Basic Estate Tax
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Basic Estate Tax



This is a presentation on real basic estate tax concepts.

This is a presentation on real basic estate tax concepts.



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Basic Estate Tax Basic Estate Tax Presentation Transcript

  • By Ward J. Wilsey, JD, LLM
    3655 Nobel Dr. Suite 345
    San Diego, CA 92122
    (858) 764-2672
    The Wilsey Law Firm
    Basic Estate Tax
  • Estate Tax
    Transfer Tax Paid at Death
    Internal Revenue Code § 2001
    Paid on Taxable Estate
    Gross Estate Less Exclusion Amount
    Internal Revenue Code § 2001
    45% Tax on Taxable Estate
    Internal Revenue Code § 2001
    But see marginal rates
  • Calculating an Estate Tax Estimate
  • Exclusions from the Taxable Estate
    Exclusion Amount ($3,500,000 in 2009)
    Expenses of the Estate (IRC § 2053)
    Funeral Expenses
    Administration Expenses
    Claims Against the Estate
    Marital Deduction (IRC § 2056)
    Charitable Bequests (IRC § 2055)
    Qualified Domestic Trust (IRC § 2056A)
  • Gifting
    You are subject to a 45% tax on gifts made to another person
    Unless an Exclusion Applies
    $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 Gifting
    You can gift $13,000 to as many different people as you wish. IRC 2503(b)
    Must be a gift of a present interest
    Options for gifting
    529 plan
  • Gifting Outright
    Outright gifts are fairly simple
    Can be done to minor’s with Guardian.  Rev. Rul. 54-400, 1954-2 CB 319
    Gifts outright will be spent outright
    Gifts can be paid indirectly in the form of medical or educational expenses
    Must comply with IRC § 2503(e)
  • Gift to 529 Plan
    Allow 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 exclusion
    Neither the donor or done is subject to income tax on distributions or growth within 529 plan
    As long as distributions are paid directly for qualified educational expenses
  • 529 Plan
    Donor 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 Downside
    Distributions 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
  • UTMA
    Transfers made into custodial account for beneficiary
    Distributed at appropriate age according to state law
    21 in California
    Disadvantages are too numerous to bother with
  • Gifts in Trust
    Gift to an Irrevocable Trust, properly drafted, it outside the estate of the Grantor.
    2503(c) Trust
    2503(b) Trust
    Crummey Trust
  • 2503(c) Trust
    Gifts 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) Trust
    Beneficiary receives income interest for life
    Income must be paid out, cannot accumulate.
    Gifts are part subject to exclusion, and part gift of non-present interest.
    Very difficult
  • Crummey Trust
    Trust that has gifts qualify for the annual exclusion by giving beneficiaries a special withdrawal right
    Crummey 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 207
    Flexibility is main advantage
    Broad discretion in investments
    Broad discretion in distributions
    Multiple beneficiaries
  • Crummey Disadvantages
    Crummey beneficiary must have a withdrawal right to take out gifts for set period of time
    Drafter 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 Trusts
    Notice to Beneficiaries is required to notify
    Gift has been made
    Withdrawal right is allowed
    Rev. Rul. 81-7, 1981-1 CB 474
    What happens if you do not give notice
    Assets are still out of Grantor’s estate
    But they may not qualify for annual exclusion
  • Crummey Trusts
    Waiver of Notice is not allowed by the IRS
    Technical 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 Beneficiaries
    The trust must include a provision allowing guardians to exercise a Crummey Withdrawal Right on behalf of minor beneficiaries
    Naumoff v. Comm'r, TC Memo. 1983-435 (1983)
  • Crummey Trusts
    Split Gifts
    Husband and Wife may elect to split gifts into a Crummey Trust. IRC 2513
    Reciprocal Gifting
    IRS will scrutinize interrelated family structures, where A creates trust for B’s kids, and B creates a trust for A’s kids
    Revenue Ruling 85-24
  • Naked Crummey Powers
    IRS has attacked giving Crummey Powers to contingent beneficiaries.
    Tax Court has rejected this argument
    Estate of Cristofani v. Comm'r, 97 TC 74 (1991)
    IRS has said they will continue to deny Crummey Rights to Contingent Beneficiaries
    Action on Decision (AOD) 1992-00
    Avoid Cristofani issues by naming grandchildren and other beneficiaries as permissible current beneficiaries, with children as “primary beneficiary”
  • Crummey Powers
    Lapse of Gift
    Beneficiary who lets Crummey Powers lapse makes a gift to the other beneficiaries. IRC 2514
    No 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 Powers
    Crummey Withdrawal Power that lapses in stages:
    After 30 days to extent of 5&5 powers
    Every year to extent remainder is less than 5% of trust assets
    IRS has treated favorably unless withdrawal right mentions amounts subject to gift tax. Private Letter Ruling 8901004
    Make sure Hanging Power does not make reference to “taxable gifts”
    Priv. Ltr. Rul. 200130030
  • Crummey GST Result
    Transfers to Crummey Trust do not qualify for the annual GST Exclusion unless:
    It is a direct skip gift
    All beneficiaries are skip persons
    Made to a Trust with one beneficiary
    Assets are in beneficiary’s estate at death
    Otherwise, lifetime GST Exemption will be used under IRC 2642(c)
    Watch out if you have made lifetime transfers to Irrevocable Trusts
    You may be creating gifts currently subject to GST
    Limit Crummey Gifts to Kids if possible
  • Generation Skipping Transfer Tax
    Transfer Tax Imposed on Transfers to Skip Persons
    In Addition to Estate Tax
    Rate is the Product of the Maximum Estate Tax Rate multiplied by the Inclusion Ratio (IRC § 2641)
    Skip Person
    Persons in a generation that is two or more generations below the transferor
    Persons 37.5 years younger than transferor, unless transferee is a spouse
  • When the GSTT Occurs
    Transfers that are subject to a GST Tax, absent an exemption (IRC § 2611(a)):
    Direct Skip
    Direct Transfer to skip person (IRC § 2611(a)(3))
    Taxable Termination
    Termination of an interest in a trust by a non-skip person unless:
    A transfer subject to an estate or gift tax occurs
    A non-skip person has an interest in the trust; or
    No transfer to a non-skip person is made
    Taxable Distribution
    Distribution from a Trust to a Skip Person
    Does 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 death
    IRC § 2631(a)
    Once you allocate your exemption, it’s Irrevocable.
    IRC § 2631(b)
  • Automatic Allocation on Direct Skips
    Any 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 Trust
    GST 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 45
    Watch this provisions for non-Dynasty Trusts
    Ex. of a Problem. Trust property will be distributed to my child 10 years after my death