OVERVIEW
What is the Estate Tax? The estate tax is an excise tax on the transfer of wealth (a transfer tax)
at the time of death. It is designed to do more than merely tax a decedent's probate estate (the
sum of all property owned by a decedent that passes under the Will of the Decedent). The estate
tax is also intended to embrace a number of other situations where, in the view of Congress, a
decedent either has or, in some instances, formerly had a sufficient nexus with property to
warrant its inclusion in the gross estate at the moment of death. The decedent (dead person) pays
the estate tax.

Authority for the Estate Tax. §2001(a) imposes the estate tax on the transfer of the
“taxable estate” of every decedent who is a citizen or resident of the U.S. §2051 defines
the taxable estate as the “gross estate” less “deductions”.
What is the Gift Tax? The gift tax is an excise tax on the transfer of wealth during life. The
donor (person who made the gift) pays the gift tax §2502(c). If the donor fails to pay the tax the
donee may be held liable for the tax to the extent of the value of the property received. §6324(b).

Authority for the Gift Tax: §2501 imposes the gift tax each calendar year on the transfer
of property by gift
What is a Trust? A trust, like a corporation, is a fictious entity created by law. A trust is a
fiduciary relationship (In law, a fiduciary duty is a special duty owed by one individual to
another. This duty is imposed by state law. Under state law, an individual who is the trustee of a
trust has a fiduciary duty to beneficiaries of a trust) in which a trustor (the donor/creator) gives
another party, known as the trustee, legal title (the right to hold title to property or assets) for the
benefit of a third party known as the beneficiary(ies). The trustee is the legal owner of the assets
(but not the beneficial owner) and administers the trust assets (invests trust assets, pays bills,
decides when to make distributions to beneficiaries etc…).

What is the Purpose of a Trust? The purposes for which the Trustor/Grantor/Trust
Creator can create trusts are as unlimited as our imagination. The trustee's duties and the
beneficiaries' interests may affect any purpose that is neither illegal nor against public
policy. In general, one of the most important is to provide for the creator's
(Grantor/Trustor) family, over time. Through the trust it is possible to separate the
benefits of ownership from the burdens of ownership. For example, D creates a trust and
transfers a house and cash to the trust (technically owned by the Trustee). The trust
document states that D’s son may live in the house while son is alive and at son’s death
then D’s grandson will be given the house. Under this arrangement, the trustee will pay
for all maintenance on the house (real estate tax, etc…) while it is owned by the trust. D,
through the use of a trust, has separated the benefits of owning the house: D’s son can
live in the house (one benefit of home ownership), but does not have the power to
transfer (i.e. sell) the house (another benefit of home ownership). D has also separated
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the burden of owning the house (maintenance / paying taxes born by Trustee) from the
benefits (beneficiaries). Perhaps D wanted to provide for the son, but did not trust the
son to manage the assets in the trust. Note that the trustee must comply with the terms of
the trust under state law. (If the trustee does not comply, the beneficiaries may sue the
trustee. It is important to have a trustee with assets – otherwise a law suit against the
trustee is meaningless – or that the Grantor trusts 100%.

Trust as a Separate Taxpaying Entity. For federal income tax purposes, a trust other
than one that is treated as owned by its creator- referred to as the Grantor -under §§671679, is generally recognized as a separate taxable entity. Perhaps most important, a trust
acts as a conduit with respect to amounts that are distributed to beneficiaries during the
taxable year. In particular, a trust is allowed to deduct, and the beneficiaries are required
to report, amounts that were properly distributed, or were required to be distributed, to
5beneficiaries. Otherwise, trusts are generally subject to the same basic tax rules that
apply to individuals.

Separation of Interests in the Trust. Although a trust is always one whole entity, the
beneficial rights in the trust may be separated.
o Income / Present Interest. Interests in trust assets may be separated between
current use and future use. The current use of trust assets is known as the income
or present interest. For example, if a trust has $ which it invests in stocks, the
dividends paid by the stock are the income or present interest (can be used now).
In the example above, the son’s interest in the trust is a present / income interest
because the son has the current right to use the house.
o Principal / Remainder Interest. Any interest which is not a current interest (can
only happen in the future is a remainder interest. Also, from a financial
perspective, the right to principal / corpus is different than the right to income.
For example, if a trust has $ which it invests stocks, the dividends paid by the
stock are the income or present interest. However, the trust might separate the
right to receive trust income (i.e. the dividends paid by the stock) from the right to
trust principal (i.e. the Trustee may be given the ability to distribute trust principal
which is separate from the ability to distribute trust income).
The Estate Tax
Gross Estate. §2031 states that only property specifically listed in sections §§ 2033-2046 is
included in the gross estate (Valuation rules discussed in §§2032, 2032A and 2701-2704). If a
particular item is not included in the gross estate under one of these sections, then it is not
included in the gross estate.
Deductions. Listed in §§ 2053-2058. If an expense is not listed in one of these sections it is not
deductible for estate tax purposes.


Expenses for indebtedness and taxes §2053
Losses §2054
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
Charitable Bequests §2055
Marital Deduction §2056
State Death Taxes §2058
What is the Taxable Estate? The taxable estate equals the Gross Estate less Deductions.
Effect of Prior Gifts. Prior Gifts (the value of gifts made by the decedent during decedent’s
lifetime) are added to the Taxable Estate, to calculate an amount usually called the Tax Base.
A tentative tax on the Tax Base is calculated using the tax rates found in §2001(c). The tax on
just the Prior Gifts (using the same tax rates from §2001(c)) is then subtracted. This (adding
prior gifts to calculate a tentative tax and then subtracting the tax due on prior gifts) may seem
like a redundant step. The practical effect is to tax the taxable estate in a higher marginal tax
bracket. It does not lead to double taxation of gifts.
Unified Credit. §2010. The Unified Credit and other credits (§§2011-2016) are subtracted
from the Tentative Tax to arrive at the tax due.

Calculating the Unified Credit. §2010(a) says there is a credit - the amount of which
shall be the “applicable credit amount”. §2010(c) says the applicable credit amount is the
tax due on the “applicable exclusion amount” adjusted for inflation. Under
§2010(c)(3)(A), the applicable exclusion amount is $5,000,000 but under §2010(c)(3)(C)
(added under the TCJCA 2017), the applicable exclusion amount for tax years 2018 –
2025 is $10,000,000 (adjusted for inflation). As a result of the inflation adjustment, the
applicable exclusion amount is $11,700,000 in 2021. It was $11,400,000 for the 2019 tax
year and was $11,580,000 for the 2020 tax year. See Rev. Proc. 2018-57 and 2019-44.
Therefore, the unified credit under §2010 for 2020 is the tax that would be due on a
$11,580,000 tax base . Based on the rates imposed by IRC §2001(c), the unified credit
amount for 2020 is $4,577,800, for 2021 is $4,625800 and for 2019 is $4,505,800. This
credit correlates to the ability to pass $11,400,000 free of estate tax in 2019, $11,580,000
as of 2020 and $11,700,000 in 2021.
Estate Tax Formula:


Gross Estate (§§ 2033-2046) less
Deductions (§§ 2053-2058)
Taxable Estate (§2051)


Taxable Estate plus
Adjusted Taxable Gifts
Tax Base (“unified transfer tax base UTTB”)

Tax Base *
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
Tax Rate
Tentative Tax (§2001) on Tax Base


Tentative Tax on Tax Base less
Gift Tax Payable for gifts made during life (after 1976) calculated as of the date of death
§2001(b)(2), (g) (note: payable means in excess of the unified credit. Any gift less than
the credit would have a payable amount of $0).
Tentative Estate Tax


Tentative Estate Tax less
Credits (§§2010-2015)
Tax Payable
Basic Exclusion amount for 2022 is $12,060,000, for 2021 $11,700,000, for 2020 is
$11,580,000, for 2019 was $11,400,000, for 2018 was $11,180,000 and for 2017 was
$5,490,000.
Example #1. D dies in 2020 with $15,000,000 in assets (estate) and made no prior
taxable gifts. D’s tentative estate tax is calculated under the table in IRC §2001(c). $5,945,800.
D’s unified credit in 2020 is the tax that would be due on $11,580,000 (which is $4,577,800
under IRC §2001(c)). Therefore, the estate tax payable is $1,368,000.
Example #2. D dies in 2020 with a taxable estate of $10,000,000 and made a $5,000,000
taxable gift in 2017. In 2020, D’s Tax Base is $15,000,000. Under §2001(c), the tentative tax on
$15,000,000 is $5,945,800. The tentative tax on the tax base is then reduced by the amount of tax
that would have been payable on all of D’s taxable gifts using the table in §2001(c). The amount
of gift tax payable is $0 because the exclusion amount is greater than $5,000,000 (The tentative
tax on the $5,000,000 gift is $1,945,800 which is less than the credit). Finally, D’s tentative tax
of $5,945,800 is reduced by D’s unified credit (the amount of tax that would be due on
$11,580,000, which is $4,577,800). Therefore, tax payable is $1,368,000.
Example #3. Same as #2 except D made a gift of $15,000,000 in 2018 and no gift in
2017. The difference here is that the prior gift does result in a gift tax due because $15,000,000
is greater than the exclusion amount. Under §2001(b), D’s Tax Base is $25,000,000. Under IRC
§2001(c), the tentative tax on $25,000,000 is $9,945,800. (calculated as $345,800 plus 40% of
the excess over $1,000,000, which is .4*$24,000,000 : see table in section 2001(c)). The tax that
would have been payable on D’s taxable gifts, using 2020 rates, would have been calculated as
follows: (tentative tax on gifts of $15,000,000 = $5,945,800 less unified credit amount available
of $4,577,800 = $1,368,000). Therefore, the tentative tax is reduced by this amount to
$8,577,800. Finally, the unified credit is applied. (the tax that would be due on $11,580,000
which is $4,577,800) and the total tax due is $4,000,000 ($8,577,800 - $4,577,800). The short-
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cut would be to recognize that in 2020, D had no exclusion left, and died with an estate of
$10,00,000. 40% of this amount is $4,000,000.
THE Gift Tax
Gift Tax: §2502(a) the amount of gift tax is equal to the difference between (1) the tentative tax
on all taxable gifts made in the current year AND in all previous years and (2) the tentative tax
on all gifts made in previous years (See table IRC §2001(c)).
Taxable Gifts: Sum of FMV of transfers subject to gift tax §2503(a) Less
o the annual exclusion ($15,000 per donee per year) Less
o Exclusions and Deductions §2503(b).
Taxable gifts
Gift Tax Formula:
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



This year’s taxable gifts +
All prior years’ taxable gifts §2504
Total Taxable Gifts
Tentative Tax on Total Taxable Gifts (using the tax table found in §2001(c)); §2502 less
Tax on prior year’s taxable gifts (again using the tax table found in §2001(c));
This year’s gift tax.
Less unified credit §2505(a) (same as for estates).
The annual exclusion for 2021, 2020, 2019 and 2018 for gifts is $15,000 per donee per year. Not
included in taxable gifts under §2503. As discussed above, the exclusion amount on which the
unified credit is calculated for 2021 is $11,700,000, for 2020 was $11,580,000 and was
$11,400,000 in 2019 and was $11,180,000 in 2018 and for 2017 was $5,490,000.
Example: G made Taxable Gifts of $1,000,000 in 2018, and 2019. In 2020, G made
additional taxable gifts of $11,000,000. Calculate the gift tax due in each year? 2018: In 2018
the gift tax due on G’s $1,000,000 gift is $345,800 (See table in IRC Section 2001(c))
determined as follows: (1) the tentative tax on $1,000,000, or $345,800 less (2) the tentative tax
on all prior gifts $0. There will be no gift tax due in 2018 because G is entitled to her unified
credit under §2505(a). The maximum credit amount in 2018 was the tax that would be due on
$11,180,000, which is $4,417,800 (see table in 2001(c)). G used $345,800 of her unified credit
in 2018. In 2019 the gift tax under §2502(a) on G’s $1,000,000 gift is $400,000 determined as
follows: (1) the tentative tax on current and prior taxable gifts ($2,000,000), $745,800, less (2)
the tentative tax on all prior taxable gifts ($1,000,000), $345,800 (see above) = $400,000. G will
not have to actually pay any gift tax because of the remaining balance of her unified credit. The
available unified credit in 2019 for G is the tax that would be due on $11,400,000 (which is
$4,505,800 see table), less the amount previously used in 2018 which is $345,800. Therefore,
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the maximum credit available in 2019 = $4,160,000. In 2019 G’s tentative tax was $400,000 so
no tax due. In 2020, G made taxable gifts of $11,000,000. The gift tax due on this gift is
calculated as follows: (1) The tentative tax on all taxable gifts ($13,000,000) is $5,145,800 (see
table in §2001(c)). (2) The tentative tax on all prior taxable gifts ($2,000,000) is $745,800.
$5,145,800 - $745,800 = $4,400,000. Under §2505(a), G’s available unified credit is the tax that
would be due on $11,580,000 (which is $4,577,800) less the amount she already used ($745,800)
= $3,832,000. Therefore, the gift tax due in 2020 is $4,400,000 less $3,832,000 = $568,000. As
of 2020 G has used their entire unified credit and all future gifts will be taxed at a rate of 40%
(except to the extent of any additional credit added as a result of indexing for inflation).
Short Cut: Although the method above is the statutorily correct method of calculating the gift
tax due, it might be quicker and simpler to simply realize that in 2020, G made gifts that were
($13,000,000 - $11,580,000) over the exclusion amount. Therefore, in 2020 G made gifts of
$1,420,000 that are subject to the gift tax (40%). .4*$1,420,000 = $568,000.
Non-Citizens
Special rules apply to non-citizens. Whether a non-citizen is also a non-resident is also often an
important factor. The gift and estate tax applies to non-resident non-citizens only if the
transferred property is located in the U.S. §§2011(a), 2001(a).

Gifts.
o Applicability
 Citizens. Any gift transfer by an individual, who is a U.S. citizen at the
time of the transfer, is subject to the gift tax, whether or not the individual
is residing in the United States and regardless of the situs of the property
transferred.
 Residents. Same rules as citizens
 Non-Residents. Only gifts of real property and tangible personal property
located within the U.S. are subject to the Gift Tax §2511(a).
 Intangible Property. Gifts of intangible property by non-resident
non-citizens of the U.S. is not subject to gift taxation (even if the
gift occurs within the U.S.) §2501(a)(2).
 EXAMPLE. B, who is not, and never has been, a citizen or
resident of the United States, disclaims a life income interest in a
trust established three years previously for the benefit of B and B's
family by B's aunt, a U.S. resident. All of the assets of the trust are
invested in intangible property in the form of stocks, bonds, and
mutual funds. The trustee is a U.S. corporation. B's disclaimer,
more than nine months after the creation of B's interest in the trust,
is not timely under §2518, and therefore would constitute a taxable
gift if B were a citizen or resident of the United States. Because B
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is not a citizen or resident of the United States, however, the
disclaimer of B's life estate in a trust corpus comprised exclusively
of intangible property is within the exception provided in
§2501(a)(2) and therefore is not regarded as a transfer subject to
the gift tax
o Annual Exclusion
 Applies to all gifts subject to gift tax. Increased to $157,000 for gifts to
non-citizen spouse (this is because the marital deduction is not available
for transfers to non-citizen spouses).
o Gift Splitting
 If non-citizen spouse is a non-resident then gifts may not be split. Gifts
may be split if spouse is a U.S. resident.
o Definition of Resident.
 U.S. Resident. For purposes of the gift tax, the regulations define a U.S.
“resident” as an “individual who has his domicile in the United States at
the time of the gift. The regulations define “domicile” under common law
principles, and according to these principles, domicile is acquired by
living in a place, for even a brief period of time, with no definite present
intention of living elsewhere. Regs. §25.2501-1(b).
 U.S. Possession. A person who is a U.S. citizen solely by reason of being
born in a U.S. possession (i.e. Puerto Rico) is treated as a non-resident
alien for gift tax purposes.

EXAMPLE: C, a U.S. citizen §2501(b); Regs. §25.2501-1(c). by reason
of his birth in the United States at San Francisco, established residence in
Puerto Rico and acquired Puerto Rican citizenship. C makes a gift of stock
of a Spanish corporation on Sept. 4, 1958, while a citizen and domiciliary
of Puerto Rico. C's gift is, by reason of the provisions of §2501(b), subject
to the gift tax imposed by §2501 because C's United States citizenship is
based on birth in the United States and is not based solely on being a
citizen of a possession or solely on birth or residence in a possession.
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