1. By Ward J. Wilsey, JD, LLM 3655 Nobel Dr. Suite 345 San Diego, CA 92122 (858) 764-2672 wardwilsey@wilseylaw.com The Wilsey Law Firm www.wilseylaw.com Basic Estate Tax

2. Estate Tax Transfer Tax Paid at Death Internal Revenue Code § 2001 Paid on Taxable Estate Gross Estate Less Exclusion Amount Internal Revenue Code § 2001 45% Tax on Taxable Estate Internal Revenue Code § 2001 But see marginal rates

3. Calculating an Estate Tax Estimate LINEINSTRUCTIONVALUE 1.Enter Value of Gross Estate$5,000,000 2.Enter Applicable Exclusion Amount$3,500,000 3.Calculate Taxable Estate$1,500,000 4.Multiply By Estate Tax Rate45% 5.Calculate Approximate Estate Tax$675,000

4. Exclusions from the Taxable Estate Exclusion Amount ($3,500,000 in 2009) Expenses of the Estate (IRC § 2053) Funeral Expenses Administration Expenses Claims Against the Estate Debts Marital Deduction (IRC § 2056) Charitable Bequests (IRC § 2055) Qualified Domestic Trust (IRC § 2056A)

5. Gifting You are subject to a 45% tax on gifts made to another person Unless an Exclusion Applies Exclusions $13,000 Annual Gifting under IRC §2503(b) $1,000,000 Lifetime Exclusion under IRC §2505(a) Certain direct expenditures for health care and educational expenditures under §2503(c)

6. Annual Gifting You can gift $13,000 to as many different people as you wish. IRC 2503(b) Must be a gift of a present interest Options for gifting Outright 529 plan UTMA Trust

7. Gifting Outright Outright gifts are fairly simple Can be done to minor’s with Guardian. Rev. Rul. 54-400, 1954-2 CB 319 Gifts outright will be spent outright Gifts can be paid indirectly in the form of medical or educational expenses Must comply with IRC § 2503(e)

8. Gift to 529 Plan Allow donor’s to prepay educational expenses on a tax advantaged basis. Contributions to 529 Plan are taxable gifts. IRC § 529(c)(2). Eligible for annual exclusion Neither the donor or done is subject to income tax on distributions or growth within 529 plan As long as distributions are paid directly for qualified educational expenses

9. 529 Plan Donor can elect to gift five years worth of annual exclusions, and apply next five years worth of exemptions. IRC 529(c)(2)(b). Assets in 529 Plan are not in estate of donor or done. IRC 529(c)(4) 529 plan can be transferred to another beneficiary when no longer needed. IRC 529(c)(3)(c)

10. 529 Plan Downside Distributions not used for qualified educational expenses will be subject to income tax plus 10% penalty. Donor is taxed on returned contributions, to extent of earnings, plus 10% penalty. IRC 529(c)(3) May be easier to make contributions directly to educational provider. 2503(e) Opportunity Cost for gifts made

11. UTMA Transfers made into custodial account for beneficiary Distributed at appropriate age according to state law 21 in California Disadvantages are too numerous to bother with

12. Gifts in Trust Gift to an Irrevocable Trust, properly drafted, it outside the estate of the Grantor. Options 2503(c) Trust 2503(b) Trust Crummey Trust

13. 2503(c) Trust Gifts to this trust will qualify under the annual exclusions if: 1. The trust principal and income may be paid to or spent on behalf of the donee before he or she reaches age 21; 2. Any money not spent is distributed to the donee when he or she reaches age 21; and 3. Any unspent money is either paid to the donee's estate or passes under a general power of appointment granted to the donee if the donee dies before reaching age 21.

14. 2503(b) Trust Beneficiary receives income interest for life Income must be paid out, cannot accumulate. Gifts are part subject to exclusion, and part gift of non- present interest. Very difficult

15. Crummey Trust Trust that has gifts qualify for the annual exclusion by giving beneficiaries a special withdrawal right Crummey v. Comm'r, 397 F2d 82 (9th Cir. 1968) Rev. Rul. 73-405, 1973-2 CB 321, revoking Rev. Rul. 54-91, 1954-1 CB 207 Flexibility is main advantage Broad discretion in investments Broad discretion in distributions Multiple beneficiaries

16. Crummey Disadvantages Crummey beneficiary must have a withdrawal right to take out gifts for set period of time Drafter should not use less than 30 day time period. See, e.g., Priv. Ltr. Ruls. 200130030, 200011058, 200011054– 200011056, 199912016, 9812006, 9810006, 9809006, 9809004 ; see also Estate of Cristofani v. Comm'r, 97 TC 74 (1991), acq. in result only 1992-1 CB 4, 1996-1 CB 1.

17. Crummey Trusts Notice to Beneficiaries is required to notify Gift has been made Withdrawal right is allowed Rev. Rul. 81-7, 1981-1 CB 474 What happens if you do not give notice Assets are still out of Grantor’s estate But they may not qualify for annual exclusion

18. Crummey Trusts Waiver of Notice is not allowed by the IRS Technical Advice Memorandum 9532001 “current notice of a gift and the withdrawal rights over it is an absolute prerequisite to a donee's “real and immediate benefit” from the gift” Minor Beneficiaries The trust must include a provision allowing guardians to exercise a Crummey Withdrawal Right on behalf of minor beneficiaries Naumoff v. Comm'r, TC Memo. 1983-435 (1983)

19. Crummey Trusts Split Gifts Husband and Wife may elect to split gifts into a Crummey Trust. IRC 2513 Reciprocal Gifting IRS will scrutinize interrelated family structures, where A creates trust for B’s kids, and B creates a trust for A’s kids Revenue Ruling 85-24

20. Naked Crummey Powers IRS has attacked giving Crummey Powers to contingent beneficiaries. Tax Court has rejected this argument Estate of Cristofani v. Comm'r, 97 TC 74 (1991) IRS has said they will continue to deny Crummey Rights to Contingent Beneficiaries Action on Decision (AOD) 1992-00 Avoid Cristofani issues by naming grandchildren and other beneficiaries as permissible current beneficiaries, with children as “primary beneficiary”

21. Crummey Powers Lapse of Gift Beneficiary who lets Crummey Powers lapse makes a gift to the other beneficiaries. IRC 2514 Exceptions No gift to the extent that lapse does not exceed the greater of $5,000 or 5% of the trust assets. IRC 2514(e) No gift if Beneficiary has a Testamentary General Power of Appointment over assets. Priv. Ltr. Ruls. 8142061, 8229097, 8517052. See also Regs. 25.2511-2(b) Hanging Crummey Powers

22. Crummey Withdrawal Power that lapses in stages: After 30 days to extent of 5&5 powers Every year to extent remainder is less than 5% of trust assets Authority IRS has treated favorably unless withdrawal right mentions amounts subject to gift tax. Private Letter Ruling 8901004 Make sure Hanging Power does not make reference to “taxable gifts” Priv. Ltr. Rul. 200130030

23. Crummey GST Result Transfers to Crummey Trust do not qualify for the annual GST Exclusion unless: It is a direct skip gift All beneficiaries are skip persons Made to a Trust with one beneficiary Assets are in beneficiary’s estate at death Otherwise, lifetime GST Exemption will be used under IRC 2642(c) Watch out if you have made lifetime transfers to Irrevocable Trusts You may be creating gifts currently subject to GST Limit Crummey Gifts to Kids if possible

24. Generation Skipping Transfer Tax Transfer Tax Imposed on Transfers to Skip Persons In Addition to Estate Tax Rate is the Product of the Maximum Estate Tax Rate multiplied by the Inclusion Ratio (IRC § 2641) Skip Person Persons in a generation that is two or more generations below the transferor Grandchildren Persons 37.5 years younger than transferor, unless transferee is a spouse

25. When the GSTT Occurs Transfers that are subject to a GST Tax, absent an exemption (IRC § 2611(a)): Direct Skip Direct Transfer to skip person (IRC § 2611(a)(3)) Taxable Termination Termination of an interest in a trust by a non-skip person unless: A transfer subject to an estate or gift tax occurs A non-skip person has an interest in the trust; or No transfer to a non-skip person is made Taxable Distribution Distribution from a Trust to a Skip Person Does not include any transfer relating to exclusion of certain transfers for educational or medical expenses under IRC § 2503(e)

26. Exemptions From Generation Skipping Transfer Tax $3,500,000 Exemption during life or upon death IRC § 2631(a) Once you allocate your exemption, it’s Irrevocable. IRC § 2631(b)

27. Automatic Allocation on Direct Skips Any direct skip made during your lifetime will receive automatic allocation, of remaining exemption, to extent necessary to make inclusion ration zero. IRC § 2631(b)(1) You may elect not to have a deemed allocation apply by timely filed gift tax return. IRC § 2631(b)(1) Automatic allocation is permanent once this due date expires.

28. Transfers to Trust GST Exemption is deemed to be allocated to all lifetime “non-skip” transfers to GST trusts, unless the transferor elects otherwise. IRC § 2632(c) Unless, the trust principal is distributed to a non-skip person before the age of 45, or upon an event that will reasonably happen before age 45 Watch this provisions for non-Dynasty Trusts Ex. of a Problem. Trust property will be distributed to my child 10 years after my death