570 Notes 27-1
CHAPTER 27 - GIFT & ESTATE TAXES
THE UNIFIED TRANSFER TAX SYSTEM OVERVIEW
I.
TAX ASSESSED ON TRANSFEROR, NOT THE RECIPIENT
II.
CUMULATIVE NATURE OF TAX
III. UNIFIED RATE SCHEDULE
 Under 2001 Tax Act, top unified transfer tax rates (> 50%) are reduced from 2001-2010. Top rate for 2007 –
2009 was 45%. In 2010, it dropped to 35%, but sunsets (reverts to 2001 amounts) in 2011.

Estate tax repealed for 2010, but sunsets in 2011.
III.
UNIFIED CREDIT
Gift Tax:
Estate Tax
I.
Year
2002-2009
2010
Year
2009
2010
Credit
345,800
330,800
Equivalent Tax Exemption
1,000,000
1,000,000
Credit
Equivalent Tax Exemption
1,455,800
3,500,000
estate tax repealed
THE GIFT TAX
GIFT TAX FORMULA
Gross Amount of Gifts (FMV)
Exclusions / Deductions
Annual Exclusion
Gift-splitting between spouses
Tuition or medical expenses paid on behalf of another
Marital Deduction
Charitable & Political Contributions
=
Taxable Gifts for Current Year
+
Taxable Gifts for Prior Years
=
Taxable Gifts to Date
X
Tax Rate
=
Tentative Gift Tax
Prior Gift Tax Paid or “Deemed” Paid
Unified Credit
=
Current Gift Tax Liability
Example: Joe makes gifts of $113,000 (each) to his nephew and to his niece in 2010. Joe’s total taxable lifetime
gifts prior to 2010 were $925,000, on which Joe had paid $0 gift tax (due to the uniform credit).
1
570 Notes 27-2
II.
A.
B.
C.
TRANSFERS SUBJECT TO THE GIFT TAX
Requirements:
1. Inadequate Consideration
2.
Personal vs. Business Setting
3.
-
Must be Complete
give up control; no power to change disposition for own or other’s benefit
a. Revocable Trusts
Statutory Exclusions from the Gift Tax
1. Payment of Medical or Tuition Expenses
amounts paid on behalf of an individual directly to an educational organization for tuition or directly
to any person for medical care as payment for medical care.
2.
Transfers to Political Organizations
3.
Property Settlements in Conjunction with Divorce
If pursuant to a written divorce document that is obtained within the 3-year period beginning 1 year
before the agreement date.
Deductions from the Gift Tax
1. Charitable organization deduction
2.
Marital deduction
3.
ANNUAL EXCLUSION
a. Amount
b. Present Interest Requirement
c. Defn. of Present Interest
An unrestricted right to the immediate use, possession, or enjoyment or the income from property
d. Defn. of Future Interest
A legal term that includes reversions, remainders, and other interests which are limited to
commence in use, possession, or enjoyment at some future date.
e. Special Provision for Trusts for Minors
Interest can accumulate until age 21. Annual exclusion still allowed if principal and interest is made
payable when the minor reaches 21.
4.
Gift-Splitting Election
2
570 Notes 27-3
D.
Miscellaneous Transfers
1. Creation of Joint Bank Accounts
2.
Creation of Other Joint Tenancies
3.
§7872 Below-Market Interest Loans
III.
A.
VALUATION OF GIFTS
General Rule
B.
Life Estates and Remainder Interests
IV. COMPLIANCE AND PROCEDURAL CONSIDERATIONS
A. Filing Requirements
B.
Due Date
V. GIFT TAX EXAMPLES
(1) During the current year, Jane and Harry, a married couple, make the following transfers (assume gift-splitting
election made):
Transfer:
Amt. Taxable
Deduction
- $20,000 cash to son Hal
- $20,000 tuition for daughter Beth
- $60,000 to the American Diabetes Foundation
- $10,000 to the “Bob for Governor” campaign
- $200,000 to a revocable trust for the benefit of their 2 children
- $30,000 for medical care and medical insurance for Jane’s mom
- $50,000 car to Harry’s brother, subject to a debt of $30,000
(2) Mel (single) makes the following transfers:
 Child support payment for son - $25,000
 Qualified transfer in trust for son, Marvin, age 12 (Marvin has no access to the funds until he is 21, but funds
may be used on his behalf) - $450,000
 Transfer of stocks to an irrevocable trust. Mel retains the income for his life; his sister will receive the principal
on Mel’s death - $200,000 (assume the income interest value is $140,000 and the remainder value is $60,000)
Assuming Mel Made prior taxable gifts of $750,000 and paid $55,500 tax, what is his current gift tax liability?
3
570 Notes 27-4
THE ESTATE TAX (2009 RULES)
I.
ESTATE TAX FORMULA
Gross Estate
-
=
+
=
X
=
-
=
Deductions
Funeral, Administrative Expenses, Casualty Losses
Debts
Charitable Bequests
Marital Deduction
State Death Taxes
Taxable Estate
Post-’76 Taxable Gifts
Total Lifetime Transfers
Tax Rates
Tentative Tax
Credits
Post-’76 Gift Taxes Paid
Unified Credit
Net Estate Tax Liability
II.
A.
GROSS ESTATE – VALUATION
Date of Death Valuation
B.
Alternate Valuation Date
When
-
III.
A.
Restriction
GROSS ESTATE - INCLUSIONS
All Property in Which the Decedent had an Interest.
1. Jointly-Owned Property
Type of joint ownership
Include in Estate
Tenancy in common
Only the FMV of the decedent’s share
Community property
½ the FMV
Joint tenancy w/ spouse or tenancy
½ the FMV
by the entirety w/ spouse
Joint tenancy w/ nonspouse
FMV x the % of total cost furnished by decedent
2.
Life Insurance is included if:
a. Payable to the estate
b. Any incidents of ownership retained (e.g., right to change beneficiary)
4
570 Notes 27-5
B.
Adjustments for Gifts within 3 years of Death
1. The Gross-Up Rule
2.
Following Assets:
a. Life insurance policy proceeds
b.
Property with Retained Life Estate
c.
Revocable Transfers
IV. DEDUCTIONS
A. Marital Deduction
1. Generally, surviving spouse must receive property outright & be able to control its ultimate destination.
2. So, terminable interests (e.g., decedent grants spouse right to occupy home until her death) don’t qualify
for the deduction.
a. Exception for QTIP (Qualified Terminable Interest Property). Property goes into a trust, & surviving
spouse receives all of the trust income annually, bet decedent has determined where property goes
at spouse’s death. Note that the property will be included in the surviving spouse’s estate at death.
V.
Procedural Notes
 Form 706
 Due 9 months after death (automatic 6-month extension available)
 Required only if Gross Estate > equivalent exemption amount
THE ESTATE TAX (2010 RULES)
I.
ESTATE TAX IS REPEALED
II.
VALUATION RULES (FOR BENEFICIARIES’ BASIS DETERMINATION)
A. Modified carryover basis
1. lesser of
a. Decedent’s adjusted basis, or
b. FMV at date death
2. Executor can elect to increase the basis of the decedent's property up to $1.3 million, and up to $3
million for property transferring to surviving spouse (not to exceed FMV at death).
3. Executors must file informational return detailing transfers at death of non-cash assets in excess
of $1.3 million. No IRS guidance on this informational return to date.
5
570 Notes 27-6
V. GROSS ESTATE EXAMPLE
Marcia died this year. How much of each of the following is included in her gross estate?
Asset
1. Marcia owned a $100,000 life insurance policy on her son George’s life. The
cash surrender value of the policy was $25,000 when Marcia died.
2. George purchased and owned a $100,000 life insurance policy on Marcia’s life
(his mom), which he collected when Marcia died.
3. For $30,000, Marcia purchased $100,000 of insurance on her life. She gave
this policy to her husband Milford 4 years before she died.
4. For $35,000, Marcia purchased an additional $100,000 of insurance on her life.
She gave this policy to her son George one year before she died, and paid gift
tax of $5,000 on the transfer.
5. Marcia and son George jointly owned real estate at $600,000. Marcia paid
$45,000 of the original cost and George paid $15,000.
6. Marcia and husband Milford jointly own additional real estate valued at
$1,200,000. Milford paid the entire $680,000 purchase price. (Assume this is not
community property.)
7. Marcia established a revocable trust with son George as remainder
beneficiary. The value of the assets was $60,000 when the trust was created and
$200,000 when Marcia died.
8. Marcia owned a vacation residence and transferred title to George 6 years
ago, but she (and Milford) continued to use the property each summer. (No one
else uses the property.) Property’s FMV = $500,000.
9. Marcia and Milford jointly own cash, stocks, personal effects and other real
estate valued at $2,000,000.
10. Marcia has a life estate in a trust created by her father’s will. Son George is
the remainder beneficiary. The value of trust assets is $1,250,000. Marcia has
an income interest and can use trust assets for her support, health, education, or
maintenance.
Amt Included
GENERATION-SKIPPING TRANSFER TAX OVERVIEW





GSTT is separate & in addition to the gift & estate tax
Assessed on transfers to “skip person” (an individual that is 2 or more generations below transferor)
3 basic forms:
 Direct skip (e.g., grandparent to grandchild)
 Taxable termination – termination of a nonskip person’s interest in property held in trust, after which only
a skip person has an interest in the trust property (e.g., father creates trust with life estate to child &
remainder interest to grandchild); termination occurs @ child’s death
 Taxable distribution – distribution from a trust to a skip person (e.g., establish a trust to provide for
discretionary payment of income and corpus to child and grandchild. Payments to grandchild are
taxable distributions.)
Tax is at the maximum transfer rate
 Exemption amount = to estate tax exemption ($2m in 2008; $3.5m in 2009); gift-splitting is allowed
Repealed in 2010, but sunsets in 2011
6
570 Notes 27-7
2008 & 2009 TAX RATE SCHEDULE -- ESTATE & GIFT TAX
TAXABLE
TRANSFER
OVER:
$0
10,000
20,000
40,000
60,000
80,000
100,000
150,000
250,000
500,000
750,000
1,000,000
1,250,000
1,500,000
BUT NOT
OVER:
$10,000
20,000
40,000
60,000
80,000
100,000
150,000
250,000
500,000
750,000
1,000,000
1,250,000
1,500,000
----------
TAX IS:
$0
1,800
3,800
8,200
13,000
18,200
23,800
38,800
70,800
155,800
248,300
345,800
448,300
555,800
PLUS
THIS %
18%
20%
22%
24%
26%
28%
30%
32%
34%
37%
39%
41%
43%
45%
OF TAXABLE
TRANSFER
OVER
$0
10,000
20,000
40,000
60,000
80,000
100,000
150,000
250,000
500,000
750,000
1,000,000
1,250,000
1,500,000
2010 TAX RATE SCHEDULE -- ESTATE & GIFT TAX
TAXABLE
TRANSFER
OVER:
$0
10,000
20,000
40,000
60,000
80,000
100,000
150,000
250,000
500,000
BUT NOT
OVER:
$10,000
20,000
40,000
60,000
80,000
100,000
150,000
250,000
500,000
--------
TAX IS:
$0
1,800
3,800
8,200
13,000
18,200
23,800
38,800
70,800
155,800
PLUS
THIS %
18%
20%
22%
24%
26%
28%
30%
32%
34%
35%
OF TAXABLE
TRANSFER
OVER
$0
10,000
20,000
40,000
60,000
80,000
100,000
150,000
250,000
500,000
7