Unit 8, part 4 Complex Estate Planning and Tax issues

1. Unit 8, part 4Complex Estate Planning and Tax issues Economic Growth and Tax Relief Reconciliation Act

2. Gift Tax Issues under EGTRRA • $1,000,000 lifetime exclusion • Taxable gifts • Advantages of lifetime giving • $11,000 exclusion (2002) per donee • Exclude appreciation from estate • Gift taxes paid reduce taxable estate

3. Gift Tax Issues under EGTRRA • Disadvantages of lifetime giving • May not be a taxable estate • Loss of step up in basis • Contra - may not get step up in basis at death • Gifts within 3 years of death

4. Filing Gift Tax Returns • 3 year statute of limitation • Gift and estate tax, if error not more than 25% of reported gift • 6 year statute of limitation if > 25% • No statute of limitation for unreported gifts • Dinners, clothing, and the new Porsche

5. Gifts included within gross estate • Gifts within 3 years of death • Gifts with retained life estate or other interest

6. Other Gift Tax Exclusions • Marital deduction • No limited • Terminable interests excluded unless a QTIP election is made

7. Other Gift Tax Exclusions • Educational or medical payments • Paid directly to qualified educational organization • Does not include payments to qualified tuition programs or Coverdell education savings accounts • Paid directly to medical provider • Includes health insurance premiums • No gift tax return required

8. Valuation of Closely Held Corporations and LLCs • Minority interest discounts • Marketability discounts • Gifts of shares or interests: factors to consider • Statute of limitations • Retained interest • Affect on basis

9. Valuation of Closely Held Corporations and LLCs • Step up in basis • Not applied to appreciated assets held in the corporate, LLC, or partnership name • Unless the LLC or partnership terminates at death • Applies to shares or interest of the decedent

10. Carryover Basis Rules • Gifts • Donor’s basis plus gift tax paid • Cannot exceed FMV

11. Carryover Basis Rules • Date of death • Step up through 2009 • 2010 - no step up, except: • Amounts added to basis: • $1,300,000 ($60,000 for nonresident aliens) • Unused capital losses from decedent’s final tax year • Unused net operating losses from decedent’s final tax year • Losses that would have been realized had decedent sold assets immediately before death • Additional $3,000,000 for surviving spouse

12. Carryover Basis Rules • Record keeping • Basis reporting requirements added • Lifetime gifts - to donee within 30 days • Donor contact information • Gift tax return information • Transfers at death • Reported to IRS

13. Repeal of Qualified Family-Owned Business Deduction • Effective after December 31, 2003 • Exclusion amount goes up to $1,500,000 in 2004 • QFOB deduction & applicable exclusion were limited to $1,300,000 • Recapture left in place (10 or 12 years) - Conference Report • EGTRRA actually repeals recapture provision

14. Installment Payment of Estate Tax • 5 years interest only; followed by up to 10 annual installments • 2% rate on first $1,060,000 (2001, amount indexed for inflation) • Eligibility expanded under EGTRRA

15. Special Use Valuation • Reduces value from FMV to use value in farming or closely held business • Reduction in value limited to $800,000 (2001, indexed) • Qualified use for 5 of 8 years before decedent’s death • Substantial portion of assets in estate

16. Conservation Easements - Statutory Authority • Uniform Conservation Easement Act (UCEA) • Common law restrictions abolished • Exemption from marketable title acts • Meets IRS requirements • Conservation and Historic Preservation Agreements Act

17. Conservation Easements - Federal Estate Tax Treatment • Posthumous donations • By will • Consent by interest holders • Estate tax exclusion • Capped • 2001 - $400,000 • 2002 - $500,000, or • 40% of remaining value, whichever is less

18. Conservation Easements - Federal Estate Tax Treatment • Estate tax exclusion • Reduction - difference less than 30% • 2% for each 1% below 30% • Acquisition indebtedness excluded • 3 year holding period prior to death • Geographic limitations repealed (through 2010)

19. Conservation Easements - Federal Income Tax Treatment • Purchases • Capital gain reported • Basis allocated proportionally • Installment sales

20. Conservation Easements - Federal Income Tax Treatment • Donations • Deduction for FMV • 50% limitation • Spread over subsequent 5 years • Basis allocated proportionally • Bargain sales

21. Conservation Easements - Federal Income Tax Treatment • Requirements for deductibility • Perpetuity • Conservation purpose • Reservation of rights • Pesticide use/clear cutting • Surface mining banned • Subordination of indebtedness • Plan for monitoring and enforcement

22. Conservation Easements - State Income Tax Benefits • Charitable deduction • Credit

23. Conservation Easements - Real Estate Tax Benefits • Reduced FMV/reduced appraisal • Reduced appreciation

24. Conservation Easements - Appraisal & Valuation Issues • FMV at time of donation or purchase • Reduced by resultant increase in value of retained property • No deduction - benefits to donor exceed public benefits

25. Conservation Easements - Appraisal & Valuation Issues • Valuation methods • Comparable sales • Typically insufficient sales of PDRs • “Before and after” method • FMV prior to donation less FMV after donation • Two appraisals required • Substantiation requirement • Licensed appraiser

26. Conservation Easements - “Like-Kind” Exchanges (sec. 1031) • Conservation easements may be exchanged for a fee simple interest • Basic requirement for nonsimultaneous like-kind exchanges • Like-kind property • Like-kind exchange permitted in sales contract • Qualified intermediary used to hold funds • Reverse like-kind exchanges permitted