimited marital gift tax deduction

(1) Spouse is entitled to income from the property
(2) Power to appoint property is limited to spouse
(3) Unconsumed property is included in the spouse's estate

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Super Annual Exclusion

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An annual exclsusion amount of $143k for a gift that otherwise qualifies as an annual-exclusion gift, the gift meets the requirements for a gift tax marital deduction, and the spouse is an alien spouse

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Gift Tax Charitable Deduction

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A gift tax deduction equal to the value of a gift made to a qualified charity
Qualified charities:
(1) US charity if used exclusively for public purposes
(2) Religious, scientific, or charitable organizations
(3) Fraternal societies, orders, or associations
(4) Veterans' associations, organizations, or societies

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Net Gifts

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Exists when the donee voluntarily agrees to pay the gift tax on the value of the donor's gift

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5 Steps of Calculating Taxable Gifts

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(1) List total gifts for the year
(2) Subtract one-half of gift deemed to be made by donor's spouse (split gifts)
(3) Subtract total annual exclusions
(4) Subtract marital deduction
(5) Subtract charitable deduction

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Carryover of Donor's Basis

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Basis of gifted property that is carried over from the donor to the donee

A property transfer also results in a transfer of the transferor's basis in the property. The transferor's basis in the property "carries over" to the transferee when calculating gain, but FMV is basis if donor's basis is greater than FMV when there's a loss

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Factors in Gift Selection

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(1) Property's likelihood of appreciating in value
(2) Unlikelihood of donor's needing the property in the future
(3) Property's not being subject to indebtness
(4) Income tax brackets of the donor and donee
(5) Carryover of basis to donee
(6) Possible estate disqualification from other favorable tax treatment Code sections