Chapter 25
Transfer Taxes and Wealth
Planning
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Learning Objectives
1.
Outline the structure of federal transfer taxes
2.
Describe the operation of the federal gift tax
3.
Summarize the operation of the federal estate
tax
4.
Explain principles of wealth planning
2
Federal Transfer Taxes

Common Features:

Common tax rate schedule

Unified credit


Prevents taxation of all but large cumulative transfer
“Exemption equivalent” is taxable amount of credit

Unlimited charitable deduction

Unlimited marital deduction for transfers to a
spouse
3
Federal Gift Tax

Levied on individual taxpayers for taxable gifts
completed during a calendar year

Transfers subject to gift tax:

Imposed on intervivos gifts, lifetime transfers of
property for less than adequate consideration

Imposed once a gift has been completed (occurs
when donor relinquishes control of the property and
donee accepts the gift)
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Valuation

Property is included in the taxable gift at its fair market
value at the date of the gift

Fair market value

“the price at which such property would change hands
between a willing buyer and a willing seller, neither being
under any compulsion to buy or to sell, and both have
reasonable knowledge of the relevant facts”
5
Temporal interests

Remainders and life estates

Future interests are valued at present value, calculated by
estimating the time until the present interest expires

Present value calculation uses the §7520 interest rate
published by the treasury
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Example of temporal interests
Ben transfers $1M of stock to the Junior Trust and
directs it to pay income to Junior for his life and
remainder to Georgia. How is the life estate valued
if Junior is 5 years-old at the time of the gift and the
Section 7520 rate is 5%?
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Federal Gift Tax

Gifts specifically excluded from the gift tax

Incomplete and revocable gifts

Payments for support obligations or debts

Contributions to political parties or candidates

Medical and educational expenses paid on behalf of
an unrelated individual
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Federal Gift Tax

Annual exclusion

Most gifts are eligible for an annual exclusion of
$14,000 (2014) per donee per year

Gifts of present interests qualify for the exclusion


A present interest is a right to own and enjoy the property
currently
Certain gifts of future interests placed in trust for a
minor can also qualify for the exclusion
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Federal Gift Tax

Calculating taxable gifts

Gift-Splitting election

increases the likelihood that gift tax will be reduced:





Better use of the annual exclusions or unified credits
Potential for lower tax rate on a portion of the gift
Spouse must be married at the time of the gift and not divorce
or remarry during the year
Both spouses must consent to the election by filing a timely gift
tax return
Annual election that applies to all completed gifts
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Federal Gift Tax

Deductions are limited to the value of the gift after the
annual exclusion

Marital deduction

Gifts to a spouse but not gifts of nondeductible terminable
interests


An interest that terminates and transfers to another upon an event
or after a specified amount of time
Charitable deduction


No percentage limitation but qualifies for an income tax
deduction
No gift tax return necessary for gifts of entire interest
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Federal Gift Tax

Computation of the gift tax

Prior taxable gifts + current taxable gifts

Tax on cumulative gifts


Subtract gift tax on prior taxable gifts



Purpose is to increase the tax base and thereby increase the
marginal tax rate applying to current gifts
prevent double taxation of prior taxable gifts
Tax is calculated using current rate schedule
Unused unified credit (calculated using current rate
schedule
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Gift tax example
Brian made a $7 million taxable gift this year. Previously
he had made a $1 million taxable gift that was offset by the
unified credit. What amount of gift tax is due on Brian’s
gift?
13
Federal Estate Tax

Designed to tax the value of property owned or
controlled by an individual at death

The Gross Estate has two components:

Probate – Process of paying the debts of the
decedent, and transferring the ownership of any
remaining property to the decedent’s heirs

Probate Estate – Property owned by a decedent (titled
in the name of the decedent) at the time of the death
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Federal Estate Tax
The gross estate consists of:



The probate estate plus
Value of certain automatic property transfers that take effect
at death

Automatic transfers include joint ownership with right
of survivorship.

Property is valued at the fair market value at the date
of the decedent’s death.

Executor can elect to value the estate on an alternate
valuation date, six months after death, if it reduces the gross
estate and estate tax
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Federal Estate Tax


Taxable estate is the gross estate reduced by:

Administrative expenses, debts, losses, and state
death taxes

Marital and charitable deductions
Computation of estate tax

Adjusted taxable gifts


Are prior gifts (not already included in the gross estate)
Objective is to allow estate tax base to reflect all transfers
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Federal Estate Tax

Unified credit

Eliminates transfer taxes on a estates with minimal lifetime
and testamentary transfers

Measured by current tax on exemption equivalent

Amount of cumulative taxable transfers that can be made without
exceeding the unified credit

Credit is applied after reducing the total tax on cumulative
transfers for taxes payable on adjusted taxable gifts

A surviving spouse whose deceased spouse died without
using their unified credit is entitled to the unused credit (a
deceased spousal unused exclusion amount or DSUE)
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Estate tax example
Ed died this year with a taxable estate of $10 million. In
2008 Ed made a $1 million gift that was offset by the
unified credit. What is the amount of estate tax due on
Ed’s estate?
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Wealth Planning Concepts


The generation-skipping tax (GST)

Supplemental tax designed to prevent the avoidance
of transfer taxes through transfers that skip a
generation of recipients

Not widely applicable as it does not apply to transfers
that qualify for an annual gift tax exclusion
Income tax considerations
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Wealth Planning Concepts

Transfer tax planning techniques

Serial gifts


DSUE



Strategy saves gift taxes by converting a potentially large
taxable transfer into multiple smaller transfers that qualify for
the annual exclusion
Allows use of unused exemption of deceased spouse
Bypass provisions can accomplish same objective with more
control over assets
The Step-up in tax basis
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