CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM
Estate Planning
Module 5
Estate Planning Issues Related to
Generation-Skipping Transfer Tax &
Income Tax
© 2011, College for Financial Planning, all rights reserved.
Learning Objectives
5–1 Identify the purpose and basic features of the
federal generation-skipping transfer tax
(GSTT).
5–2 Analyze a situation to identify types and
consequences of transfers that are subject to
the federal generation-skipping transfer tax
(GSTT).
5–3 Analyze a situation to calculate the federal
generation-skipping transfer tax (GSTT).
5–4 Analyze a situation to identify the income tax
implications of an estate transfer technique.
5-2
Questions to Get Us Warmed Up
5-3
Generation-Skipping Transfer Tax (GSTT)
Nature & Incidence
• tax on transfer of wealth (during life or at death) to
•
•
•
persons who are deemed to be two or more generations
younger than the transferor
GSTT in addition to any gift or estate tax due on the
transfer
GSTT exemption is same as estate tax exclusion
amount; cumulative over a lifetime
taxed at top regular estate tax
rate for year of transfer
5-4
Generation-Skipping Transfer Tax (GSTT)
Skip Persons
•
Is a transferee of property who is deemed to be two or more generations
younger than the transferor or the transferor’s spouse.
•
If transferee (or the transferee’s spouse) is a lineal descendant of a
grandparent of the transferor or the transferor’s spouse, generations are
determined by comparing the number of generations from such
grandparent to the transferor versus the transferee.
•
If the transferee is not a lineal descendant of a grandparent of the
transferor or the transferor’s spouse, transferee must be more than 37.5
years younger than transferor or transferor’s spouse.
•
A trust can be a skip person if the only beneficiaries
with a current interest in trust assets are all
skip persons; if there are no beneficiaries
with a current interest, the trust can still
be a skip person if all future distributions
from the trust can be made only to skip
persons.
5-5
Lineal Descendant Skip Parties
Transferor’s
Grandparent
Aunt/Uncle
Transferor’s Parent
Aunt/Uncle
Cousin
Sibling
TRANSFEROR
Sibling
Cousin
1st Cousin
Once Removed
Niece/Nephew
Child
Niece/Nephew
1st Cousin
Once Removed
1st Cousin
Twice Removed
Grand
niece/nephew
Grandchild
Grand
niece/nephew
1st Cousin
Twice Removed
1st Cousin
Thrice Removed
Adopted
Great-Grand
niece/nephew
Great-Grandchild
Great-Grand
niece/nephew
1st Cousin
Thrice Removed
5-6
Non Lineal Descendant Skip Parties
Transferor’s Great
Grandparent
Great Aunt/Uncle
Transferor’s Grand
Parent
Great Aunt/Uncle
1st Cousin
Once Removed
Transferor’s
Parents
1st Cousin
Once Removed
2nd Cousin
Transferor
2nd Cousin
2nd Cousin
Once Removed
2nd Cousin
Once Removed
2nd Cousin
Twice Removed
2nd Cousin
Twice Removed
Persons identified in shaded boxes are not considered part of the lineal line and follow the unrelated party rules.
Whether the individuals in the gray shaded boxes are skip individuals will depend on age.
5-7
Generation-Skipping Transfer Tax (GSTT)
Nonskip Person
• Is a transferee of property who is deemed to be less
•
•
than two generations younger than the transferor or the
transferor’s spouse.
Defined by the IRC as anyone who is not a skip party;
thus, if the transferor has retained an interest in the
property, the transferor can be a nonskip party.
Transferor’s spouse or former spouse
is always considered a nonskip
person regardless of the age
difference with the transferor.
5-8
GSTT: Exempt Transfers
• direct and exclusive payment of
•
•
o medical expenses
o tuition expenses
transfers to
o a spouse or former
spouse
o to a charity (most)
o individuals deemed to be
less than two generations
younger than the transferor
lifetime direct skip transfers of a present interest under
the maximum annual exclusion amount
5-9
GSTT: Deceased Ancestor/Parent Skip Rule
To a Lineal Heir
• transferee must be a lineal descendant of a parent of the
•
•
transferor or transferor’s spouse
parent of the transferee must be deceased at earliest
time the transfer is subject to gift or estate tax
(completion of the gift or date of death, respectively)
skip party will move into the deceased parent’s
generation, which may avoid the GSTT
To a Collateral Heir
• transferee must be lineal descendant of transferor’s
•
parent, but not a lineal descendant of the transferor
in addition to above, transferor must have no living lineal
descendants at completion of the transfer
5-10
GSTT: Direct Skips
•
•
•
•
•
•
can occur during life or at death
in addition to gift or estate tax
can be in trust or outside of trust
determining factor: only skip parties have a
current beneficial interest in the transferred
property
reported on either gift tax or estate
tax return
tax, if any, will be due at same
time as gift or estate tax on
the transfer
5-11
GSTT: Indirect Skips
• can occur during life or at death
• usually occurs in trust, but can be outside of
•
•
•
trust
determining factor: at least one non-skip party
has a current beneficial interest in the property
after the transfer; at least one skip party must
have an interest in the transferred property
will be in addition to gift or estate tax, and will
be reported on same return, but tax, if any, will
not be due at the same time
GSTT will be due upon taxable termination or
distribution
5-12
GSTT
Taxable Termination
• occurs upon the termination of the beneficial
interests of all non-skip parties in property that
is the subject of an indirect skip, whether by
death, lapse of time or otherwise
Taxable Distribution
• occurs upon the actual distribution
of property that is the subject of an
indirect skip to a skip party other
than as a result of a taxable
termination
5-13
GSTT: Reverse QTIP Election
•
•
•
•
•
can be made when remainder beneficiaries of QTIP trust are
skip persons in relation to the transferor and the transferor’s
spouse, and the regular QTIP election has been made
must be made on the same return as the regular QTIP
election
reverses the presumption that the grantor’s spouse is the
transferor of the trust assets to the remainder beneficiaries at
death (because trust assets must be included in spouse’s
gross estate by IRC 2044)
grantor then becomes the transferor to the skip persons
and can thus assign his/her GSTT exemption
saves GSTT exemption of spouse for
subsequent transfers
5-14
Generation-Skipping Transfer Tax (GSTT): Exemption
• Is a cumulative lifetime exemption for each transferor in
•
•
•
the amount of the current estate tax exclusion amount.
Deemed allocation rules automatically apply sufficient
exemption (if available) to prevent payment of tax
unless transferor (or PR) affirmatively elects otherwise.
If sufficient exemption is allocated to cover the taxable
amount on the first gift or estate tax return on which the
transfer is reported, all future distributions will be free
from payment of tax even if transferred amount
increases in value.
If transferred amount would have to be included in
transferor’s gross estate (estate tax inclusionary periodETIP) exemption cannot be allocated until ETIP ends.
5-15
Question 1
Which one of the following is a true statement
about taxable distributions?
a. The return used to report a taxable distribution
is the federal estate tax return, Form 706.
b. The trust involved in a taxable distribution is
responsible for paying any GSTT due.
c. Each skip person who received a
taxable distribution is responsible
for paying the GSTT due.
d. If the skip person is incompetent,
it is the responsibility of the
fiduciary of the trust making a
taxable distribution to pay the GSTT
out of additional trust funds.
5-16
Question 2
A transfer where at least one non-skip party has
a current interest in the transferred property
after completion of the transfer is known as
a. an indirect skip.
b. a taxable distribution.
c. a taxable termination.
d. a direct skip.
5-17
Question 3
Which one of the following is a true statement
about the GSTT?
a. Only that part of a gift that will go to non-skip
parties is subject to the GSTT.
b. GSTT due on an indirect skip is reported
when the gift is given on Form 706 or Form
709.
c. The transferor reports the GSTT due on an
indirect skip and the federal gift or estate tax
due on the transfer at the same time.
d. GSTT on indirect skips cannot be
immediately determined upon completion of
the transfer.
5-18
Question 4
Which one of the following is the valuation date
used to establish the value of property
transferred during the life of the transferor
whenever an indirect skip is involved?
a. the date of completion of the transfer
b. the date a taxable distribution or termination
occurs
c. the date that the direct skip portion of the
transfer occurs
d. six months after the actual date of transfer
5-19
Question 5
With respect to the GSTT, which one of the
following is an election that allows the donor or
decedent’s estate to be deemed the transferor
of property that qualifies as an indirect skip?
a. gift tax election
b. QTIP election
c. reverse QTIP election
d. marital deduction
election
5-20
Question 6
Which one of the following is not a prerequisite
for application of the GSTT?
a. gratuitous completed transfer
b. transferee deemed to be two or more
generations younger than the transferor
c. transfer qualifies as a direct skip transfer
d. no exceptions or exemptions from the
normal rules apply
5-21
Question 7
The applicable credit amount can be applied to
offset generation-skipping transfer taxes, gift
taxes, or estate taxes.
True
False
5-22
Question 8
If generations are determined by age, for the
GSTT to apply, the transferee must be
a. 32½ years younger than the transferor.
b. more than 32½ years younger
than the transferor.
c. 37½ years younger than the transferor.
d. more than 37½ years younger than the
transferor.
5-23
Question 9
Taxable terminations occur when non-skip
parties no longer have an interest in the trust
property, whether or not an actual distribution of
trust property is made to a skip party.
True
False
5-24
Question 10
When transferred property is subject to an
estate tax inclusion period (ETIP) the GSTT
exemption cannot be assigned until the ETIP
period ends.
True
False
5-25
Income Tax: Goals Related to Capital Gains
• delay or avoid the realization or
•
•
•
•
recognition of capital gain
timing an event to realize longterm (more than one year) rather
than short-term gain
shaping an event to qualify for a
deferral of the recognition of gain
selecting an asset for transfer
that will generate the smallest
amount of gain
shaping a transaction so that
the gain will be realized by a
taxpayer in a lower marginal
income tax bracket
5-26
Income Tax: Goals Related to Ordinary Income
• have the income taxed at a lower marginal rate
• have income taxed to several different persons
•
•
or entities to take advantage of multiple
personal exemptions and to take another “run
up the rate ladder”
avoid alternative minimum
tax (AMT), excess accumulations
tax, and personal holding
company tax
shift receipt/taxation of
future income
5-27
Income Tax: Basis Rules
Property Received by Gift
• carryover of donor’s basis to donee, except
where “loss” property is given and donee
subsequently sells property at a loss, in which
case the donee’s basis is the fair market value
of the property at the time of the gift
• if donor (or donee in a net gift situation) pays
gift tax out of pocket on the gift, donee may
increase the donor’s adjusted
basis by such taxes as
are attributable to previously
unrealized appreciation
5-28
Donee’s Basis in Loss Property
Tony gives Bob an asset with a date-of-gift fair market
value of $80,000. Tony has an adjusted basis in this
asset before the gift of $100,000. If Bob sells the asset
for $70,000, Bob will use the date-of-gift fair market
value of $80,000 to compute a $10,000 loss. If Bob sells
the property for $90,000, there will be neither gain nor
loss. If Bob sells the property for $110,000, Bob will use
Tony’s adjusted basis of $100,000 to compute a
$10,000 gain.
Bob sells
for $70,000
$10,000 loss
$80,000 on
date of gift
Bob sells $100,000 basis Bob sells
for $90,000 on date of gift for $110,000
Bob incurs no gain or loss
Bob incurs
$10,000 gain
5-29
Donor's basis 
appreciati
on
appreciati
on
gift
gift tax
taxpaid
paid Donee'
Donee'ssbasis
basis
value
taxable value
Donee’s Basis when Gift Tax is Paid Out of Pocket
In 2012, Ted gave Bert an asset with a date-of-gift
fair market value of $113,000 and a taxable gift
value of $100,000 (due to the annual exclusion).
Ted had an adjusted basis in this asset before the
gift of $40,000. Since Ted used his gift tax
applicable credit amount on prior gifts, Ted paid a
gift tax of $35,000 on this gift. Bert’s basis in the
asset will be $65,550—$40,000 (donor’s adjusted
basis prior to gift) + $25,550.
appreciation
Donor's basis 
 gift tax paid Donee's basis
taxablevalue
$113,000  $40,000
 $35,000
$113,000  $13,000
5-30
Income Tax: Basis Rules
Property Received from an Estate by
a Beneficiary
• If property was included in decedent’s gross estate, the
•
estate and beneficiary to whom the property is
distributed has a basis in the asset equal to its estate
tax value except a reverse gift of one year or less, and
except for income in respect of a decedent-IRD—
whether measured as of
o the date of death,
o the alternate valuation date, or
o by special use valuation.
With community property, even the half owned by the
surviving spouse gets a step up in basis to its estate tax
value.
5-31
Income Tax: Holding & Tacking Rules
Property
Acquired by
Purchase
Property
Acquired by
Gift
• Holding period
begins on date of
purchase.
• Holding period of
donee can tack
to holding period
of donor if donee
assumes donor’s
basis; otherwise
holding period
begins with date
of completion of
the gift.
Property
Acquired by
Distribution
from an Estate
• All property
acquired by
distribution from
an estate is
deemed to be
held long term by
the beneficiary.
5-32
Income Tax: Installment Reporting of Gain
Installment Sale
• Not available for sales of marketable securities or sales
•
•
•
•
of depreciated property to a controlled entity.
Available whether payments are secured or unsecured.
Purchase price must be paid in year other than year of
sale.
Installment reporting of gain is automatic unless seller
elects to report all gain in the year of sale.
Payments composed of three parts:
o return of basis, which is tax free
o gain or profit taxed as capital gain
o interest taxed as ordinary
income
5-33
Income Tax: Installment Reporting of Gain
Private Annuity
• Is an installment sale in which amount of payment is
•
•
•
determined by using the actuarial lifetime of the seller
and the applicable federal discount rate for the month of
sale.
Payments continue for actual lifetime of seller, whether
that is more or less than his or her actuarial lifetime.
If seller is willing to accept smaller payments, they can
be made over two (or more) lifetimes.
Installment reporting of gain is
not available whether payments
are secured or unsecured.
5-34
Income Tax: Installment Reporting of Gain
Self Canceling Installment Note
• Normal installment sale except all unmatured
payments will be canceled at seller’s death.
• Cancellation provision must be “paid for” by
paying a premium (increased purchase price or
interest rate) equivalent to possibility that seller
may die prior to due date of all installments
(known as a SCIN premium).
• Payments can be secured
or unsecured.
5-35
Income Tax: Taxation of Trust Income
Determination of who is taxable on trust
income should be made according to the
following hierarchy:
•
•
•
•
•
Do any of the grantor trust rules apply? If “yes,” the grantor is taxable to
the extent such rules apply; if “no” or to extent such rules do not apply, go
to next bullet.
Does anyone have a general power of appointment (such as a Crummey
power, or a demand or invasion right) over trust assets? If “yes,” the holder
of such power is taxable to the extent of the power whether exercised or
not; if “no” or to extent such power does not cover all income, go to next
bullet.
Is distribution of trust income mandatory on an annual basis? If “yes,”
income beneficiaries are taxable whether trust income is actually
distributed or not. If “no” go to next bullet.
Have any discretionary distributions of trust income been made? If “yes,”
recipients of such distributions are taxable on such distributions, and the
trust gets a deduction; if “no” or to extent of remaining trust income, go to
next bullet
Accumulated income is taxed to the trust at trust rates.
5-36
Income Tax: Grantor Trust Rules
Cause trust income to be partially or totally
taxed to the grantor of the trust
Apply when
• grantor or grantor’s spouse has power to amend, alter, or revoke the
trust.
• trust income is or may be distributed to the grantor or the grantor’s
spouse.
• trust income is or may be accumulated for future distribution to the
grantor or the grantor’s spouse.
• trust income is or may be used to pay premiums on insurance on the
life of the grantor or the grantor’s spouse.
• trust income is used to discharge a legal support obligation of the
grantor.
• trust income is or may be used to discharge any legal obligation of the
grantor.
• the grantor retains a reversionary interest that exceeds 5% of the
value of the trust at the time of creation.
• grantor or grantor’s spouse has the power to control beneficial
enjoyment of trust assets, or has certain administrative powers.
5-37
Income Tax Charitable Deduction
•
•
•
•
•
•
•
Charity must be qualified for income
tax purposes.
Must givecash or property.
Value of what is given to the charity
must exceed the value of anything
received in return.
Gift must be completed prior
to close of the tax year in which
it is claimed.
If a gift of a partial interest, must
be made in a qualifying form.
Donor must itemize deductions.
Donation must be made inter vivos.
5-38
Charitable Income Tax Deduction
Amount
Deductible
50%
Charity
30% Charity
1. Cash
100%
50%
30%
2. Short-term capital gain
(ordinary income) property
Basis
50%
30%
3. Inventory
Basis
50%
30%
4. Long-term capital gain real estate and
intangible personal property
100% FMV or
Basis
30%
50%
20%
(basis only)
5. Long-term capital gain use--related
tangible personal property
100% FMV or
Basis
30%
50%
20%
(basis only)
6. Long-term capital gain use--unrelated
tangible personal property
Basis
50%
20%
7. Life insurance
Lesser of
Replacement
Cost or Basis
30%
50%
20%
20%
5-39
Charitable Income Tax Deduction: Miscellaneous Rules
• total charitable deductions in any year cannot
•
•
•
•
exceed 50% of the donor’s AGI
contributions to 50% charities must be deducted
in full prior to contributions to 30% charities
contribution of an automobile, boat, or airplane
for a claimed value in excess of $500 subject to
special rules
special rules for contribution of patents or other
intellectual property
noncash contributions in excess of $500,000
require a qualified appraisal
5-40
Question 11
Which of the following would qualify as common estate
planning goals associated with the taxation of capital
gains?
I. delaying or avoiding realization of a capital gain
II. timing an event that will cause the realization of
gain to be short term
III. selecting an asset for sale that has the least
appreciation
IV. designing the transaction so that the gain will be
realized by the original owner
a. I and III only
b. II and IV only
c. III and IV only
d. I, II, and III only
5-41
Question 12
Which one of the following is not a characteristic of an
installment sale?
a. The seller may recognize any gain from the sale of a
capital asset over the period for which payments are
made.
b. Cost recovery recapture is reported ratably over the
period for which payments are made rather than all
in the year of sale.
c. The right to the installment recognition of gain is
automatic if at least one payment is made in any
year other than the year of sale.
d. Installment sale treatment is available whether the
payments are secured or unsecured.
5-42
Question 13
Which one of the following is not a component
of the payments received by the seller under a
promissory note originating from an installment
sale of a capital asset?
a. cost recovery recapture
b. return of basis
c. gain
d. interest
5-43
Question 14
Which one of the following is a true statement about a
donee’s basis in property acquired by gift?
a. If no money changed hands between the donor and
donee, the donee’s basis will be zero.
b. The donee will always receive a “carryover cost
basis” from the donor.
c. For loss property, if the donee sells the property for
less than its FMV at the time of gift, then the
donee’s basis will be the property’s FMV on the date
of the gift.
d. The donee will receive a step-up in basis
to the FMV of the property gifted, if on
the date of the gift, the FMV is greater
than the cost basis of the donor.
5-44
CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM
Estate Planning
Module 5
End of Slides
© 2011, College for Financial Planning, all rights reserved.