1. Taxation of Individuals and Business Entities
2018 Edition
Chapter 25
Transfer Taxes and Wealth Planning
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2. Federal Transfer Taxes
Common Features
Common tax rate schedule
Applicable (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

3. Federal Transfer Tax Rates
EXHIBIT 25-1 Unified Transfer Tax Rates*
Tax Base Equal to or Over
Not Over
Tentative Tax
Plus
of Amount over $
$ ,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

4. Calculating the Tax
A two-step shortcut method to calculating the transfer tax is available for any taxable transfer above $1 million
Step 1: Subtract $1 million from the taxable transfer and multiple the difference by 40%.
Step 2: Add $345,800 to the product from step 1.
Example: Tax on a taxable transfer of $5.49 million
Step 1: ([$5.49−$1] × 40%) = $1.796 million
Step 2: $345,800 + $1,796,000 = $2,141,800

5. Federal Gift Tax (1 of 7) EXHIBIT 25-3 The Federal Gift Tax Formula
Part 1: Calculate taxable gifts for each individual donee:
Current Gifts
Minus
½ of split gifts (included in spouse’s current gifts)
Plus
½ of split gifts by spouse
Annual exclusion ($14,000 per donee)
Marital and charitable deductions
Equals
Current taxable gifts
Part 2: Sum taxable gifts for all donees and calculate tax:
Total Current Taxable Gifts
Prior taxable gifts
Cumulative taxable gifts
Times
Current tax rates
Cumulative tax
Current tax on prior taxable gifts
Remaining unified credit
Gift Tax Payable

6. Federal Gift Tax (2 of 7)
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)

7. Federal Gift Tax (3 of 7)
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

8. Federal Gift Tax (4 of 7) Annual exclusion
Most gifts are eligible for an annual exclusion of $14,000 (2017) 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

9. Federal Gift Tax (5 of 7) 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

10. Federal Gift Tax (6 of 7)
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

11. Federal Gift Tax (7 of 7) 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)

12. Valuation
Property is included in the taxable gift at its fair market value at the date of the gift
Fair market value
“[T]he 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”

13. 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

14. 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 the 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).

15. 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
− ,800
Less unused UC ($5.49M − $1M)
− 1,796,000
Tax due on Brian’s taxable gift
$ 1,004,000
Note that Brian’s cumulative taxable gifts are $2.51 over the exemption equivalent ($8M − $5.49M). The gift tax is a flat 40% over the exemption equivalent (40% × $2.51 = $1.02M).

16. Federal Estate Tax (1 of 8)
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 (titled) by a decedent at the time of death

17. Federal Estate Tax (2 of 8)
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

18. Federal Estate Tax (3 of 8)
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)

19. Federal Estate Tax (4 of 8)
EXHIBIT 25-6 The Federal Estate Tax Formula
Gross estate
Minus
Expenses, debts, and losses
Equals
Adjusted gross estate
Marital and charitable deductions
Taxable estate
Plus
Adjusted taxable gifts
Estate tax base
Times
Current tax rates
Tentative tax
Gift taxes paid on adjusted taxable gifts
Unified credit
Estate Tax Payable

20. Federal Estate Tax (5 of 8)
EXHIBIT 25-7 Amount of Jointly Owned Property Included in Gross Estate
Ownership Form
Marital status of Co-owners
Amount in Gross Estate
Community property (discussed below)
Married
Half the fair market value
Joint tenancy with right if survivorship
Joint tenancy with right of survivorship
Unmarried
Percentage of fair market value determined by decedent’s contribution to total cost of the property
Tenancy in common
Married or unmarried
Percentage of fair market value determined by decedent’s interest in the property

21. Federal Estate Tax (6 of 8)
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

22. Federal Estate Tax (7 of 8)
Applicable credit
Eliminates transfer taxes on 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 applicable 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 applicable credit is entitled to the unused credit (a deceased spousal unused exclusion or DSUE)

23. Federal Estate Tax (8 of 8)
Year of gift/death
Applicable Exclusion Amount
1986
$500,000
600,000
1998
625,000
1999
650,000
675,000
1,000,000 *
1,500,000 *
2,000,000
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

24. Estate Tax Example
Ed died this year with a taxable estate of $10 million. In 2011, Ed made a $1 million gift that was offset by the applicable 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 $5.49M)
− 2,141,800
Tax due on Ed’s estate
$ 2,204,000
Note that Ed’s estate is $5.51M over the exemption equivalent ($11M − $5.49M). The estate tax is a flat 40% over the exemption equivalent (40% × $5.51M= $2.20M).

25. Wealth Planning Concepts (1 of 2)
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

26. Wealth Planning Concepts (2 of 2)
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

27. End of Presentation