Post on 23-Dec-2015
McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill Companies Inc
Principles of Taxation: Advanced Strategies Chapter 14Chapter 14 The Transfer Tax SystemThe Transfer Tax System
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Overview of System
Tax imposed on transferorTax imposed on transferor Tax is cumulative in natureTax is cumulative in nature
Amount and rate depends on prior Amount and rate depends on prior activityactivity
Integrated gift and estate system integratedIntegrated gift and estate system integrated Rates steeply progressiveRates steeply progressive
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Unified CreditSlide 14-3
Represents a lifetime exemption from transfer Represents a lifetime exemption from transfer taxestaxes
Credit first used to offset gift taxes. Any Credit first used to offset gift taxes. Any remainder used to offset estate taxesremainder used to offset estate taxes
For year 2001, this results in a exemption For year 2001, this results in a exemption equivalent of $ 675,000equivalent of $ 675,000 Exemption equivalent is amount of wealth that Exemption equivalent is amount of wealth that
can be transferred free of transfer taxescan be transferred free of transfer taxes
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Gift Tax FormulaFair market value of gifts during yearFair market value of gifts during yearLess: Annual exclusion and deductionsLess: Annual exclusion and deductionsCurrent year taxable giftsCurrent year taxable giftsPlus: Prior year taxable giftsPlus: Prior year taxable giftsCumulative taxable giftsCumulative taxable giftsX Transfer tax ratesX Transfer tax ratesTax on cumulative giftsTax on cumulative giftsLess: Tax computed on prior year giftsLess: Tax computed on prior year giftsPre-credit gift taxPre-credit gift taxLess: Unified CreditLess: Unified CreditGift tax payableGift tax payable
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Gifts
Transfers for less than adequate Transfers for less than adequate consideration in money or money’s worthconsideration in money or money’s worth
No gift until transfer completeNo gift until transfer complete
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Valuation of Gifts
Fair market valueFair market value Price that property would change hands with Price that property would change hands with
willing buyer and willing sellerwilling buyer and willing seller Difficult items to value:Difficult items to value:
LandLand Interests in closely held businessesInterests in closely held businesses Art workArt work
May need appraisalMay need appraisal
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Partial Interests
Example: Gift of income interest to Example: Gift of income interest to individual 1 for life, remainder to individual individual 1 for life, remainder to individual 22
Regulations provide guidance on how to Regulations provide guidance on how to allocate between the two individualsallocate between the two individuals
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Annual Exclusion
Up to $ 10,000 of gifts to any individual Up to $ 10,000 of gifts to any individual may be excluded from gift taxmay be excluded from gift tax
Married couples may gift splitMarried couples may gift split Election to treat any gift as made equally Election to treat any gift as made equally
by each spouseby each spouse Only present interests qualify for the Only present interests qualify for the
exclusionexclusion
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Gift Tax Deductions
Unlimited marital deduction for gifts to Unlimited marital deduction for gifts to spousespouse
Deduction for gifts to charityDeduction for gifts to charity
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Estate Tax FormulaFair market value of gross estateLess: DeductionsTaxable estatePlus: Post-1976 cumulative taxable giftsCumulative taxable transfersX Transfer tax ratesPre-credit estate taxLess: Gift taxes paid or deemed paidLess: Estate tax creditsEstate tax payable
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Gross Estate
Items included at fair market value at date Items included at fair market value at date of deathof death
May elect to value items six months after May elect to value items six months after date of death if total estate decreases in date of death if total estate decreases in valuevalue
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Items Includable in Gross Estate Property owned by decedent at date of deathProperty owned by decedent at date of death Life insurance owned by decedentLife insurance owned by decedent Portion of jointly owned propertyPortion of jointly owned property Transfers with retained life estatesTransfers with retained life estates Certain gifts made within 3 years of deathCertain gifts made within 3 years of death Gift tax paid on gifts made within 3 years of Gift tax paid on gifts made within 3 years of
deathdeath Survivorship annuity benefitsSurvivorship annuity benefits
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Property Owned by Decedent at Date of Death
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Includes all probate propertyIncludes all probate property Property that passes by will or through Property that passes by will or through
intestacyintestacy Includes all retirement accounts such as Includes all retirement accounts such as
pensions and individual retirement accountspensions and individual retirement accounts
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Joint Ownership
Ownership where two or more persons have an Ownership where two or more persons have an undivided interest in propertyundivided interest in property
Types:Types: Joint tenancy- Ownership passes to survivors or Joint tenancy- Ownership passes to survivors or
survivorssurvivors Tenancy by the entirety- same as joint tenancy but Tenancy by the entirety- same as joint tenancy but
between husband and wifebetween husband and wife Tenancy in common- no right of survivorshipTenancy in common- no right of survivorship Community Property- property except for gifts and Community Property- property except for gifts and
inheritances acquired during marriage in a inheritances acquired during marriage in a community property statecommunity property state
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Joint Ownership
Jointly held property with rights of Jointly held property with rights of survivorshipsurvivorship General rule: Entire value of property General rule: Entire value of property
less contribution of decedent includable less contribution of decedent includable in gross estatein gross estateException: If joint owners were Exception: If joint owners were
married, 50% of value of property married, 50% of value of property includableincludable
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McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill Companies Inc
Joint Ownership
Tenancy in common – amount includable in Tenancy in common – amount includable in gross estate determined by state lawgross estate determined by state law
Community property – 50% owned and Community property – 50% owned and includable by each spouseincludable by each spouse
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Estate Tax Deductions
Funeral expensesFuneral expenses Estate administration costsEstate administration costs Estate casualty and theft lossesEstate casualty and theft losses Certain liabilitiesCertain liabilities Gifts or bequests to charityGifts or bequests to charity Gifts or bequests to spouseGifts or bequests to spouse
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Estate Tax Credits
State death tax creditState death tax credit Subject to a maximum limitationSubject to a maximum limitation
Credit for estate tax on prior transferCredit for estate tax on prior transfer Allowed if property passed through Allowed if property passed through
another estate during past 10 yearsanother estate during past 10 years Reduced by 20% for every two year Reduced by 20% for every two year
increment that has passed since property increment that has passed since property was previously taxedwas previously taxed
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Generation Skipping Transfer Tax
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Tax imposed on transfers that skip a Tax imposed on transfers that skip a generationgeneration Example: gift to grandchildExample: gift to grandchild
Imposed at 55% rateImposed at 55% rate Exemptions:Exemptions:
$ 10,000 annual gift tax exclusion$ 10,000 annual gift tax exclusion $ 1,060,000 exclusion allocated to every $ 1,060,000 exclusion allocated to every
transferortransferor
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State Death Taxes
Imposed by every stateImposed by every state Types:Types:
Inheritance tax imposed on the privilege of Inheritance tax imposed on the privilege of inheriting assetsinheriting assets
Rate generally based upon relationship between Rate generally based upon relationship between transferor and transfereetransferor and transferee
Estate taxEstate tax Pick up taxPick up tax
Tax equal to maximum deduction for state death Tax equal to maximum deduction for state death taxes on federal returntaxes on federal return
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Charitable Contributions
Allowed as an income, gift and estate tax Allowed as an income, gift and estate tax deductiondeduction
Full fair market value generally deductible Full fair market value generally deductible for all purposesfor all purposes
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Tax Basis Issues
Recipient taxable on any income produced Recipient taxable on any income produced by inherited or gifted propertyby inherited or gifted property
Tax basisTax basis Property acquired from decedentProperty acquired from decedent
Basis equal to fair market value on Basis equal to fair market value on date of death or alternative valuation date of death or alternative valuation datedate
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Tax Basis IssuesSlide 14-23
Property acquired by giftProperty acquired by gift Carryover basis if asset worth more than Carryover basis if asset worth more than
donor’s basisdonor’s basis Split basis if asset depreciated in valueSplit basis if asset depreciated in value
Carryover basis for gainCarryover basis for gainFair market value for lossFair market value for loss