...Federal Estate Tax Introduction Federal estate taxes have been a heavily debated topic since the law was introduced in 1916. The IRS defines estate taxes as “a tax on your right to transfer property at your death.” A History of the Tax Estate taxes trace back to as early as 700 B.C. Historians believe there was a 10% tax in Egypt on the transfer of property upon death. In the United States, the tradition of taxing assets after death was used on and off from 1797 to fund wars. The first federal estate tax law was passed under the Stamp Act of 1797 to fund an undeclared naval war on France. It was repealed 5 years later, and another law was not passed requiring the tax until the Tax Act of 1862. This particular act was enacted to help finance the Civil War and was repealed in 1870. Two important Supreme Court cases set the stage for the estate taxes Americans face today. First, in 1874 a citizen argued estate taxes are unconstitutional because they are a direct tax and under the Constitution, must be allocated among the states according to population. The Supreme Court disagreed arguing direct taxes tax land, houses and other permanent real estate. 2 The second case didn’t directly involve the issue of estate taxes, but instead challenged the legality of the Income Tax Act of 1894. However, this lawsuit indirectly affected estate tax laws because it included gifts and inheritances subject to income tax. “The Supreme Court struck down the whole bill because the tax...
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...Estate and Gift Tax Outline Repetti Fall 2013 Boston College Law School Casebook: Federal Wealth Transfer Taxation, 6th Edition Table of Contents Filing Returns 3 Gift Tax: 3 Estate Tax: 3 Generation-Skipping Tax: 3 Statutes of Limitations, Interest, Penalties: 3 Computation of the Estate and Gift Tax 3 General Description of Gift Tax: 4 General Description of the Estate Tax: 4 Role of State Law 4 Scope of the Estate Tax 5 Beneficial Ownership and § 2033: 5 Interests Arising at Death 5 “Property” versus “Expectancy” 6 Bank Deposits, Checks, and Notes 6 Right to Accrued Payments 7 The Scope of the Gift Tax: §§ 2501 and 2511 7 Is There a “Transfer” of “Property?” 7 Interest-Free Loans and Rent-Free Use of Other Assets 8 When is the Transfer “Completed?” 8 Transferred Interest Incapable of Valuation 9 Indirect Transfers 10 What is a “Gift”? 10 Donative Intent and “Adequate and Full Consideration” 10 Transfers of Property in Satisfaction of Marital Rights 11 Dower and Curtesy Interests in the Gross Estate 11 Marital Rights as Consideration 11 Transfers Incident to Separation and Divorce 12 Transfers with Retained Powers and Rights 13 Transfers with Retained Life Estates: § 2036 13 Reciprocal Trusts 14 Retention of Right to Income from Property: § 2036(a)(1) 14 Retention of Possession or Enjoyment of the Property: §§ 2036(a)(1) and 2036(b) 14 Retention of Power to Designate Who Shall Possess or Enjoy the Property:...
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...Minimization of Individual Tax Liability in Real Estate Investment In the world of investing, in general, one question is often the most challenging to answer. How does an investor grow their nest egg without losing the majority of their gain to the IRS as income tax? This question is even more challenging in the area of real estate where one’s tax liability is drastically increased by just the sale of one property. This simple transaction can increasing the investor’s ordinary income if the property is a short term investment (investment is less than 1 year) or increasing their capital gains for long term investments (over 1 year). Surprisingly, there are several easy ways to drastically reduce tax liabilities with some planning and basic knowledge of the IRS tax code. There are several tools at their disposal including utilizing Internal Revenue Service Section 1031 (1031 Exchange), using pretax income to form a self-directed IRA, or by forming a limited liability company (LLC) to protect their investment. The 1031 Exchange began as the idea that two individuals could trade one property for another and, as a result, there was no gain or loss realized. In 1979 the Internal Revenue Service (IRS) came to the realization that it was not as common to find someone who wanted to trade real property in this manner. As a result the IRS modified the Law allowing an individual or corporation to sell property and purchase another property as long as specific guidelines were met. This...
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...Given: The Year 10 financial statements for a partnership, Fan Company A, have been provided on the “Year 10 Financial Statements” worksheet (see the “Partnership Income and Tax” attachment below). The Year 11 financial data is also provided on the “Year 11 Financial Data” worksheet (see the “Partnership Income and Tax” attachment below). Use ‘Admit Partner D to Partnership’ template section for this data. On January 1, Year 11, Partner A died. The partnership agreement stipulated that in the event of a partner’s death, the partner’s interest would be paid to the estate within 90 days of the date of death. The balances in the partnership accounts were determined on January 1. The partnership has the authority by the partnership agreement to sell the deceased partner’s interest at a minimum of 100% of the capital account at the date of death. The remaining partners found an interested party, Partner D, who paid $350,000 for Partner A’s interest. The partnership agreement specifies that any bonus accruing from the sale of a deceased partner’s interest will be added to the remaining partners as of the date of death. Partner B will receive 5/8 of the bonus and Partner C will receive 3/8 of the bonus. Use ‘REALIGNMENT OF PARTNERSHIP ALLOCATIONS’ template section for this data. On October 1, Year 11, the partners agreed to add a new partner. Partner E will own a 20% share of the partnership. Partner E has some expertise that will benefit the partnership. Partner E is investing...
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...The inheritance tax, or estate tax, is a tax which the United States levies on the total taxable value of the estate of a deceased person. The amount of tax is calculated regardless of the method in which the assets of the estate are transferred to the person's heirs: assets included in a will, transferred automatically because the person died intestate or as an insurance benefit or account payoff. Inheritance tax is paid by the executor of the estate or by the person in charge of its assets. The United States has a consolidated policy on inheritance and gift tax so that a person cannot give away his or her estate to potential beneficiaries shortly before death in order to avoid taxation; beneficiaries would simply pay gift tax rather than inheritance tax in this case. The federal government makes a distinction between the "gross estate" (all assets) and the "taxable estate" (assets less a certain number of allowable deductions such as funeral expenses, some charitable contributions and various other deductions). In most cases, if the estate is left to a charitable organization or a surviving spouse, no inheritance tax is due. There are also exclusions for a certain portion of the estate; however, these have been frequently changed by recent tax legislation, and usually, it is worth consulting a professional to determine what amount of the estate is not taxable under current federal law. In part because these complexities make it possible for some wealthy people to establish...
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...The Federal gift tax is imposed on the right to transfer property by one person (the donor) to another (the donee) for less than full and adequate consideration. The tax is payable by the donor. If the donor fails to pay the tax when due, the donee may be held liable for the tax to the extent of the value of the property received Since the donor cannot pay or cannot be located, as in the this case, the IRS can pursue the donees for the tax under the doctrine of transferee liability. For individual who are neither residents nor citizens of the United States (i.e. nonresidents a liens, or NRAs), the Federal gift tax appliles only to gifts of property situated within the United States. Exempted, however, are gifts of intangibles, such as stock and bonds. For decedents who are nonresident aliens, the Federal estate tax is imposed on the value of property located within the United States. However, unlike the gift tax, the estate tax applies to stock in U.S. corporations. Mr. Kim's concerns are groundless. Except for property located within the United States, the Federal estate tax does not apply to nonresident aliens. The country in which a person happens to die has no relevance in regard to the application of U.S. transfer taxes. For NRAs, any gifts of properties (other than intangibles) located within the United States will be subject to the federal gift tax. Arturo could avoid any U.S. gift tax by having the children buy the properties in their own names. For decedents who...
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...University School of Law Herzog Summer Visiting Professor in Taxation University of San Diego School of Law FOUNDATION PRESS © 2013 © 2013 By FOUNDATION PRESS ISBN PREFACE This supplement is designed to update our casebook and accompanying study problems book: Federal Wealth Transfer Taxation: Cases and Materials (6th ed. 2009), and Federal Wealth Transfer Taxation: Study Problems (6th ed. 2010). We hereby grant permission to users of Federal Wealth Transfer Taxation to distribute copies of this supplement to students, either in hard copy or in electronic form. This supplement is current through August 1, 2013 and incorporates The American Taxpayer Relief Act of 2012 (Pub. L. No. 112-240, 126 Stat. 2313 (2013)) and The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Pub. L. No. 111-312, 124 Stat. 3296 (2010)). We want to thank Jack Bogdanski (Lewis & Clark) for his detailed comments on the prior edition of these books. This is the third update to Federal Wealth Transfer Taxation since the July 16, 2010 death of our lead author, mentor, and dear friend, Paul McDaniel. Paul was a co-author of the original edition of this book in 1977, with Hank Gutman, Stanley Surrey, and Bill Warren, and remained as co-author of the five subsequent editions of the book. Being asked to join Paul as a co-author on this book was one of the proudest (and most intimidating) moments of our careers. In working with...
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...CH 12 The scope of the estate tax Sec 2033 Section 2033 · Gross estate: Value of the property to extend of interest at time of death Section A · estate tax is excise tax: “tax included on the property” · Tax base must include the value of the property that most obviously is transferred (FUNCTION OF 2033) · Section 2033 includes (GROSS ESTATE) o Decedent’s securities o Bank deposits o Real state o Income earned before death are collectible by the estate § Rent § Interest § Dividends § Partnership profits § Refunds § Vested rights § Promissory notes (matured or not) § Insurance policies § Saleable (commercial) leasehold interest § Interest in rented property · By either tenants in common or one-half community. § Federal and State bonds are includable despite their exemption from other taxation either by their express terms or by law · REG 20.2033 o Descendant hold only legal title (trustee) under enforceable oral or written does not possess an interest taxable under section 2033. § Ex: agent o ONLY DIRECTLY OWNED PROPERTY · Principal reliance on judicial and administrative interpretation of Sec 2033’s simple language potentially would yield over inclusions “many” o There are not many limits o Limits must be established o Congress explicit responded what property interest that are to be taxed, eventhough they lied beyond the reach of 2033. § 2033- Base line § Section 2041 · in...
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...married couple buys a home and wants to make sure that whoever survives obtains sole ownership of the property. Community property c. Grandparents want to make an outright gift of undeveloped land to adult children to be held as undivided co-owners. Joint tenants 13) LO4 Addison provides all of the support of her dependent father, Walter, who lives with her. Because Walter is very proud and wants to appear independent, Addison gives him the money to pay his medical bills. Is Addison subject to the Federal gift tax as a result of these transfers? Explain. No, the Federal gift tax does not apply to tuition payments made to an educational organization on another's behalf. Nor does it apply to amounts paid on another's behalf for medical care. 18) LO5 Regarding the gift-splitting provision of sect 2513, comment on the following. a. What it was designed to accomplish. a gift made by a person to someone other than his or her spouse may be considered, for Federal gift tax purposes, as having been made one-half by each spouse. b. The treatment of any taxable gifts previously made by the nonowner spouse. c. How the election is made to split gifts is not necessary when husband and wife transfer jointly owned or community property to a third party. d. The spouses are divorced during the year, they may still split the gift if neither marries anyone else during the year. e. The utility of the election in a community property jurisdiction is made to split gifts is not necessary...
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...Wills, Trusts, and Estates FIN 4004 Spring, 2013 CRN 13341 (MW 4:00-5:15pm) Jason Bryan Malone, Esq. 2117 Pamplin Hall Email: jbmalone@vt.edu Office Hours: MW 12:10pm-1:10pm (Additional hours will be posted on Scholar throughout the semester) (Please feel free to make an appointment or come by during other times) Text: Estate Planning for Financial Planners, 6th ed., Michael A. Dalton and Thomas P. Langdon Course Description: Estate Planning focuses on the efficient conservation and transfer of wealth, consistent with the client’s goals. It is a study of the legal, financial and non-financial aspects of this process, covering topics such as trusts, wills, probate, advanced directives, charitable giving, wealth transfers and related taxes. Course Objectives: At the end of this course, the student should be able to understand, explain, analyze and evaluate estate planning needs and taxation in order to recommend appropriate techniques for meeting estate planning and objectives, including without limitation: • Determine client estate planning needs and objectives, taking into account financial and non-financial (behavioral/social/emotional) aspects of estate planning • Understand the effects of the lack of estate planning, including state laws of intestacy • Project estate taxation and liquidity needs in various situations • Recommend appropriate and efficient methods of wealth transfer for a client’s situation, including...
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...Family Owned Business Estate Planning In this case study, as John’s financial advisor, I have been tasked with reducing, or eliminating the potential estate tax burden of John’s estate. Additionally, I am tasked with maximizing the amount of wealth transferred to John’s heirs. John, age 61, is married to Jane, age 60. He owns Victory Company, a family business professionally valued at $5.6 million. He and Jane have three children and seven grandchildren. One son, Paul, manages Victory Company and will someday own it. John's overall wealth is about $15 million. This includes the $5.6 million value of Victory Company, which nets $1.5 million before tax and after paying John a $300,000 salary plus liberal fringe benefits. After taxes, John earns about $400,000 to $600,000 more per year than he and Jane spend. The balance of John's wealth includes two homes (a main residence and a vacation home) worth a combined $2.7 million; $1.7 million in his 401(k) plan; cash assets and a stock and bond portfolio totaling $1.8 million; $2.9 million in income-producing real estate; and $300,000 in sundry assets. There also is $6.2 million in insurance on John's life that is now owned by an irrevocable life insurance trust (ILIT). This insurance includes a $1.2 million whole life policy and $5 million in 10-year term insurance with six years remaining in the term. Business This first thing I need to get a handle on is John’s company. The $5.6 million value of Victory Company represents over...
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...TRANSFER TAX -refers to the burden imposed upon the right to gratuitously transfer or transmit property, tangible or intangible from one person to another. Filing: within 6 months from the date of death 15%-relative 30%-stranger Filing: within 30 days from the date of donation -are taxes imposed upon the gratuitous disposition of private property. ESTATE TAX FORMULA: KINDS OF TRANSFER TAXES: ESTATE TAX NIRC Donation mortis causa Tax levied on the transmission of properties from decedent to his heirs Tax on the privilege to transmit property at death Excise tax or privilege tax Effective upon death Tax base is the net estate Net estate amounting to P200,000 is exempted 20% highest rate DONOR’S TAX NIRC Donation inter vivos Tax levied on the transmission of properties from a living person to another living person. Gross Estate (Sec. 85) TAX ON THE TRANSFER OF REAL PROPERTY LGC Less: Ordinary Deductions (Sec. 86)_____________ Equals: Net Estate before share of surviving spouse Less: Share of surviving spouse________________ Equals: Net estate before special deductions Less: Special deductions______________________ Equals: Net taxable estate Multiply:Tax Rate (Sec 84)______________________ Equals: Estate Tax Payable If there’s tax credit available: Excise tax or privilege tax Effective during the life time of the donor Tax base is the net gift within the calendar year Net gift amounting to P100,000 is exempted highest rates: Estate tax payable Less: Tax credit____________...
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...2007 Workbook Chapter 6: Death of a Taxpayer Federal Tax Forms ................................................... 189 Income in Respect of a Decedent (IRD).................. 194 Deductions in Respect of a Decedent ...................... 201 Inherited Property.................................................... 202 Trusts ......................................................................... 205 Special Issues ............................................................ 210 Corrections were made to this workbook through January of 2008. No subsequent modifications were made. Tax professionals are frequently called on to guide fiduciaries through income tax complications resulting from the death of a taxpayer. While a tax preparer should never try to replace the estate attorney, there are services she can provide. This chapter gives an overview of what might be expected. When a taxpayer dies, the court appoints someone (a fiduciary) to handle the taxpayer’s estate. This fiduciary’s title can be executor, executrix, administrator, administratrix, or personal representative. The fiduciary has a responsibility to the decedent’s estate. Primarily, the fiduciary has the responsibility to follow the guidelines of the will and handle the assets of the estate for the best interests of the beneficiaries. Consequently, it is important for the fiduciary to have a basic understanding of various issues that arise when a taxpayer dies. The fiduciary completes a Form 56, Notice Concerning...
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...who are named in the trust document. 7. A trust created during the lifetime of the individual is a living trust while a trust created at the death of the individual is a testamentary trust. 8. Is a trust subject to federal income tax? Yes and if so what tax form would be filed? Trust and Estate Tax Return. 9. If an individual wanted to control his or hers assets after they died they would have established through their living trust a will. 10. This type of trust declaration would allow the individual to avoid probate but would still be subject to taxation by federal estate tax . 11. A gift qualifying for the annual exclusion must be $14000 or less and be a present interest gift. 12. The person making the gift is the donor and the person receiving the gift is the donee. 13. If an individual makes a taxable gift they must file a tax report on money above the annual gift exclusion. 14. Donor makes 11 cash gifts qualifying for the annual exclusion but make 1 taxable gift the donor must subtract the taxable gift from his/her lifetime inclusion and report the taxable gift. 15. The donor has a cost basis of $25 and has owned the stock since 4/15/13 on the date of the gift fair market value is $40 per share. * What value would be used for gift tax purposes?...
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...000 – 2,500 * 75%, yr2) Separately stated Jack Dividends $125 $250 (Yr1= 25% of 500/ Yr2 = 25% of 1000) Interest Income $500 $625 (Yr1= 25% of 2000/ Yr2 = 25% of 2500) Jill Dividends $375 $750 (Yr1= 75% of 500/ Yr2 = 75% of 1000) Interest income $1,500 $1,875 (Yr1= 75% of 2000/ Yr2 = 75% of 2500) b. Complete UpAHill’s Form 1120S, Schedule K, for year 1. Year1 1120S 1. Ordinary business income (loss) 42,500 2. Net rental real estate income (loss) 0 3a. Other Gross rental income (loss) 0 b. Expenses from other rental activities 0 c. Other net rental income (loss) 3b-3a 0 4. Interest income 2,000 5....
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