By Ward J. Wilsey, JD, LLM3655 Nobel Dr. Suite 345San Diego, CA 92122(858) 764-2672wardwilsey@wilseylaw.comThe Wilsey Law Firm www.wilseylaw.comBasic Estate Tax

Estate TaxTransfer Tax Paid at DeathInternal Revenue Code § 2001Paid on Taxable EstateGross Estate Less Exclusion AmountInternal Revenue Code § 200145% Tax on Taxable EstateInternal Revenue Code § 2001But see marginal rates

Calculating an Estate Tax Estimate

Exclusions from the Taxable EstateExclusion Amount ($3,500,000 in 2009)Expenses of the Estate (IRC § 2053)Funeral ExpensesAdministration ExpensesClaims Against the EstateDebtsMarital Deduction (IRC § 2056)Charitable Bequests (IRC § 2055)Qualified Domestic Trust (IRC § 2056A)

GiftingYou are subject to a 45% tax on gifts made to another personUnless an Exclusion AppliesExclusions$13,000 Annual Gifting under IRC §2503(b)$1,000,000 Lifetime Exclusion under IRC §2505(a)Certain direct expenditures for health care and educational expenditures under §2503(c)

Annual GiftingYou can gift $13,000 to as many different people as you wish. IRC 2503(b)Must be a gift of a present interestOptions for giftingOutright529 planUTMATrust

Gifting OutrightOutright gifts are fairly simpleCan be done to minor’s with Guardian. Rev. Rul. 54-400, 1954-2 CB 319Gifts outright will be spent outrightGifts can be paid indirectly in the form of medical or educational expensesMust comply with IRC § 2503(e)

Gift to 529 PlanAllow donor’s to prepay educational expenses on a tax advantaged basis.Contributions to 529 Plan are taxable gifts. IRC § 529(c)(2).Eligible for annual exclusionNeither the donor or done is subject to income tax on distributions or growth within 529 planAs long as distributions are paid directly for qualified educational expenses

529 PlanDonor can elect to gift five years worth of annual exclusions, and apply next five years worth of exemptions. IRC 529(c)(2)(b).Assets in 529 Plan are not in estate of donor or done. IRC 529(c)(4)529 plan can be transferred to another beneficiary when no longer needed. IRC 529(c)(3)(c)

529 Plan DownsideDistributions not used for qualified educational expenses will be subject to income tax plus 10% penalty. Donor is taxed on returned contributions, to extent of earnings, plus 10% penalty. IRC 529(c)(3)May be easier to make contributions directly to educational provider. 2503(e)Opportunity Cost for gifts made

UTMATransfers made into custodial account for beneficiaryDistributed at appropriate age according to state law21 in CaliforniaDisadvantages are too numerous to bother with

Gifts in TrustGift to an Irrevocable Trust, properly drafted, it outside the estate of the Grantor. Options2503(c) Trust2503(b) TrustCrummey Trust

2503(c) TrustGifts to this trust will qualify under the annual exclusions if:1. The trust principal and income may be paid to or spent on behalf of the donee before he or she reaches age 21; 2. Any money not spent is distributed to the donee when he or she reaches age 21; and 3. Any unspent money is either paid to the donee's estate or passes under a general power of appointment granted to the donee if the donee dies before reaching age 21.

2503(b) TrustBeneficiary receives income interest for lifeIncome must be paid out, cannot accumulate.Gifts are part subject to exclusion, and part gift of non-present interest.Very difficult

Crummey TrustTrust that has gifts qualify for the annual exclusion by giving beneficiaries a special withdrawal rightCrummey v. Comm'r, 397 F2d 82 (9th Cir. 1968)Rev. Rul. 73-405, 1973-2 CB 321 , revoking Rev. Rul. 54-91, 1954-1 CB 207Flexibility is main advantageBroad discretion in investmentsBroad discretion in distributionsMultiple beneficiaries

Crummey DisadvantagesCrummey beneficiary must have a withdrawal right to take out gifts for set period of timeDrafter should not use less than 30 day time period. See, e.g., Priv. Ltr. Ruls. 200130030 , 200011058 , 200011054–200011056 , 199912016 , 9812006 , 9810006 , 9809006 , 9809004 ; see also Estate of Cristofani v. Comm'r, 97 TC 74 (1991) , acq. in result only 1992-1 CB 4, 1996-1 CB 1 .

Crummey TrustsNotice to Beneficiaries is required to notifyGift has been madeWithdrawal right is allowedRev. Rul. 81-7, 1981-1 CB 474What happens if you do not give noticeAssets are still out of Grantor’s estateBut they may not qualify for annual exclusion

Crummey TrustsWaiver of Notice is not allowed by the IRSTechnical Advice Memorandum 9532001“current notice of a gift and the withdrawal rights over it is an absolute prerequisite to a donee's “real and immediate benefit” from the gift”Minor BeneficiariesThe trust must include a provision allowing guardians to exercise a Crummey Withdrawal Right on behalf of minor beneficiariesNaumoff v. Comm'r, TC Memo. 1983-435 (1983)

Crummey TrustsSplit GiftsHusband and Wife may elect to split gifts into a Crummey Trust. IRC 2513Reciprocal GiftingIRS will scrutinize interrelated family structures, where A creates trust for B’s kids, and B creates a trust for A’s kidsRevenue Ruling 85-24

Naked Crummey PowersIRS has attacked giving Crummey Powers to contingent beneficiaries.Tax Court has rejected this argumentEstate of Cristofani v. Comm'r, 97 TC 74 (1991)IRS has said they will continue to deny Crummey Rights to Contingent BeneficiariesAction on Decision (AOD) 1992-00Avoid Cristofani issues by naming grandchildren and other beneficiaries as permissible current beneficiaries, with children as “primary beneficiary”

Crummey PowersLapse of GiftBeneficiary who lets Crummey Powers lapse makes a gift to the other beneficiaries. IRC 2514ExceptionsNo gift to the extent that lapse does not exceed the greater of $5,000 or 5% of the trust assets. IRC 2514(e)No gift if Beneficiary has a Testamentary General Power of Appointment over assets. Priv. Ltr. Ruls. 8142061 , 8229097 , 8517052. See also Regs. 25.2511-2(b)Hanging Crummey Powers

Hanging Crummey PowersCrummey Withdrawal Power that lapses in stages:After 30 days to extent of 5&5 powersEvery year to extent remainder is less than 5% of trust assetsAuthorityIRS has treated favorably unless withdrawal right mentions amounts subject to gift tax. Private Letter Ruling 8901004Make sure Hanging Power does not make reference to “taxable gifts”Priv. Ltr. Rul. 200130030

Crummey GST ResultTransfers to Crummey Trust do not qualify for the annual GST Exclusion unless:It is a direct skip giftAll beneficiaries are skip personsMade to a Trust with one beneficiaryAssets are in beneficiary’s estate at deathOtherwise, lifetime GST Exemption will be used under IRC 2642(c)Watch out if you have made lifetime transfers to Irrevocable TrustsYou may be creating gifts currently subject to GSTLimit Crummey Gifts to Kids if possible

Generation Skipping Transfer TaxTransfer Tax Imposed on Transfers to Skip PersonsIn Addition to Estate TaxRate is the Product of the Maximum Estate Tax Rate multiplied by the Inclusion Ratio (IRC § 2641)Skip PersonPersons in a generation that is two or more generations below the transferorGrandchildrenPersons 37.5 years younger than transferor, unless transferee is a spouse

When the GSTT OccursTransfers that are subject to a GST Tax, absent an exemption (IRC § 2611(a)):Direct SkipDirect Transfer to skip person (IRC § 2611(a)(3))Taxable TerminationTermination of an interest in a trust by a non-skip person unless:A transfer subject to an estate or gift tax occursA non-skip person has an interest in the trust; orNo transfer to a non-skip person is madeTaxable DistributionDistribution from a Trust to a Skip PersonDoes not include any transfer relating to exclusion of certain transfers for educational or medical expenses under IRC § 2503(e)

Exemptions From Generation Skipping Transfer Tax$3,500,000 Exemption during life or upon deathIRC § 2631(a)Once you allocate your exemption, it’s Irrevocable.IRC § 2631(b)

Automatic Allocation on Direct SkipsAny direct skip made during your lifetime will receive automatic allocation, of remaining exemption, to extent necessary to make inclusion ration zero. IRC § 2631(b)(1)You may elect not to have a deemed allocation apply by timely filed gift tax return.IRC § 2631(b)(1)Automatic allocation is permanent once this due date expires.

Transfers to TrustGST Exemption is deemed to be allocated to all lifetime “non-skip” transfers to GST trusts, unless the transferor elects otherwise.IRC § 2632(c)Unless, the trust principal is distributed to a non-skip person before the age of 45, or upon an event that will reasonably happen before age 45Watch this provisions for non-Dynasty TrustsEx. of a Problem. Trust property will be distributed to my child 10 years after my death