R5: M7: Estate and Gift Transactions.

Taxable Gift.

(1). annual, inflation-adjusted exclusion: per person, per year [to anyone]. (2). Unlimited Exclusion.

Gifts: Complete vs. Incomplete Gifts. Complete gifts qualify for the annual exclusion and, in most cases, are not considered part of the gross estate at death. However, incomplete gifts are included in the gross estate for purposes of computing the estate tax.

(1). complete gifts. (2). incomplete gifts. (3). conditional gifts. (4). revocable gifts.

Unified Estate and Gift Tax [Transfer Tax]. The estate tax and gift tax have been unified into a single transfer tax. Not all gifts are subject to the gift tax.

(1). life time gifts. (2). Death time transfers.

☐ marital deduction. in order to qualify for a marital deduction, there may not be a terminable interest in the property unless the property qualifies as qualified terminable interest property [QTIP]. In order to qualify as QTIP property:

(1). the donee spouse must be entitled to all income from the property for his / her lifetime; (2). no one other than the donee spouse may receive any distributions of income or principal from the property for his/ her lifetime;

Gifts: Present vs. Future Interest. (1). Definition. The postponement of a right to use, possess, or enjoy the property distinguishes a future interest from a present interest.

(2). Future Interest Gifts. (3). Present Interest Gifts.

Estate Deductions. The gross estate is reduced by deductions that include:

(2.1). Medical expenses. (2.2). Administrative expenses. (2.3). Unlimited charitable deduction. (2.4). Unlimited Marital Deduction.

Transfer tax rate: the transfer tax rate schedule is applied to total transfers. Lifetime taxable gifts and transfers at death are taxed on a cumulative basis.

(3.1). unified estate and gift credit. (3.2). Applicable exclusion amount. (3.3). Deceased spouse's unused exclusion. [if the spouse who dies first does not use all of their unified credit, the surviving spouse can use it [add it to their credit]]

☐ marital deduction. (3). the donee spouse must have the right to require that the subject property be made productive; and

(4). the property must be subject to payment of its pro rata share of estate taxes upon the death of the surviving spouse.

The tax due on current gifts is determined as follows: Gross Gifts in a Calendar Year [at FMV]. Less: exclusion of $14,000 per donee per year. Less: Unlimited marital deduction of gift to donor's spouse. Less: Charitable gifts.

= Taxable gifts this year. Plus: taxable gifts of prior year. = Cumulative lifetime gifts. ----------------------------------- Taxon Cumulative Lifetime Gifts [Calculate]. Less: gift tax paid on prior gifts. Less: applicable credit. = tax due on current gifts.

(3). conditional gifts.

A gift is conditional if it is subject to conditions precedent and will not be provided until the conditions have been met [e.g., a recipient will not get the gift unless he graduates from a four-year accredited college].

Gross Estate [@ FMV assets]. Less: Non-discretionary deductions. = Adjusted Gross Estate. Less: Discretionary deductions. = Taxable estate.

Add: Adjusted taxable gifts. = Tentative tax base at death. x Uniform tax rates. = Tentative estate tax. Less: Gift taxes payable. = Gross estate tax. Less: Applicable credit. = Estate tax due.

Generation-Skipping Transfer Tax [GSTT]. The IRC provides that for 2017 transfers, the GSTT rate is equal to the highest estate and gift tax rate in effect.

For 2017, the exemption amount is $5,490,000. Married couples can "split" the generation-skipping transfer and thus obtain a maximum total exemption of $10,980,000 for 2017.

Marital Deduction. Facts: When Jim and Nina became engaged in April Year 1, Jim gave Nina a ring that had a fair market value of $50,000. After their wedding in July Year 1, Jim gave Nina $75,000 in cash so that Nina could have her own bank account. Both Jim and Nina are U.S. citizens.

Required: What was the amount of Jim's Year 1 marital deduction? Solution: $75,000 was Jim's marital deduction for Year 1.

Calculating Taxable Gifts. Facts: Between January 1, Year 1, and March 31, Year 1, Jack Smith made the following gifts: $14,000 in cash to Allan; a sculpture valued at $4,000 to Barry; and to Charles, 100 shares of common stock in Zorro Corp., a publicly held corp., valued at $400 per share.

Smith made no other gifts during the quarter. Required: Calculate Jack's total amount of taxable gifts for the quarter.

Estates follow the same general rule for taxable events and basis as we learned in individual and partnership taxation.

Taxpayer:Estate. Event: Taxable. Taxed: Fair Market Value. Basis: Fair Market Value. Taxpayer: Beneficiary. Event: Nontaxable. Taxed: NONE. Basis: Net Book Value [FMV from estate].

Calculating Taxable Gifts.

The "total amount of gifts" equals the aggregate value of all gifts made during the calendar year less the applicable annual $14,000 [$28,000 if married and gift splitting] exclusion per donee.

[Note that the total basis remains unchanged (i.e., $100 x 100 shares = $10,000 and $50 x 200 shares = $10,000).] When Boone gifted the stock to Dixon (note: it would not have mattered if Dixon had not been a relative), the donee (Dixon) received the stock at the carryover basis of the donor (Boone).

The 100 shares gifted to Dixon were shares from after the stock split; therefore, they have a basis of $50 per share, or a total basis of $5,000 for the 100 shares. [Note that Boone still has 100 shares at a basis of $50 as well.]

(3.1). unified estate and gift credit.

The IRC provides for a "unified estate and gift tax credit" of $2,141,800 for year 2017. This tax credit is equal to the tax, before credits, on $5,490,000 tentative tax base at death.

Required: Determine the exclusion amount and estate tax on the Pat estate. Solution: The Pat estate's exclusion amount will be $7,980,000, which is the sum of $5,490,000 available to the Pat estate plus the $2,490,000 that is the Lee estate's unused exclusion amount.

The Pat estate's unified estate and gift tax credit will be equal to the tax on $7,980,000, and the net estate tax due will be $408,000 : 40% tax rate x [$9,000,000 -$7,980,000].

Exclusion. Facts: Lee and Pat are married to each other. Lee dies in 2017. The Lee estate's tentative tax base at death is $3 million. The Lee estate claims a unified estate and gift tax credit equal to the estate tax, before credits, on $3 million.

The executor of the Lee estate timely elects to allow the Pat estate--when Pat dies-- to use the Lee estate's unused exclusion amount of $2,490,000. Pat, who has never made any lifetime gifts, dies later that year with a tentative tax base at death of $9 million.

Further, regardless of how long Carter owned the stock (i.e., it could have only been owned for one day), it was automatically deemed long-term property upon Carter's death. So, Boone had 100 shares of stock at a basis of $100/share when Boone received the inheritance.

Then, there was a 2-for-1 stock split on April 1 of the following year. This transaction caused Boone to now have double the amount of shares (or, 200 shares) at half the basis per share (or, $50/share).

Further, regardless of how long Carter owned the stock [i.e., it could have only been owned for one day], it was automatically deemed long-term property upon Carter's death. So Boone had 100 shares of stock at a basis of $100/share when Boone received the inheritance.

Then, there was a 2-for-1 stock split on April of the following year. This transaction caused Boone to now have double the amount of shares [or, 200 shares] at half the basis per share [or, $50/share].

Generation-Skipping Transfer Tax [GSTT]. The generation-skipping transfer tax is designed to prevent an individual from escaping an entire generation of gift and estate tax.

This is a separate tax that is imposed in addition to federal estate and gift tax. The tax applies when individuals transfer property to a person who is two or more generations younger than the donor or transferor. Either the trustee or the transferor pays the GSTT.

The Gift Tax [Form 709]: Tax is paid by person giving the gift. This reflects the theory that had the gift not been made, the asset would have been included in the donor's estate and would have been taxable.

This means that an individual subject to gift tax, usually only a donor who gives more than $14,000 [or $28,000 if married and gift splitting is elected] to a single donee in a year must file a gift tax return Form 709, which includes keeping track of total lifetime taxable gifts to date.

(2.1). Medical expenses. Alternatively, medical expenses not funeral expenses, because they are not deductible for income tax purposes paid out of the estate may be deducted on the final income tax return of the decedent [Form 1040], subject to the 10 percent limitation.

This option is available provided: ☐ the expenses are paid within one year of death; ☐ they are not deducted on the decedent's Form 706; and ☐ The executor files an appropriate waiver. [expense or liability not both]

this question combines the rules of estate taxation and gift taxation. Carter's investment in the stock was $50 per share when he died.

Upon Carter's death, the stock received a step-up in basis to the fair market value at the date of death [or six months later, if the alternate lower valuation date was elected]. Therefore, the stock's basis was $100 per share when it was transferred to Boone.

Carter's investment in the stock was $50 per share when he died. Upon Carter's death, the stock received a stepup in basis to the fair market value at the date of death (or six months later, if the alternate lower valuation date was elected). Therefore, the stock's basis was $100 per share when it was transferred to Boone.

[Note that no capital gain was reportable for the step-up in basis from $50 to $100; however, Carter's estate included the stock at its fair market value of $100/share for estate tax purposes and likely paid a large amount of estate tax on that.]

(1). annual, inflation-adjusted exclusion: per person, per year [to anyone]. in determining the amount of gifts made in a calendar year, the donor may exclude the first $14,000 of gifts made to each donee. This annual exclusion is not available for a gift of a future interest

[i.e., a gift that can only be enjoyed by the donee at some future date], even if the donee does receive a current ownership interest in the gift. A gift by either spouse may be treated as made one-half by each. This gift splitting creates a $28,000 exclusion per donee.

Recipients: Nontaxable = No income - NBV. the recipient of a gift pays no gift tax, and the gift does not represent taxable income to the recipient.

[the general rule for the basis of gifts received is that the basis to the recipient equals the donor's basis plus gift tax paid due to the appreciation in the value inherent in the gift.]

(2). incomplete gifts.

a gift is not considered complete [and is not subject to the gift tax] if it is conditional or revocable.

(4). revocable gifts.

a gift is revocable if the donor reserves the right to revoke the gift or change the beneficiaries. The gift is complete when those rights terminated by reason other than the donor's death.

☐ Payments made directly to an educational institution.

amounts paid on behalf of a donee for tuition paid directly to an educational organization are allowed an unlimited exclusion from gift tax.

☐ payments made directly to a health care provider for medical care.

fees paid directly to a health care provider for medical care of the donee are allowed an unlimited exclusion from gift tax.

[Note that no capital gain was reportable for the step-up in basis from $50 to $100;

however, Carter's estate included the stock at its fair market value of $100/share for estate tax purposes and likely paid a large amount of estate tax on that.]

(3.3). Deceased spouse's unused exclusion. [if the spouse who dies first does not use all of their unified credit, the surviving spouse can use it [add it to their credit]]. For decedents who die in 2017, the estate of a surviving spouse may be able to use,

in addition to the $2,141,800 unified estate and gift tax credit [based on the $5,490,000 applicable exclusion amount], an additional credit based on the unused exclusion amount of the surviving spouse's predeceased spouse.

Imputed interest on an interest-free loan

is subject to gift tax for each year the loan is outstanding.

The Gift Tax [Form 709]: Tax is paid by person giving the gift. The gift tax is a transfer tax payable by certain donors of gifts.

its main purpose is to make the donor liable for the tax that would have been payable as estate tax at the donor's death.

Gross Estate. The gross estate includes the value at the date of death [or at an alternative valuation date, which is the earlier of the date the property is distributed to the heirs or six months after date of death]

of all the decedent's worldwide property, including real property, personal tangible property, and intangible property. the gross estate also includes the fair market value of the decedent's share of jointly held property.

Carter purchased 100 shares of stock for $50 per share. Ten years later, Carter died on February 1 and bequeathed the 100 shares of stock to a relative, Boone, when the stock had a market price of $100 per share.One year later, on April 1, the stock split 2 for 1. Boone gave 100 shares

of the stock to another of Carter's relatives, Dixon, on June 1 that same year, when the market value of the stock was $150 per share. What was Dixon's basis in the 100 shares of stock when acquired on June 1? This question combines the rules of estate taxation and gift taxation.

[Note that the total basis remains unchanged [i.e., $100 x 100 shares= $10,000 and $50 x 200 shares = $10,000.]] When Boone gifted the stock to Dixon [note: it would not have mattered if Dixon had not been a relative], the donee [Dixon]

received the stock at the carryover basis of the donor [Boone]. The 100 shares gifted to Dixon were shares from after the stock split; therefore, they have a basis of $50 per share, or a total basis of $5,000 for the 100 shares. [Note that Boone still has 100 shares at a basis of $50 as well.]

Rule: Transfers between husband and wife [interspousal transfers] are not subject to taxation for gift tax or income tax purpose.

the $75,000 transfer was after the date of marriage and would be subject to the unlimited marital deduction. The $50,000 transfer prior to marriage was not subject to the marital deduction. It would, however, be subject to the annual gift tax exclusion.

(3.2). Applicable exclusion amount. The IRC calls this $5,490,000 amount the "applicable exclusion amount." however, this amount is not subtracted in calculating the tentative tax base at death; rather, the estate computes

the estate tax on the tentative tax base at death and then reduces that tax by the $2,141,800 unified estate and gift tax credit. The net result is generally an estate tax due equal to: 40% x [tentative tax at death -$5,490,000].

(3.3). Deceased spouse's unused exclusion. The unused exclusion amount is generally the predeceased spouse's applicable exclusion amount minus

the portion of that exclusion amount that the predeceased spouse's estate used to offset estate tax otherwise due.

(1). Definition. ☐ a present interest qualifies for the annual exclusion and in most instances would be removed from the estate. ☐ a future interest [or a present interest without ascertainable value] does not qualify for the annual exclusion and,

unless the required time period has passed, will not be removed from the estate. Because a gift of a future interest does not qualify for the annual exclusion, the donee is generally required to file Form 709, regardless of the amount of the future interest.

(2.3). Unlimited charitable deduction.

unlimited transfers to charitable, scientific, educational, and religious organizations that are termed discretionary deductions.

(2.4). Unlimited Marital Deduction.

unlimited transfers to the decedent's spouse; sometimes referred to as the "unlimited marital deduction."

The Gift Tax [Form 709]: Tax is paid by person giving the gift. Gifts of future interest are also subject to gift tax,

without exemption, and must file Form 709. The estate tax return is considered the final gift tax return for purposes of computing the tax.

Applicable credit:

☐ 2017: $2,141,800. ☐ this credit amount is equal to the tax, before credits, on a $5,490,000 tentative tax base at death.

Gross Estate. ☐ incomplete gifts [joint accounts] [gift = drawn upon]. ☐ Revocable transfers: (a). no future interest. (b). Trust in which children receive in the future.

☐ All property entitled to be received [income in respect of a decedent]. (a). salary. (b). rental income. (c). pension income.

Gross Estate:

☐ FMV property. ☐ insurance proceeds. ☐ incomplete gifts. ☐ revocable transfers. ☐ income in respect of decedent.

Other Credits. Other credits reduce the gross estate tax and include:

☐ Foreign Death Taxes. ☐ Prior Transfer Taxes [Prior Gift Taxes Paid]. Gift taxes paid on gifts made after 1976 are technically not a credit but are subtracted from the tentative estate tax to arrive at the gross estate tax.

(2). Unlimited Exclusion. [pay directly- don't give money to person].

☐ Payments made directly to an educational institution. ☐ payments made directly to a health care provider for medical care. ☐ Charitable gifts. ☐ marital deduction.

In order to apply the annual exclusion to a gift, the gift must be all of the following:

☐ a present interest. ☐ complete. ☐ under $14,000 / $28,000 per donee [unless paid directly for medical expenses and / or education expenses and/or paid to charities].

The Estate Tax [Form 706] = FMV The estate tax is a transfer tax rather than an income tax. it is imposed on the value of property transferred by the decedent at death.

☐ an estate must file IRS Form 706 if the gross value of the estate plus historical taxable gifts by the decedent exceed $5,490,000 in 2017. ☐ Form 706 must be filed within nine months after the decedent's death [unless an extension is requested.] [due in 9 months / birth and death]

Discretionary deductions.

☐ charitable bequests, unlimited. ☐ marital deduction, unlimited.

(1). complete gifts. A gift is considered complete [and is subject to gift tax]:

☐ even though the donee is not yet born, provided his identity can later be ascertained. ☐ despite the possibility that the property may revert to the donor at some future time.

(1). life time gifts. ☐ Certain gifts, discussed later in this module, qualify for an unlimited exclusion. ☐ in addition, gifts of $14,000 or less per year / per donee are excluded.

☐ for 2017, a $2,141,800 unified estate and gift tax credit effectively exempts from the gift tax cumulative, nonexcluded gifts having a value of $5,490,000.

Gross Estate. ☐ if property is owned jointly [50 /50] with a spouse, include 50 percent of fair market value of jointly owned property in gross estate.

☐ if property is owned in an arrangement other than 50 / 50 , include 100 percent less other owner's contribution in gross estate. [Gifts to kids] ☐ insurance proceeds [if the deceased / estate is the beneficiary or had incidence of ownership at death].

(3). Present Interest Gifts. Examples of present interest gifts include: ☐ outright gifts of cash or property; ☐ trust income interests where annual or more frequent distribution is mandatory; ☐ estates for a term certain;

☐ life estates [ownership of the right to use property presently but not ownership of the property itself]; ☐ bonds or notes [even though interest is not payable until maturity]; and ☐ unrestricted transfers of life insurance policies.

nondiscretionary deductions.

☐ medical expenses. ☐ administrative expenses. ☐ outstanding debts. ☐ claims against the estate. ☐ funeral expenses. ☐ indebtedness of property. ☐ certain taxes [e.g., taxes before death and state death taxes].

(2.2). Administrative expenses. an estate is allowed to deduct expenses of administering and settling the estate on Form 706. [Alternatively, as in situations in which there is no taxable estate, the executor of the estate may deduct those expenses on the estate's form 1041].

☐ outstanding debts of decedent. ☐ Claims against the estate. ☐ funeral costs. ☐ certain taxes.

☐ Adjusted taxable gifts.

☐ post-1976 gifts that were taxed. ☐ no double tax because subtracted later in this computation.

Gift taxes payable.

☐ reduction by gift taxes payable on gifts made after 1976. ☐ this eliminates double taxation of these gifts.

Uniform tax rates.

☐ the "uniform tax rates" apply to both taxable gifts and estates.

(2). Death time transfers. ☐ Certain death time transfers, discussed later in the module, are excluded from the estate tax.

☐ the unified estate and gift tax credit of $2,141,800 [2017] effectively exempts from estate/ gift tax the first $5,490,000 [2017] of otherwise taxable cumulative gifts and death time transfers.

(2). Future Interest Gifts. examples of future interest gifts include: ☐ reversions [gifting assets and later getting the property back]; ☐ remainders [distributed at some future time];

☐ trust income interests where accumulation of income by a trustee is mandatory and accumulations are distributed at some future time at the discretion of the trustee; and ☐ present interests without ascertainable value.