The Federal Gift and Estate Tax And Financial Planning

1
The Federal Gift and Estate Tax And Financial
Planning

• Terminology
• Outline of the Federal Estate and Gift Tax
• Sample Problem
• Life Insurance and Estate Planning

2
Terminology

• Probate Court passes title (after debts are
  paid)
• 1) named in will
• 2) intestate (by state laws when no valid will
  exists)
• Will Spells out how assets are to be distributed
  at death
• Valid will requirements
• 1) made while competent
• 2) witnessed
• 3) form acceptable to state
• Executor(rix) carries out terms of will
• Administrator carries out state law (intestate)

3
GENERAL OUTLINE OF PROCEDURE

• List and value all property in the estate
• Subtract expenses and debts
• Add taxable gifts
• Calculate tax
• (See following slides for specifics)

4
1) List the value of all property in the estate

• personal property
• cash and securities
• real estate
• business investments (at fair market value)

5
Step 1) List the value of all property in the
estate (continued)

• life insurance benefits
• paid to estate
• used to satisfy a decedent's obligations
• Where there is an incidence of ownership
• property subject to
• general power of appointment vs. limited power of
  appointment
• not included even if paid to oneself under
  limited power if does not exceed 5/5 rule 5 of
  property or 5,000
• annuities payable to another party

6
Valuation date

• Must select valuation date for all assets
• date of death or
• an alternative 6 months after date of death
• business property may lose value fast

7
Step 2. Subtract the following

• allowable deductions
• funeral expenses
• probate costs
• estate administration
• debts
• marital deduction

8
Marital Deduction

• nonterminable interest from decedent to spouse
• can minimize or possibly eliminate FET on S1 by
  passing all property to S2
• but S1 does not use the 2,000,000 property
  value unified credit (2007 increasing to 3.5M
  in 2009)

9
Marital Deduction

• Can actually increase FET, probate and estate
  costs when S2 dies except if S2 remarries,
  consumes, or gifts (during lifetime) property
• marital deduction property must be nonterminable
  interest
• interest must not end by death, at an age, or any
  other event - so property gets taxed when S2
  dies.
• Except QTIP trusts, Power of Appointment trusts
  (exempted terminal interest)

10
Unified Credit Gift Tax Exemption
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Gifts

• Can give some or all property to charity at death
  to reduce estate size.
• give property during life limited charitable
  contributions reduce annual taxable income
  deductible (itemized)
• 2009 13/26 gift applies to life-time taxable
  gifts
• also reduces estate size

12
Step 3. Add Taxable Gifts - Post 1976 gifts

• Even if you already paid gift tax, post 1976
  added back in to increases marginal tax rates
• not 10/20 gifts (now 13/26, 2009), excess of
  these amounts
• taxes also added back if paid within 3 years of
  gift because the tax would have been in the
  estate if not paid
• all taxable gifts
• revocable transfers
• gifts of life insurance (explained later)
• property transferred with retained interest

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STEP 4 Calculate Tax

• apply FET Unified rates
• take credit for gift taxes already paid
• credit for state death taxes paid
• credit for gift taxes pre 1977 gifts included in
  gross estate
• credit for taxes paid on property in a previous
  estate (10 years) i.e. two close deaths
• take unified credit (on 2,000,000 property)
  780,800 (2007) tax (or increased amount to 2009)

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Simple Example
15
Life Insurance in Estate Planning

• Involves the use of whole life insurance
• Adds Liquidity
• FET
• probate costs
• final illness
• state death taxes
• instead of having to liquidate assets (including
  businesses)

16
Ownership of Life Insurance

• if incidence of ownership exists - included in
  gross estate
• What constitutes ownership?
• assigned or given away within 3 years of death -
  included in estate

17
Ownership of Life Insurance

• Proceeds should not be included in estate - but
  should be available to the estate plan.
• spouse or trust should be owner and beneficiary
• can purchase assets from estate or
• can make loans to the estate
• What happens if spouse owns, insured is object of
  insurance, and beneficiary a third party? Any
  gift issues?

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Ownership of Life Insurance

• When insurance coverage is assigned or
  transferred there are two requirements to not be
  included in estate
• more than 3 years transferred from date of death
• not more than 5 p(x) that the contract will
  revert back to donee actuarially
• If transferred, taxes may be paid early
• cash value included in S1 if S1 dies owning
  policy on S2.