Basic Estate Tax


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Basic Estate Tax

  1. 1. By Ward J. Wilsey, JD, LLM<br />3655 Nobel Dr. Suite 345<br />San Diego, CA 92122<br />(858) 764-2672<br /><br />The Wilsey Law Firm<br />Basic Estate Tax<br />
  2. 2. Estate Tax<br />Transfer Tax Paid at Death<br />Internal Revenue Code § 2001<br />Paid on Taxable Estate<br />Gross Estate Less Exclusion Amount<br />Internal Revenue Code § 2001<br />45% Tax on Taxable Estate<br />Internal Revenue Code § 2001<br />But see marginal rates<br />
  3. 3. Calculating an Estate Tax Estimate<br />
  4. 4. Exclusions from the Taxable Estate<br />Exclusion Amount ($3,500,000 in 2009)<br />Expenses of the Estate (IRC § 2053)<br />Funeral Expenses<br />Administration Expenses<br />Claims Against the Estate<br />Debts<br />Marital Deduction (IRC § 2056)<br />Charitable Bequests (IRC § 2055)<br />Qualified Domestic Trust (IRC § 2056A)<br />
  5. 5. Gifting<br />You are subject to a 45% tax on gifts made to another person<br />Unless an Exclusion Applies<br />Exclusions<br />$13,000 Annual Gifting under IRC §2503(b)<br />$1,000,000 Lifetime Exclusion under IRC §2505(a)<br />Certain direct expenditures for health care and educational expenditures under §2503(c)<br />
  6. 6. Annual Gifting<br />You can gift $13,000 to as many different people as you wish. IRC 2503(b)<br />Must be a gift of a present interest<br />Options for gifting<br />Outright<br />529 plan<br />UTMA<br />Trust<br />
  7. 7. Gifting Outright<br />Outright gifts are fairly simple<br />Can be done to minor’s with Guardian.  Rev. Rul. 54-400, 1954-2 CB 319<br />Gifts outright will be spent outright<br />Gifts can be paid indirectly in the form of medical or educational expenses<br />Must comply with IRC § 2503(e)<br />
  8. 8. Gift to 529 Plan<br />Allow donor’s to prepay educational expenses on a tax advantaged basis.<br />Contributions to 529 Plan are taxable gifts. IRC § 529(c)(2).<br />Eligible for annual exclusion<br />Neither the donor or done is subject to income tax on distributions or growth within 529 plan<br />As long as distributions are paid directly for qualified educational expenses<br />
  9. 9. 529 Plan<br />Donor can elect to gift five years worth of annual exclusions, and apply next five years worth of exemptions. IRC 529(c)(2)(b).<br />Assets in 529 Plan are not in estate of donor or done. IRC 529(c)(4)<br />529 plan can be transferred to another beneficiary when no longer needed. IRC 529(c)(3)(c)<br />
  10. 10. 529 Plan Downside<br />Distributions not used for qualified educational expenses will be subject to income tax plus 10% penalty. <br />Donor is taxed on returned contributions, to extent of earnings, plus 10% penalty. IRC 529(c)(3)<br />May be easier to make contributions directly to educational provider. 2503(e)<br />Opportunity Cost for gifts made<br />
  11. 11. UTMA<br />Transfers made into custodial account for beneficiary<br />Distributed at appropriate age according to state law<br />21 in California<br />Disadvantages are too numerous to bother with<br />
  12. 12. Gifts in Trust<br />Gift to an Irrevocable Trust, properly drafted, it outside the estate of the Grantor. <br />Options<br />2503(c) Trust<br />2503(b) Trust<br />Crummey Trust<br />
  13. 13. 2503(c) Trust<br />Gifts to this trust will qualify under the annual exclusions if:<br />1. The trust principal and income may be paid to or spent on behalf of the donee before he or she reaches age 21; <br />2. Any money not spent is distributed to the donee when he or she reaches age 21; and <br />3. Any unspent money is either paid to the donee&apos;s estate or passes under a general power of appointment granted to the donee if the donee dies before reaching age 21.<br />
  14. 14. 2503(b) Trust<br />Beneficiary receives income interest for life<br />Income must be paid out, cannot accumulate.<br />Gifts are part subject to exclusion, and part gift of non-present interest.<br />Very difficult<br />
  15. 15. Crummey Trust<br />Trust that has gifts qualify for the annual exclusion by giving beneficiaries a special withdrawal right<br />Crummey v. Comm&apos;r, 397 F2d 82 (9th Cir. 1968)<br />Rev. Rul. 73-405, 1973-2 CB 321 , revoking Rev. Rul. 54-91, 1954-1 CB 207<br />Flexibility is main advantage<br />Broad discretion in investments<br />Broad discretion in distributions<br />Multiple beneficiaries<br />
  16. 16. Crummey Disadvantages<br />Crummey beneficiary must have a withdrawal right to take out gifts for set period of time<br />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&apos;r, 97 TC 74 (1991) , acq. in result only 1992-1 CB 4, 1996-1 CB 1 .<br />
  17. 17. Crummey Trusts<br />Notice to Beneficiaries is required to notify<br />Gift has been made<br />Withdrawal right is allowed<br />Rev. Rul. 81-7, 1981-1 CB 474<br />What happens if you do not give notice<br />Assets are still out of Grantor’s estate<br />But they may not qualify for annual exclusion<br />
  18. 18. Crummey Trusts<br />Waiver of Notice is not allowed by the IRS<br />Technical Advice Memorandum 9532001<br />“current notice of a gift and the withdrawal rights over it is an absolute prerequisite to a donee&apos;s “real and immediate benefit” from the gift”<br />Minor Beneficiaries<br />The trust must include a provision allowing guardians to exercise a Crummey Withdrawal Right on behalf of minor beneficiaries<br />Naumoff v. Comm&apos;r, TC Memo. 1983-435 (1983)<br />
  19. 19. Crummey Trusts<br />Split Gifts<br />Husband and Wife may elect to split gifts into a Crummey Trust. IRC 2513<br />Reciprocal Gifting<br />IRS will scrutinize interrelated family structures, where A creates trust for B’s kids, and B creates a trust for A’s kids<br />Revenue Ruling 85-24<br />
  20. 20. Naked Crummey Powers<br />IRS has attacked giving Crummey Powers to contingent beneficiaries.<br />Tax Court has rejected this argument<br />Estate of Cristofani v. Comm&apos;r, 97 TC 74 (1991)<br />IRS has said they will continue to deny Crummey Rights to Contingent Beneficiaries<br />Action on Decision (AOD) 1992-00<br />Avoid Cristofani issues by naming grandchildren and other beneficiaries as permissible current beneficiaries, with children as “primary beneficiary”<br />
  21. 21. Crummey Powers<br />Lapse of Gift<br />Beneficiary who lets Crummey Powers lapse makes a gift to the other beneficiaries. IRC 2514<br />Exceptions<br />No gift to the extent that lapse does not exceed the greater of $5,000 or 5% of the trust assets. IRC 2514(e)<br />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)<br />Hanging Crummey Powers<br />
  22. 22. Hanging Crummey Powers<br />Crummey Withdrawal Power that lapses in stages:<br />After 30 days to extent of 5&5 powers<br />Every year to extent remainder is less than 5% of trust assets<br />Authority<br />IRS has treated favorably unless withdrawal right mentions amounts subject to gift tax. Private Letter Ruling 8901004<br />Make sure Hanging Power does not make reference to “taxable gifts”<br />Priv. Ltr. Rul. 200130030<br />
  23. 23. Crummey GST Result<br />Transfers to Crummey Trust do not qualify for the annual GST Exclusion unless:<br />It is a direct skip gift<br />All beneficiaries are skip persons<br />Made to a Trust with one beneficiary<br />Assets are in beneficiary’s estate at death<br />Otherwise, lifetime GST Exemption will be used under IRC 2642(c)<br />Watch out if you have made lifetime transfers to Irrevocable Trusts<br />You may be creating gifts currently subject to GST<br />Limit Crummey Gifts to Kids if possible<br />
  24. 24. Generation Skipping Transfer Tax<br />Transfer Tax Imposed on Transfers to Skip Persons<br />In Addition to Estate Tax<br />Rate is the Product of the Maximum Estate Tax Rate multiplied by the Inclusion Ratio (IRC § 2641)<br />Skip Person<br />Persons in a generation that is two or more generations below the transferor<br />Grandchildren<br />Persons 37.5 years younger than transferor, unless transferee is a spouse<br />
  25. 25. When the GSTT Occurs<br />Transfers that are subject to a GST Tax, absent an exemption (IRC § 2611(a)):<br />Direct Skip<br />Direct Transfer to skip person (IRC § 2611(a)(3))<br />Taxable Termination<br />Termination of an interest in a trust by a non-skip person unless:<br />A transfer subject to an estate or gift tax occurs<br />A non-skip person has an interest in the trust; or<br />No transfer to a non-skip person is made<br />Taxable Distribution<br />Distribution from a Trust to a Skip Person<br />Does not include any transfer relating to exclusion of certain transfers for educational or medical expenses under IRC § 2503(e)<br />
  26. 26. Exemptions From Generation Skipping Transfer Tax<br />$3,500,000 Exemption during life or upon death<br />IRC § 2631(a)<br />Once you allocate your exemption, it’s Irrevocable.<br />IRC § 2631(b)<br />
  27. 27. Automatic Allocation on Direct Skips<br />Any direct skip made during your lifetime will receive automatic allocation, of remaining exemption, to extent necessary to make inclusion ration zero. <br />IRC § 2631(b)(1)<br />You may elect not to have a deemed allocation apply by timely filed gift tax return.<br />IRC § 2631(b)(1)<br />Automatic allocation is permanent once this due date expires.<br />
  28. 28. Transfers to Trust<br />GST Exemption is deemed to be allocated to all lifetime “non-skip” transfers to GST trusts, unless the transferor elects otherwise.<br />IRC § 2632(c)<br />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<br />Watch this provisions for non-Dynasty Trusts<br />Ex. of a Problem. Trust property will be distributed to my child 10 years after my death<br />