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

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

Gift Tax Issues under EGTRRA l 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

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

Gifts included within gross estate l Gifts within 3 years of death l Gifts with retained life estate or other interest

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

Other Gift Tax Exclusions l 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

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

Valuation of Closely Held Corporations and LLCs l 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

Carryover Basis Rules l Gifts Donor’s basis plus gift tax paid Cannot exceed FMV

Carryover Basis Rules l Date of death Step up through 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

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

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

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

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

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

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

Conservation Easements - Federal Estate Tax Treatment l 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)

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

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

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

Conservation Easements - State Income Tax Benefits l Charitable deduction l Credit

Conservation Easements - Real Estate Tax Benefits l Reduced FMV/reduced appraisal l Reduced appreciation

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

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

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