Estates and Trusts FNBSLW 442

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Estates and TrustsFNBSLW 442

• Federal Estate Tax and
• Federal Generation-Skipping Tax

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Estate Tax

• A tax on a donors privilege of making a
  gratuitous transfer at death.

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Basic Computation Estate Tax

• Determine Contents of Gross Estate
• Value Gross Estate
• Subtract Deductions
• Determine Tax Base
• Compute Estate Tax

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Contents of the Gross Estate

• Gross Estate for the purpose of the estate tax,
  property in which a decedent had an interest at
  death.
• All property, real or personal, tangible or
  intangible, wherever located.
• Includes probate and nonprobate assets, as well
  as some lifetime transfers.

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Contents of the Gross Estate - Examples

• Wedding ring, wallet, home and personal property,
  other real property, stocks and bonds, remainder
  interests, cds, spouses elective share, business
  interests, some joint tenancy interests, some
  annuity and death benefit interests, general
  power of appointment held by decedent.
• Not included life estate interests from others,
  expectancy interest, some joint tenancy
  interests, some annuity and death benefit
  interests.

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Joint Tenancy Interests

• If J/T is with non-spouse, 100 interest is
  included in gross estate unless survivor
  purchased of property w/ own funds.
• If J/T is with spouse, 50 interest is included
  in gross estate (but marital deduction applies).

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Annuity and Death Benefit Interests

• If decedent had right to receive benefits, the
  value of the benefits that remain is part of the
  gross estate.
• However, if decedent did not have the power to
  name the beneficiary b/c they are statutorily
  payable to decedents spouse or children, the
  benefits are not included in the gross estate.

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Transfers w/ Retained Life Estate or Control of
Beneficial Interests

• Gross estate includes property transferred by
  decedent during life if decedent retained
• Life estate,
• Right to income for period not ending prior to
  decedents death,
• Right to income for period not ascertainable
  (with no reference to decedents death), or
• Right to designate the recipients of that
  property or the income therefrom.

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Transfers w/ Retained Reversionary Interest

• Gross estate includes property transferred by
  decedent during life if decedent retained
  reversionary interest and
• donee must survive decedent to receive the
  property, and
• decedent retained reversionary interest that
  exceeds 5 of the value of the transferred
  property.

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Powers of Appointment

• Gross estate includes general power of
  appointment decedent had at time of death.
• Recall, a general power of appointment is one the
  decedent could exercise in favor of the decedent,
  his estate, or his creditors.

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Valuation of Gross Estate

• Property in the gross estate is normally valued
  as of the date of the decedents death.
• Some discounts might be applicable.
• Fractional discount
• Marketability discount
• Blockage discount

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Special Use Valuation

• Real property used for farming and closely held
  business real property that passes to a member of
  decedents family may qualify for special use
  valuation.

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Alternate Valuation Date

• Personal representative may elect to value the
  property at the alternate valuation date, six
  months after decedents death, if doing so would
  reduce both
• value of the gross estate and
• amount of estate tax
• If selected, must be used for all assets.

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Deductions

• Marital Deduction
• Charitable Deduction
• Deductions for Expenses, Debts, and Taxes

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Deductions for Expenses, Debts, and Taxes

• Funeral expenses, administration expenses, debts
  and taxes are deductible from the gross estate.
  Also deductible are
• Certain losses incurred during the settlement of
  the estate.
• Under EGTRRA, state death taxes on gross estate
  property, if decedent dies before 2005 or after
  12/31/2010.

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Computation of Estate Tax

• Begins by determining the taxable estate, i.e.,
  the value of the gross estate reduced by the
  estate tax deductions.

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Tax Base

• Determined by adding to the taxable estate all
  taxable gifts (except those already in the gross
  estate) the decedent made on or after January 1,
  1977, at their date of gift values.
• (Gifts covered by the annual exclusion, medical
  and educational expense exclusion, marital
  deduction and charitable deduction are not
  included in the tax base.)

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Tentative Tax

• Computed on the tax base by using the rate
  schedule in I.R.C. 2001(c).
• Exceptions
• If the decedent dies in 2010, there is no federal
  estate tax owed regardless of the estate under
  EGTRRA.
• If the decedent dies in 2011 or thereafter, a
  different rate chart applies (the pre-EGTRRA
  chart).

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Tentative Tax Rate Schedule
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Estate Tax Credits and Related Adjustments

• Estate tax credits and adjustments are subtracted
  from the tentative tax, including
• Gift tax payable on decedents inter vivos
  taxable gifts made after 12/31/76, and
• Applicable credit amount (formally called the
  unified credit when the gift and estate taxes
  were the same).

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State Death Tax Credit

• If the decedent dies before 2005 or after 2010,
  the decedents estate will be entitled to a
  credit for state death taxes that the decedents
  estate actually pays subject to a cap based on
  the size of the decedents estate.
• Step one - compute the tentative maximum credit
  under the table,
• Step two multiply the tentative credit by the
  appropriate percentage based on the decedents
  year of death from the chart.

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Estate Tax Return

• The estate tax return must be filed and the
  estate tax paid within 9 months of the decedents
  death.

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Liability for Estate Tax

• The personal representative of the decedents
  estate is obligated to pay the federal estate
  tax.
• If no personal representative has been appointed,
  any person in actual or constructive possession
  of any property of the decedent is required to
  pay the entire tax to the extent of the value of
  the property in the persons possession.

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Federal Generation-Skipping Transfer Tax

• A tax on specified transfers to donees who are
  more than one generation younger than the donor.
• Imposed on certain inter vivos and _at_ death
  transfers.
• An additional flat-rate tax on top of any federal
  gift or estate tax that the donor or decedent
  might also owe on the transfer.
• The tax rate is the highest marginal estate tax
  rate.

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Skip Person Defined

• Skip person triggers the GST.
• Person who is two or more generations younger
  than the decedent.
• Unless lineal descendants are involved, second
  generation begins _at_ 37½ years younger.

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Transfers Subject to GST Tax

• Direct Skip transfer directly to a skip person
  that is also subject to federal or estate gift
  tax.
• Taxable Termination occurs when property passes
  to a person because of the termination of a
  trust.
• Taxable Distribution occurs when the trustee of
  a trust makes a distribution of income or
  principal to a skip person (that doesnt qualify
  as a direct skip or taxable termination).

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Exemptions and Exclusions

• Annual Exclusion
• Educational and Medical Expense Exclusion
• Lifetime Exemption

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GST Lifetime Exemption Chart

• 2002-2003 1,060,000 inflation
• 2004-2005 1,500,000
• 2006-2008 2,000,000
• 2009 3,500,000
• 2010 No GST tax
• 2011 1,060,000 inflation