Overview of Estate/Gift Tax Unified Rate Schedule

1. Overview of Estate/Gift Tax Unified Rate Schedule • Single unified transfer tax applies to estates/gifts (post 12/76) – until 2003 why? • Rates range from 18% to 35% - 11/12 on cumulative lifetime transfers • Rates approved until 12 – no estate tax in 10 • Unified credit essentially results in the minimum out of pocket rate of 35%.

2. Unified Rate Schedule - Gifts • Gift purposes • Calculate lifetime (cumulative) taxable gifts • Compute tax using the unified rate schedule • Subtract tax on cumulative gifts prior to current year. • Result in current years gift tax • Why is this method used? Why not simply do it on a year by year basis using the table?

3. Unified Rate Schedule - Estates • Apply rates schedule to estate tax base • Estate tax base = taxable estate + all taxable gifts made after 1976 (other than gifts included in the gross estate) • Why do we add the previous taxable gifts? • Estate tax before credits = • Tax on the estate tax base • Less: gift tax payable on the gifts included using the current rate structure • Credits (unified credit/foreign tax credit) are subtracted to arrive at estate tax due.

4. Unified Credit • One time credit against taxes paid on wealth transfers both in life and at death. • Applies to cumulative life transfers • The credit is not a refundable credit. What is a refundable credit? • Credit will be increased to $1,455,800 over the next 8 years = $3.5 Million exclusion. In 2008 it is $780,800 for a total exclusion of $2,000,000.

5. Filing Requirements - Estates and Gifts • When is the estate and gift tax returns (Form 706 and 709) due? • Does every person who dies have to file this form? • What triggers the need to file a gift tax return? • What is the essence of the generation skipping transfer tax?

6. Gift Tax Returns- Must be filed IF: • The donor gave taxable gifts to any donee other than the donor’s spouse • What are taxable gifts? • The donor gave gifts to charity unless the donor transfers entire interest and the property is used for a charitable purpose only • Is this the only place charitable gifts are recorded? • Election of Gift splitting / Gift of terminable interest to spouse. • Gift taxes not scheduled for repeal

7. Estate and Gift Tax Returns • Returns - Forms Required • What form is used to report and pay the estate tax of U.S. Citizens or residents? • Form 706-NA - used for nonresidents, non citizens • Form 706-A - used to report recapture of tax benefits previously enjoyed under Sec. 2032A elections • When must the estate tax return be filed? • Who must file an estate tax return? • Do Non-resident aliens need to file an estate return?

8. Gift Tax • What is the gift tax? • In general what is a gift? • On whom is the gift tax levied? • In general how is the gift tax calculated? • When is the gift tax due? • How are gifts reported? • How does the unified credit apply to gifts?

9. Gift taxes (continued) • What is a disclaimer? • Does a gift exist when a joint tenancy with right of survivorship is created? • Does it matter if the joint tenancy is between spouses or is created as a tenancy by the entirety

10. Gifts (continued) • What are taxable gifts? • How does the annual exclusion factor into the calculation of taxable gifts? • Do transfers in Settlement of Support Obligations constitute taxable gifts? • How are gifts valued? Is there an alternate valuation date available for gifts? • What is gift splitting and how is it operationalized?

11. Gift Taxation (continued) • What amounts reduce the amount of gifts subject to tax? • What are the steps involved in calculating gift tax? Why do these steps make sense? • If a married couple gives $26,000 to their child, do they have to file a gift tax return? • What documentation must be included to support the valuation of property?

12. Gifts - valuation • How are gifts valued? • Real estate? / Business Interests? / Mortgages? • Stocks and Bonds? • Household effects? / Other property? • How are reversionary interests treated for gift purposes? • How are gifts of life insurance contracts valued?

13. Gifts - continued • What are net gifts? • Are transfers for consideration considered gifts? • Are transfers in settlement of marital rights considered gifts?

14. Taxable gifts • What are the elements of a gift? • Transfer / Acceptance / Cessation of Dominion and Control / Donative Intent??? • Are gifts to political organizations gifts. • What about inter-spousal transfers? • How are below market rate loans treated? • What are the gift tax implications? • What are the income tax implications?

15. Gift Taxation (continued) • How are annuities valued for gift tax purposes? • Gratuitous purchase of an annuity contract is a gift if the purchaser retains no rights in the contract. • Creation of an annuity in a trust or other property constitutes a taxable gift. • A taxable gift is also made when a person establishes an annuity for his or her own benefit and irrevocably names another to receive certain benefits that may be payable after the annuitants deaths • U.S. savings bonds - Simply naming beneficiary for post death is not a gift.. A gift does exist when you buy the bond in someone else name.

16. Gifts (continued) • What is required to have a completed gift? • What is dominion and control • How does dominion and control impact whether a gift exists? • Give some examples where dominion and control impact the timing of a gift? What estate tax provisions does this sound like? • Do gifts for medical and educational purposes qualify for the $13,000 gift tax exclusion. • When does a gift tax return not have to be filed?

17. Gift-Splitting • Must be elected annually on form 709 • Gift splitting requires that each spouse file a separate 709 – • Equalizes the difference between separate property and community property in community property states. • Donor must be married at the time of the gift. • Each spouse must a citizen or resident at the time of the gift.

18. Annual Exclusion -$13K per donee– 2009-2010 • What gifts does it apply to? • How many exclusions can a donor take per donee? • Under what conditions does it not apply to educational and medical expenses? What qualifies as medical expenses? • Gifts by check may be a problem, why? • What are future interests • Gifts of income that commence immediately, are gifts of a present interest. What are Crummey trusts? • Gifts to a minor are not a future interest if the property and income as long as property & income will be dist at 21.

19. Deductions and Exemptions • Gifts to qualified charities are deductible for gift tax purposes see page 357. • Special rules exist for the Sec. 507 private foundation termination tax. • Similar treatment for charitable deductions when dealing with remainder interests. • Marital Deduction - unlimited for non-terminable interest property • Special rules for alien spouses (128K) annually • Special rules for TIP - exception QTIP – p 360

20. Generation Skipping Tax • What is the purpose of the Generation Skipping Tax? • GST only applies to direct beneficial interests. What are direct beneficial interests? What interests are excluded? • What is a generation skipping transfer (Sec. 2611)? • On what transfers do these provisions apply? (Sec. 2612) – • Taxable distribution • Taxable Terminations • Direct Skips

21. GST (continued) • What is the general definition of a skip person (Sec. 2613)? • Who is a skip person for purposes of a trust? • How are non-lineal descendents assigned to generations for GST purposes (Sec. 2651)? • What is the special rule in the case of deceased parents?

22. Return Requirements • Lifetime direct skips - reported on form 709 - gift tax return excluding 2010- due April 15 • GST occurring at death - GST calculated as part of the form 706. • If from a trust - File form R-1. • Generation skipping trusts must file forms 706GS to report trust distributions that are subject to the GST.