Taxation of Gifts and Estates Chapter 21 Taxation of Gifts and Estates Chapter 21: Taxation of Gifts and Estate Transfers

The Unified Gift and Estate Transfer Tax System The general theory behind the unified gift and estate transfer tax system is that at the time of transfer of property, either during life (gifts) or at death (bequests), the transferor will pay the same tax rate or amount for the transfer, regardless of when the transfer is made. Chapter 21: Taxation of Gifts and Estate Transfers

The Federal Gift Tax System A gift of property will be valued for gift tax purposes at the fair market value as of the date of transfer. Annual Exclusion and Gift Splitting Applicable Credit Qualified Transfers Gifts to Spouses Payments for Support Reporting and Paying Taxes Chapter 21: Taxation of Gifts and Estate Transfers

The Federal Estate Tax System The federal estate tax is an excise tax on the right to transfer assets by a decedent. Reporting and paying taxes Gross estate Deductions from the gross estate Funeral and Administrative Costs Final Medical Costs Debts Chapter 21: Taxation of Gifts and Estate Transfers

The Charitable Deduction Direct charitable bequests Charitable trusts (CRT) Chapter 21: Taxation of Gifts and Estate Transfers

Chapter 21: Taxation of Gifts and Estate Transfers The Marital Deduction A marital deduction occurs when the decedent’s estate claims as a deduction from the adjusted gross estate an unlimited qualifying bequest or transfer of property to a surviving spouse Qualifications for the Marital Deduction Chapter 21: Taxation of Gifts and Estate Transfers

Chapter 21: Taxation of Gifts and Estate Transfers The Marital Deduction Direct Bequests to a Spouse Qualified Terminable Interest Property Trust (QTIP) Power of Appointment Trust Chapter 21: Taxation of Gifts and Estate Transfers

Optimizing the Marital Deduction The Credit Equivalency (Bypass) Trust Use of Disclaimers Alien Surviving Spouses Chapter 21: Taxation of Gifts and Estate Transfers

Generation Skipping Transfer Tax (GSTT) The GSTT is in addition to the unified gift and estate tax and is designed to tax large transfers that skip a generation (that is, from grandparent to grandchild) Chapter 21: Taxation of Gifts and Estate Transfers

Estate Tax Reduction Techniques Do not over-qualify the estate, use the credit equivalency. Do not under-qualify the estate, use an appropriate amount for the marital deduction, generally to reduce estate tax to zero. Generally, remove life insurance from the estate of the client. Chapter 21: Taxation of Gifts and Estate Transfers

Estate Tax Reduction Techniques (cont’d) Change the ownership of life insurance or use irrevocable life insurance trust (must remove all incidents of ownership). Use lifetime gifts. Make use of annual exclusions with gift splitting. Use basic trusts. Use charitable contributions, transfers, and trusts. Chapter 21: Taxation of Gifts and Estate Transfers