Class 43 Estate Planning II Quiz

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Class 43 Estate Planning II Quiz 14 and
15 back, and 15 critique?Incorporation, Tax
-savings Bonus Due!!Estate Planning all week!
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Quiz 15 -- critique

• 1. The best income tax deductions are before
  adjusted gross income.
• 2. Jointly owned property avoids probate.
• 3. Health insurance can only be deducted on the
  Schedule A for a sole proprietor.

• 4. Limited Liability Companies may be taxed as
  partnerships.
• 5. Special valuation of farmland is available
  only for deceased, active farmers estates.

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Elements of Gift Tax Law

• Gifts are valued at fair market value.
• 11,000 (indexed up from 10,000) annual
  exclusion
• 100 marital deduction
• An adjusted taxable gift adds to the estate tax
  base.
• Taxable gifts are cumulative with one another.
• Note, if estate tax is inevitable, lifetime gifts
  are more efficient than holding ownership until
  death.
• Gifts are not taxable income!
• However, capital asset gifts carry the donors
  basis!

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Gift Example

• 2003 Gift, FMV
• Less annual Exclusion(s)
• Marital Deduction
• Adjusted Taxable Gift
• Prior Taxable Gift
• Pre-1977 ..100,000
• Post-1976 50,000
• Total prior taxable gifts
• Tentative Gift Tax Base
• Tentative Gift tax
• Credit for prior gift tax 23,800
• Less part of the unified credit (max. ?)
• Tax Due
• Be sure to file, April 15, 2004

• 111,000
• (11,000)
• N/A
• 100,000
• 150,000
• 250,000
• 70,800
• (23,800)
• (47,000)
• 0

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Federal Gift Estate Unified Tentative Tax Part
I Transfer (Estate) Tax Base Tax on Amt
Tax Rate on Excess of

in Column (1) Amt in Col. (1) (1)
(2) (3)
(4) 0
10,000 0
18 10,000 20,000
1,800 20 20,000
40,000 3,800
22 40,000 60,000
8,200 24 60,000
80,000 13,000
26 80,000 100,000
18,200 28 100,000
150,000 23,800
30 150,000 250,000
38,800 32 250,000
500,000 70,800
34
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Federal Gift Estate Unified Tentative Tax
Part II Transfer Tax Base Tax on Amount
Tax Rate on Excess of
in Column (1) Amount in
Col. (1) (1) (2)
(3) (4) 500,000
750,000 155,800 37 750,000
1,000,000 248,300
39 1,000,000 1,250,000 345,800
41 1,250,000 1,500,000
448,300 43 1,500,000 2,000,000
555,800 45 2,000,000
------------- 780,000
49 -------------------------------------- The
maximum rate was reduced by 2001 legislation to
50 for 2002, then is reduced by 1 point each
year, to 45 in 2007. In 2010 the estate tax is
repealed while the highest rate for lifetime
gifts is 35. In 2011, the estate tax returns
with a 55 maximum rate and a AEA of 1 million.
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Federal Estate Tax Applicable Exclusion Credit
Amounts.

• For Decedents Estates Applicable
  Applicable
• Lifetime Gifts in Years Exclusion
  Credit
• 2000-2001 675,000
  220,550
• 2002-2003 1,000,000 345,800
• -2005 1,500,000 555,800
• 2006-2008 2,000,000 780,800
• 2009 3,500,000
  1,455,800
• 2010 Estate tax is Repealed, Gift tax
  continues
• Estate Tax returns 1,000,000 345,800
• The applicable exclusion amount is 1 million
  for lifetime gifts from 2002 forward.

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Federal Estate Tax Applicable Exclusion Credit
Amounts.

• However, the applicable exclusion amount is 1
  million for lifetime gifts from 2002 forward.
• The highest tax rate drops to 50 in 2002 and
  then reduces in annual steps to 45 in 2009, but
  in 2010 it is the highest individual income tax
  rate for gifts.

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More on Gift Tax Law

• Donees income tax basis is that of the donor
• for capital gains purposes and for depreciation.
• If a gifts value is less than donors income tax
  basis
• donee cant get a tax loss with a sale
• unless the value falls below the FMV on the date
  of the gift (then, loss net price - FMV, dog).

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Income Tax Basis in a Nutshell

• Adjusted Basis cost or donors basis, or FMV,
  Date of Death (or value for estate tax)
  Improvements - Depreciation
• Except Income in respect of a decedent

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Income Tax Basis Rules

• Net cost, plus improvements less depreciation
  (cost recovery)
• For inheritance -- date of death value (FMV) or
  estate tax value
• Except income in respect of a decedent (IRD)
• Basis rules apply with or without estate tax
  liability!

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Income Tax Basis Rules

• For lifetime gifts -- it is the donors basis
• plus gift taxes on the inflation component
• Implications are for future income tax liability,
  and for cost recovery (depreciation)
• for he or she who inherits or receives lifetime
  gifts.
• Implications for planning are important.

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Federal Estate Tax Law- General Rules -

• All of decedents ownership interests are taxable
• including interests that may avoid probate
• Taxable value is fair market value (FMV), D.O.D.
• exceptions IRC Sections 2032 and 2032A
• Certain buy-sell agreements may set the value
• All restrictions on property interests that are
  discounted in the market place discounted for
  minority interest, marketability, capital gains
  tax liability, undivided interests in real estate
  ...

14
First Spouses Estate - 2 million 2003
1 million
1 million
1 million to spouse 1
million in credit trust qualified for the
? Life interest to
spouse marital deduction --- Remainder to
children Tentative tax
345,800

Less credit (-)
(345,800) Estate
Tax -0-
15
First Spouses Estate - 3 million 2004
1.5 million
1.5 million
1.5 million to spouse 1.5
million in credit trust qualified for the
? Life interest to
spouse marital deduction --- Then to
children Tentative tax
555,800

Less credit (-)
(555,800) Estate
Tax -0-
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"THE DIFFERENCE BETWEEN DEATH AND TAXES IS DEATH
DOES NOT GET WORSEEVERY TIME CONGRESS MEETS." 

• Will Rogers

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What is Fair Market Value (FMV)?

• Price at which property will transfer
• Between a willing parties,
• Neither being under compulsion to act,
• Both with knowledge of relevant facts.
• Hire a professional appraiser for FMV.
• Finding FMV is both a science and art!
• See Death Tax ExamplesAppendix D