1. Welcome Back
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2. Welcome Back
Time for Any Question
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3. Chapter 25
Transfer Taxes and
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4. Transfer Taxes and Wealth Planning
Chapter 25
Transfer Taxes and Wealth Planning
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5. Learning Objectives
Outline the structure of federal transfer taxes and describe the valuation of property transfers.
Summarize the operation of the federal gift tax and the calculation of the federal gift tax.
Describe the federal estate tax and the valuation of transfers, and compute taxable transfers at death and the federal estate tax.
Apply fundamental principles of wealth planning and explain how income and transfer taxation interact to affect wealth planning.
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6. Federal Transfer Taxes
Common Features:
Common tax rate schedule
Unified credit
Prevents taxation of all but large cumulative transfer
“Exemption equivalent” is taxable amount of credit
Unlimited charitable deduction
Unlimited marital deduction for transfers to a spouse
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7. Federal Transfer Tax Rates
Tax base equal or over
Not over
Tentative tax
plus
Of the amount over
10,000
18%
$10,000
$20,000
$1,800
20%
$40,000
$3,800
22%
$60,000
$8,200
24%
$80,000
$13,000
26%
$100,000
$18,200
28%
$150,000
$23,800
30%
$250,000
$38,800
32%
$500,000
$70,800
34%
$750,000
$155,800
37%
$1,000,000
$248,300
39%
$345,800
40%
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8. Federal Gift Tax
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9. 1) Taxable Gifts For Each Individual Donee
Current Gift –

10. 1) Taxable Gifts For Each Individual Donee
Current Gift – ½ Split Gift +

11. 1) Taxable Gifts For Each Individual Donee
Current Gift – ½ Split Gift + ½ Split Gift by Spouse –

12. 1) Taxable Gifts For Each Individual Donee
Current Gift – ½ Split Gift + ½ Split Gift by Spouse – Annual Exclusion [ $ 14,000 per donee ] –

13. 1) Taxable Gifts For Each Individual Donee
Current Gift – ½ Split Gift + ½ Split Gift by Spouse – Annual Exclusion [ $ 14,000 per donee ] – Marital Charitable Deduction =

14. 1) Taxable Gifts For Each Individual Donee
Current Gift – ½ Split Gift + ½ Split Gift by Spouse – Annual Exclusion [ $ 14,000 per donee ] – Marital Charitable Deduction = Current Taxable Gift

15. 2) Sum Taxable Gifts for All Donee And Calculate Tax
Total Current Taxable Gifts +

16. 2) Sum Taxable Gifts for All Donee And Calculate Tax
Total Current Taxable Gifts + Prior Taxable Gifts =

17. 2) Sum Taxable Gifts for All Donee And Calculate Tax
Total Current Taxable Gifts + Prior Taxable Gifts = Cumulative Taxable Gifts X

18. 2) Sum Taxable Gifts for All Donee And Calculate Tax
Total Current Taxable Gifts + Prior Taxable Gifts = Cumulative Taxable Gifts X Current Rate Taxes =

19. 2) Sum Taxable Gifts for All Donee And Calculate Tax
Total Current Taxable Gifts + Prior Taxable Gifts = Cumulative Taxable Gifts X Current Rate Taxes = Cumulative Tax –

20. 2) Sum Taxable Gifts for All Donee And Calculate Tax
Total Current Taxable Gifts + Prior Taxable Gifts = Cumulative Taxable Gifts X Current Rate Taxes = Cumulative Tax – Current Tax On Prior Taxable Gifts –

21. 2) Sum Taxable Gifts for All Donee And Calculate Tax
Total Current Taxable Gifts + Prior Taxable Gifts = Cumulative Taxable Gifts X Current Rate Taxes = Cumulative Tax – Current Tax On Prior Taxable Gifts – Remaining Unified Credit =

22. 2) Sum Taxable Gifts for All Donee And Calculate Tax
Total Current Taxable Gifts + Prior Taxable Gifts = Cumulative Taxable Gifts X Current Rate Taxes = Cumulative Tax – Current Tax On Prior Taxable Gifts – Remaining Unified Credit = Gift Tax Payable

23. Federal Gift Tax
Levied on individual taxpayers for taxable gifts completed during a calendar year
Transfers subject to gift tax:
Imposed on intervivos gifts, lifetime transfers of property for less than adequate consideration
Imposed once a gift has been completed (occurs when donor relinquishes control of the property and donee accepts the gift)
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24. Valuation
Property is included in the taxable gift at its fair market value at the date of the gift
Fair market value
“the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both have reasonable knowledge of the relevant facts”
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25. Temporal Interests Remainders and life estates
Future interests are valued at present value, calculated by estimating the time until the present interest expires
Present value calculation uses the §7520 interest rate published by the treasury
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26. Temporal Interests
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27. Example of Temporal Interests
Ben transfers $1M of stock to the Junior Trust and directs it to pay income to Junior for his life and remainder to Georgia. How is the life estate valued if Junior is 3 years-old at the time of the gift and the Section 7520 rate is 5%? Based on Table S, the remainder is valued at $39,040 = ( × $1M). Hence, the life estate is valued at $960,960 = ($1M − $39,040).
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28. Federal Gift Tax Gifts specifically excluded from the gift tax
Incomplete and revocable gifts
Payments for support obligations or debts
Contributions to political parties or candidates
Medical and educational expenses paid on behalf of an unrelated individual
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29. Federal Gift Tax Annual exclusion
Most gifts are eligible for an annual exclusion of $14,000 (2016) per donee per year
Gifts of present interests qualify for the exclusion
A present interest is a right to own and enjoy the property currently
Certain gifts of future interests placed in trust for a minor can also qualify for the exclusion
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30. Federal Gift Tax Calculating taxable gifts Gift-Splitting election
increases the likelihood that gift tax will be reduced:
Better use of the annual exclusions or unified credits
Potential for lower tax rate on a portion of the gift
Spouse must be married at the time of the gift and not divorce or remarry during the year
Both spouses must consent to the election by filing a timely gift tax return
Annual election that applies to all completed gifts
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31. Federal Gift Tax
Deductions are limited to the value of the gift after the annual exclusion
Marital deduction
Gifts to a spouse but not gifts of nondeductible terminable interests
An interest that terminates and transfers to another upon an event or after a specified amount of time
Charitable deduction
No percentage limitation but qualifies for an income tax deduction
No gift tax return necessary for gifts of entire interest
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32. Federal Gift Tax Computation of the gift tax
Prior taxable gifts + current taxable gifts
Tax on cumulative gifts
Purpose is to increase the tax base and thereby increase the marginal tax rate applying to current gifts
Subtract gift tax on prior taxable gifts
prevent double taxation of prior taxable gifts
Tax is calculated using current rate schedule
Unused unified credit (calculated using current rate schedule)
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33. Gift Tax Example
Brian made a $7 million taxable gift this year. Previously he had made a $1 million taxable gift that was offset by the unified credit. What amount of gift tax is due on Brian’s gift? Tax ($8M of cumulative transfers) $ 3,145,800 Less current tax on prior taxable gifts − 345,800 Less Unused UC ($5.45M - $1M) − 1,780,000 Tax due on Brian’s taxable gift $ 1,020,000 Note that Brian’s cumulative taxable gifts are $2.55M over the exemption equivalent ($8M − $5.45M). The gift tax is a flat 40% over the exemption equivalent (40% × $2.55 = $1.02M).
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34. Federal Estate Tax
Designed to tax the value of property owned or controlled by an individual at death
The Gross Estate has two components:
Probate – Process of paying the debts of the decedent, and transferring the ownership of any remaining property to the decedent’s heirs
Probate Estate – Property owned by a decedent (titled in the name of the decedent) at the time of the death
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35. Federal Estate Tax
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36. Federal Estate Tax Formula
Gross Estate –

37. Federal Estate Tax Formula
Gross Estate – Exp., Debts, and Losses =

38. Federal Estate Tax Formula
Gross Estate – Exp., Debts, and Losses = Adjusted Gross Estate -

39. Federal Estate Tax Formula
Gross Estate – Exp., Debts, and Losses = Adjusted Gross Estate - Marital & Charitable Deduction =

40. Federal Estate Tax Formula
Gross Estate – Exp., Debts, and Losses = Adjusted Gross Estate - Marital & Charitable Deduction = Taxable Estate +

41. Federal Estate Tax Formula
Gross Estate – Exp., Debts, and Losses = Adjusted Gross Estate - Marital & Charitable Deduction = Taxable Estate + Adj. Taxable Gifts =

42. Federal Estate Tax Formula
Gross Estate – Exp., Debts, and Losses = Adjusted Gross Estate - Marital & Charitable Deduction = Taxable Estate + Adj. Taxable Gifts = Estate Tax Base X

43. Federal Estate Tax Formula
Gross Estate – Exp., Debts, and Losses = Adjusted Gross Estate - Marital & Charitable Deduction = Taxable Estate + Adj. Taxable Gifts = Estate Tax Base X Current Tax Rate =

44. Federal Estate Tax Formula
Gross Estate – Exp., Debts, and Losses = Adjusted Gross Estate - Marital & Charitable Deduction = Taxable Estate + Adj. Taxable Gifts = Estate Tax Base X Current Tax Rate = Tentative Tax –

45. Federal Estate Tax Formula
Gross Estate – Exp., Debts, and Losses = Adjusted Gross Estate - Marital & Charitable Deduction = Taxable Estate + Adj. Taxable Gifts = Estate Tax Base X Current Tax Rate = Tentative Tax – Gift Taxes Paid -

46. Federal Estate Tax Formula
Gross Estate – Exp., Debts, and Losses = Adjusted Gross Estate - Marital & Charitable Deduction = Taxable Estate + Adj. Taxable Gifts = Estate Tax Base X Current Tax Rate = Tentative Tax – Gift Taxes Paid - Unified Credit =

47. Federal Estate Tax Formula
Gross Estate – Exp., Debts, and Losses = Adjusted Gross Estate - Marital & Charitable Deduction = Taxable Estate + Adj. Taxable Gifts = Estate Tax Base X Current Tax Rate = Tentative Tax – Gift Taxes Paid - Unified Credit = Estate Tax Payable.

48. Federal Estate Tax The gross estate consists of:
The probate estate plus
Value of certain automatic property transfers that take effect at death
Automatic transfers include joint ownership with right of survivorship
Property is valued at the fair market value at the date of the decedent’s death
Executor can elect to value the estate on an alternate valuation date, six months after death, if it reduces the gross estate and estate tax
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49. Federal Estate Tax Automatic transfers included in the gross estate:
Property owned by the decedent in joint tenancy with right of survivorship (tenants in common are included in the probate estate)
Proceeds of life insurance paid due to the death of the decedent if either of two conditions is met:
Decedent “owned” the policy
Decedent’s estate or executor is the beneficiary of the insurance policy
Transfers within three years of death
These transfers are “grossed up” for the amount of gift taxes paid (if any)
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50. Federal Estate Tax
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51. Federal Estate Tax Taxable estate is the gross estate reduced by:
Administrative expenses, debts, losses, and state death taxes
Marital and charitable deductions
Computation of estate tax
Adjusted taxable gifts
Are prior gifts (not already included in the gross estate)
Objective is to allow estate tax base to reflect all transfers
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52. Federal Estate Tax Unified credit
Eliminates transfer taxes on a estates with minimal lifetime and testamentary transfers
Measured by current tax on exemption equivalent
Amount of cumulative taxable transfers that can be made without exceeding the unified credit
Credit is applied after reducing the total tax on cumulative transfers for taxes payable on adjusted taxable gifts
A surviving spouse whose deceased spouse died without using their unified credit is entitled to the unused credit (a deceased spousal unused exclusion or DSUE)
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53. Applicable Exclusion Amount
Federal Estate Tax
Year of gift/death
Applicable Exclusion Amount
1986
$500,000
1987–1997
600,000
1998
625,000
1999
650,000
2000–2001
675,000
2002–2003
1,000,000
2004–2005*
1,500,000
2006–2008*
2,000,000
2009–2010
3,500,000
2011
5,000,000
2012
5,120,000
2013
5,250,000
2014
5,340,000
2015
5,430,000
2016
5,450,000
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54. Estate Tax Example
Ed died this year with a taxable estate of $10 million. In 2015, Ed made a $1 million gift that was offset by the unified credit. What is the amount of estate tax due on Ed’s estate? Tax ($11M of cumulative transfers) $ 4,345,800 Unified credit (exemption of $5.43M) − 2,125,800 Tax due on Ed’s estate $ 2,220,000 Note that Ed’s estate is $5.55M over the exemption equivalent ($11M − $5.45M). The estate tax is a flat 40% over the exemption equivalent (40% × $5.55 = $2.22M).
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55. Wealth Planning Concepts
The generation-skipping tax (GST)
Supplemental tax designed to prevent the avoidance of transfer taxes through transfers that skip a generation of recipients
Not widely applicable as it does not apply to transfers that qualify for an annual gift tax exclusion
Income tax considerations
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56. Wealth Planning Concepts
Transfer tax planning techniques
Serial gifts
Strategy saves gift taxes by converting a potentially large taxable transfer into multiple smaller transfers that qualify for the annual exclusion
DSUE
Allows use of unused exemption of deceased spouse
Bypass provisions can accomplish same objective with more control over assets
The Step-up in tax basis
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57. Happiness is having all homework up to date
Homework assignment
Using Connect – 4 Questions for 60 Points for Chapter 25.
Next time will discuss the “Course Tax return; The Project”
Happiness is having all homework up to date
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58. Thank you and See You Next Week at the Same Time, Take Care
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59. FORM 1065 u.s. return of partnership income
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60. PAGE 1 – LABEL 1
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61. PAGE 1 – INCOME 2
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62. PAGE 1 – DEDUCTIONS 3
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63. PAGE 1 – SIGN HERE 4
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64. PAGE 1 – PAID PREPARE USE ONLY 5
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65. PAGE 2 – SCH B 1
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66. PAGE 2 – SCH B 2
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67. PAGE 2 – SCH B 3
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68. PAGE 3 – SCH B 1
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69. PAGE 3 – SCH B 2
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70. PAGE 4 – SCH K 1
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71. PAGE 4 – SCH K 2
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72. PAGE 4 – SCH K 3
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73. PAGE 4 – SCH K 4
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74. PAGE 4 – SCH K 5
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75. PAGE 4 – SCH K 6
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76. PAGE 4 – SCH K 7
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77. PAGE 5 – ANALYSIS ON NET INCOME (LOSS)
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78. PAGE 5 – SCH L 1
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79. PAGE 5 – SCH L 2
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80. PAGE 5 – SCH M 1
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81. PAGE 5 – SCH M 2
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82. FORM 1120 S u. s. income tax return for an s corporation
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83. PAGE 1 – LABEL 1
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84. PAGE 1 – INCOME 2
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85. PAGE 1 – DEDUCTIONS 3
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86. PAGE 1 – TAX AND PAYMENTS 4
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87. PAGE 1 – SIGN HERE 5
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88. PAGE 1 – PAID PREPARED USE ONLY 6
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89. PAGE 2 – SCH B 1
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90. PAGE 2 – SCH B 2
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91. PAGE 2 – SCH B 3
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92. PAGE 3 – SCH K 1
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93. PAGE 3 – SCH K 2
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94. PAGE 2 – SCH K 3
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95. PAGE 2 – SCH K 4
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96. PAGE 2 – SCH K 5
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97. PAGE 2 – SCH K 6
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98. PAGE 4 – SCH K 1
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99. PAGE 4 – SCH K 2
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100. PAGE 4 – SCH L 3
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101. PAGE 4 – SCH L 4
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102. PAGE 5 – SCH M 1
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103. PAGE 5 – SCH M 2
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104. THANK YOU AND GOOD LUCK
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