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Basic Estate Tax

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 www.wilseylaw.com
      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