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Understanding Federal Gift and Estate Tax Laws in the U.S.

Explore the intricacies of federal gift and estate tax laws, covering rates, exemptions, deductions, and filing requirements. Learn about estate planning strategies and legislative changes impacting taxation. Stay current and informed on estate tax regulations.

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Understanding Federal Gift and Estate Tax Laws in the U.S.

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  1. Chapter 26 Federal Gift and Estate Tax

  2. Introduction • Growth area, Statutory • Excise taxes on transfers, estate tax v. inheritance tax • J/T, T/E, T/C, CP, JTCP • persons subject to federal E&G: U.S. citizens (and residents) - world-wide • NRA - prop w/i US, except intan pers prop gifted (e.g., stk) - est tax: sep sub chap + treaties

  3. TRA 1976 - unified rates, unified credit • Formulas - Gift and Estate Tax

  4. Gift Tax • Current taxable gifts + prior taxable gifts = tax base; • tax base x rates - credits (UTC, gift tax deemed paid) = tax due

  5. Reqs of Gift • <full & adequate consideration; • incomplete - e.g., revocable trust; • excluded - to political org, to educational institution for tuition, for medical care; • at death - life insurance – not gift, but testamentary disposition

  6. JT Bank Acct, Stk, Bond • inter vivos gift if draw during life • not gift at death

  7. Annual exclusion: • present interest, • 2503(c) minors trust • inflation adjust • deductions • charitable • marital

  8. add ALL prior gifts (cumulative) • credit for tax paid or deemed paid (deemed paid - use current rates) • gift splitting • Form 709 • due date • who must file (>annual exclusion to donee, must file to split gifts)

  9. Estate Tax • GE - deducs = TE + post 76 (ONLY) gifts = tax base • base x rate = tentative tax - credits (unified, gift tax paid or deemed paid paid) = tax due

  10. Gross Estate • Distinguish: gross est (GE) v. probate est (state law); • 2033: property owned by decedent • 2036: retained interest • 2038: revocable interest

  11. 2039: annuities: J&S or self&S • cost to continue • (value of annuity or refund) x decedent contrib/tot purch pr = inclusion

  12. 2040: joint interests • T/C & CP include portion owned at death • J/T: survivor contrib/total cost x FMV = exclusion • except J/T H&W, 1st to die incl 1/2

  13. 2042: life insurance • Incl if payable to est • Or for ben of est • Or if dec has incidents of ownership • CP: CA tracing: % prems with CP = % proceeds CP

  14. 2035 Gifts COD (add back to estate) • only certain gifts w/i 3 years • gifts under 2036, 2037, 2038, 2042 • and add back any gift tax paid w/i 3 years (gross up)

  15. Taxable Estate (TE) • 2053 expenses, indebtedness (i.e. include FMV (net)), taxes • 2054 losses during estate adm • 2055 (& 2522) charitable contribution

  16. 2056, 2056A (& 2523) marital deduction; unlimited: • property included in estate & passes or has passed to surviving spouse • terminable interest to spouse: usually not qualify (eg L/E)

  17. Surv sp include in her estate at FMV DOD if QTIP elec re qtip prop (qualifd inc int for life & no plan to appoint to other) • Est Tax - phase out low brakets & unifd credit >10M before 02

  18. Credits • 2010 Unified Transfer Credit • 2011 State Death Taxes (table) • 2012 gift tax on prop included in estate • 2013 tax on prior transfers • 2014 foreign death taxes

  19. Form 706 • due date • who must file

  20. GST Tax: • Examples, tax imposition, 1 million exemption, highest rate E&G

  21. Planning • lifetime gift giving • marital & exemption trusts • charitable • irrevocable life insurance trust • living trust

  22. 2001-2009 2010 After 2009 2011 Estate & GST Tax Phase-out Estate & GST Tax Repealed Any Gift Tax SUNSET Repeal of Estate & GST Tax Continuation of Gift Tax EGTRRA `01 In General

  23. Maximum Unified Transfer Tax Rate EGTRRA `01 Maximum Unified Trans- Calendar Year fer Tax Rate 2002 50% 2003 49% 2004 48% 2005 47% 2006 46% 2007 45%

  24. Maximum Unified Transfer Tax Rate EGTRRA `01 (continued) Maximum Unified Trans- Calendar Year fer Tax Rate 2008 45% 2009 45% 2010 & later Estate tax & GST repealed Highest individual rate (35%) applies to gift tax (phasing out lower brackets & UTC >10M Estates) 5% surcharge has also been repealed starting in 2002 EFFECTIVE DATE: decedents dying after 2001

  25. Increase in UTC Exemption Equivalent & GST Tax Exemption EGTRRA `01 Gift Tax GST & Estate Tax Calendar Year Exemption Exemption 2002 $1 million $ 1 million 2003 $1 million $ 1 million 2004 $1 million $1.5 million 2005 $1 million $1.5 million 2006 $1 million $ 2 million 2007 $1 million $ 2 million 2008 $1 million $ 2 million 2009 $1 million $3.5 million EFFECTIVE DATE: Decedents dying after 2001

  26. Qualified Family Owned Business Deduction Repealed EGTTRA `01 • Enacted as exclusion in `97 • Amended to deduction in `98 • Repealed for `04 Effective date: decedents dying after 2003

  27. Basis of Property from a Decedent EGTRRA `01 • Because of Estate tax repeal in 2010 • 2010: Modified carryover (instead of step up to FMV) • Lesser of AB of decedent or FMV DOD • No 6 month alternate valuation

  28. Basis of Property from a Decedent EGTTRA `01 (cont’d) • Executor can step-up basis 1.3m (plus certain unused capital, net op, built-in losses) • And step-up an additional 3 m for property passing to the surviving spouse

  29. Phase-out & Repeal State Death Tax Credit EGTRRA `01 Percentage of Current Calendar State DeathTaxCredit Year Disallowed 2002 25% 2003 50% 2004 75% 2005 100% • On Repeal in 2005, State Death Taxes can be deducted • EFFECTIVE DATE: decedents dying after 2001

  30. Retention of Gift Tax EGTRRA `01 • Max gift rate = 35% (max indiv inc tax rate) after 2009 • Exemption amount 1 million after 2009 • Transfer to trust = taxable gift unless donor or donor spouse grantor trust (or otherwise provided)

  31. Modification of GST EGTRRA `01 • Beyond Scope • Deemed allocation of GST tax exemption – lifetime transfers to trust (not direct skips) • Retroactive allocation of GST exemption • Severing of Trusts holding property where inclusion rates >0 • Modification of Valuation rules • Relief from late elections • New substantial compliance rules Effective Date: After 2000

  32. Taxpayer Relief Act of 1997 - Chapter 26 • Transfers from decedent’s Revocable Grantor Trust; w/i 3 yrs of death; - not included in decedent’s estate; - incldg relinguishment of power to revoke; - treated as if gift made directly by dec; For 2035; For 2038; - if under gift exclusion amt, no reportable (taxable) gift

  33. - revocable trust treated as owned by decedent under 676; • - codifies 2 8th cir. Cases - H. McNeely and E. Kisling Est. • - effective for estates of decedents dying after 8/5/97

  34. Inflation indexing (1) 10000 annual gift exclusion (2) 750000 special use valuation ceiling (3) 1m GSTT exemption (4) 1m closely held bus installm paym reduced int ceiling • Effective - after 1998 for deaths and gifts after 12/31/97

  35. Gift Tax Filing for Gifts to Charity • return not req’d for gifts >annual exclusion (10,000) • if entire value = gift tax charitable deduction • effective - gifts made after 8/5/97

  36. IRS Restructuring & Reform Act of 1998 - Chapter 26 • Qualified family owned business deduction (1998) • up to 675,000 for QFOBI • QFOBI deduction + UTC exemption equivalent 1.3 M (reduce UTC otherwise) • rationale eliminate need small bus to liquidate • complex detailed requirements

  37. Value QFOBI >50% adjusted GE (less certain passive interests plus certain gifts) • sole proprietorship, p’ship, corp (p’ship corp owned 50/70/90% by 1/2/3 fams) • dec (or fam memb) own & mat partic 5 of 8 yrs • qualified heir mat partic 5 of 8 of 10 • recapture: • elective

  38. Unified Credit to Increase Year Credit Exempt Equiv 1997 192800 600,000 1998 202050 625,000 1999 211300 650,000 2000 & 2001 220550 675,000 2002 & 2003 229800 700,000 2004 287300 850,000

  39. Year Credit Exempt Equiv 2005 326300 950,000 2006 345800 1,000,000 (no inflation adjustment in UTC)

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