1. Estate and Gift Taxation
Law T 510
University of Washington School of Law
LLM Program in Taxation
Instructor: Dwight Drake
Winter 2009
Law T Estate & Gift Tax - Instructor: Dwight Drake

2. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Contact Info – Office Hours
Phones: , , ,
URL:
Office Hours: Room 416
- Wednesday 3:30 p.m to 5:00 p.m.
- Whenever else you can catch me!
Law T Estate & Gift Tax - Instructor: Dwight Drake

3. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Course Objectives
Substantive knowledge base – Estate, Gift & Generation-Skipping Taxes
Enhance tax learning skills
Strengthen analytical, problem-solving skills
Importance of the planning process
Your individual role – design, not default
Law T Estate & Gift Tax - Instructor: Dwight Drake

4. Core Knowledge Prerequisites
Estate and trust concepts and mechanics – we will look at 20 types of trusts
Basics of common business entities:
- C Corporation
- S Corporation
- General Partnership
- Limited Partnership
- Limited Liability Company
Law T Estate & Gift Tax - Instructor: Dwight Drake

5. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Some Tips…
First: Beat Up Code. Learn to talk Code
Then Regs, Commentary and Cases to fill gaps for you. Learn what works for you.
Then: Beat up Code again
Work Study Problems Hard – First solo and slides
Focus in class
Think
Write your personal summary
Get ahead – Stay ahead!
Law T Estate & Gift Tax - Instructor: Dwight Drake

6. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Grade Criteria
24 Hour Final – 100%
Use anything that isn’t living
Not a time for research
Nothing that hasn’t been covered in class
No tricks or gimmicks
Combination short essay and analytical problems
Law T Estate & Gift Tax - Instructor: Dwight Drake

7. Federal Tax Sources
Pers. Income , ,163.5
Corp. Income
Social Insurance
Excise Taxes
Estate & Gift
Misc
Total Revenue , , , , , , ,567.7
All in billions
LLM Corporate Tax
Instructor: Dwight Drake

8. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Estate Tax Agenda
Exem. Eq. UC Max Rate
$1.5 million %
$2.0 million %
$2.0 million %
$3.5 million %
N/A %
$1.0 million %
Law T Estate & Gift Tax - Instructor: Dwight Drake

9. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Wealth Accumulation
Non-Tax Planning Agenda
- Last chance to spend it – Family priorities
- Structural money planning
- Basic Goal: Not outlive the money
Taxable Planning Agenda
- 1/3 of America’s income from capital
- 1% own 56% of financial assets
- 1/3 of America’s elderly have no income producing assets
- Average 50 yr old has 40k in financial assets
Law T Estate & Gift Tax - Instructor: Dwight Drake

10. Arguments For Estate Tax
Rich people tax – 5% pay 91%
Death is a great time to strike
Big bucks down the road:
: $294 billion
: $750 billion
We’re gonna need – Boomers are coming
Easy way to redistribute wealth – Person is dead!
Law T Estate & Gift Tax - Instructor: Dwight Drake

11. Arguments Against Estate Tax
Wrong to cash-in on tragedy – Sick to face undertaker and taxman on same day
Peanut tax that does more harm than good
Costly to administer – valuation games
Will suck up needed investment capital in future – big damage to economy
Will solidify American’s position as worse savers in the industrial world
Destroys businesses and jobs
Law T Estate & Gift Tax - Instructor: Dwight Drake

12. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Dena & Mark
Both age 61
3 kids, 6 grandkids
Own ABC Inc.
employees
- Sales: $38 million
- Net After-Tax Profit: $1.1 million
- Owners Salaries: 400K
Law T Estate & Gift Tax - Instructor: Dwight Drake

13. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
ABC Value
Adjusted EBITDA Calc:
- Net After-Tax: $1,100,000.
- Income Taxes: ,000.
- Interest ,000.
- Depr/Amort ,000.
- Owner Add-Back ,000.
Adjusted EBITDA $3,000,000.
EBITDA multiple: 6
Sales Price: $18 million (1/3 cash; 2/3 stock)
Law T Estate & Gift Tax - Instructor: Dwight Drake

14. Projected Estate Tax Hit If Keep
Assumptions: Other Assets = $2 million
Full unified credits
Estate Tax:
Last death 2009: $5,850,000.
Last death 2010
or repeal:
Last Death 2011
or beyond: $9,380,000.
Law T Estate & Gift Tax - Instructor: Dwight Drake

15. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Tax Hits If Sell
Income tax on recognized
sales proceeds: $3,400,000.
Potential future estate and
gift taxes: $7,306,000.
Total $10,706,000.
Right?
Wrong!
Law T Estate & Gift Tax - Instructor: Dwight Drake

16. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Dena & Mark Estate Plan
Remainder
Per. Res.
Trust
Family
L.L.C.
Daughter Trust
Daughter Trust
Term Use
Invest.
Assets
Income
Son Trust
Home
Char. Rem.
Trust
GC Trust - 1
LLC
Units
Dena & Mark
Living Trust
GC Trust -2
Stock
GC Trust - 3
Income
Remainder
Charitable Deduct
Cash
GC Trust - 4
GC Trust - 5
Alma
Maters
Dynasty
Trust
Income, Support
GC Trust - 6
Law T Estate & Gift Tax - Instructor: Dwight Drake

17. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Dena & Mark Sell and…
Have solid income stream rest of lives
Two-third reduction in income tax hit on sale
Estate tax burden near-nada
Big time Heroes at Alma Maters
Huge Dynasty trust forever free of transfer taxes
Business is leaned, stripped
210 employees soon lose job
Local vendors lose big customer
Dena & Mark miss action, age fast, die
Law T Estate & Gift Tax - Instructor: Dwight Drake

18. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Six Big Tax Tools
Annual Gift Tax Exclusion – Now 13k
Unified Credit – Now 3.5 mill
GST Exemption – Now 3.5 mill
Marital Deduction – Unlimited
Charitable Deduction
Valuation Games
Law T Estate & Gift Tax - Instructor: Dwight Drake

19. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
The 20 Trust Agenda
Revocable living trust
Credit shelter trust
QTIP Trust
Clayton Trust
Bypass Trust
QDOT
Irrevocable life insurance trust
2503(c) minors trust
2503(c) gift trust
Dynasty trust
Charitable Annuity Trust
Charitable Unitrust
Charitable lead trust
Personal Residence Trust
Qualified Personal Residence trust
Qualified Subchapter S Trust
Electing Small Business Trust
Descendants’ Trusts
Grantor Retained Annuity Trust (GRAT)
Intentionally Defective Grantor Trust (IDGT)
Law T Estate & Gift Tax - Instructor: Dwight Drake

20. Trust Lingo Players Trustor Settlor Grantor Honcho Trustee Fiduciary
Title Holder
Beneficiary
Income Beneficiary
Remainder holder
Contingent, non-contingent
He Who Sets Up
Revocable or irrevocable
Testamentary or inter vivos
He Who holds legal title
Mandatory
Discretionary
Ascertainable standard
He Who Gets Benefits
Law T Estate & Gift Tax - Instructor: Dwight Drake

21. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Trust Mechanics
Legal document
Separate bank account
Transfer documents
Title insurance
Tax ID number
Separate tax return (Form 1041)
Trustee communications
Accounting requirements
Income distributions
Investment management
Fiduciary obligations
Corpus invasion issues
Trustee succession
Creditor protection and spendthrift limitations
Domestic vs. Foreign – Import Law vs. Export Assets
Law T Estate & Gift Tax - Instructor: Dwight Drake

22. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Trust Taxes
Three Income Tax Scenarios
Grantor Trust ( ) – Income all taxes to Grantor by virtue of control.
Simple Trust – Income taxable to beneficiaries; distribution mandatory.
Complex trust – Income taxable to trust or Bs. T rate structure 15% to 35%. Max Rate kick in at low income level.
Estate Tax
Generally “any interest” per 2033.
Inclusion rules of 2035, 2036, 2037, 2038, 2041, 2043, 2044.
Gift Tax
All completed gifts
Present v. Future Interests
GST Tax
Transfers to skip persons
Direct skips, Taxable Terminations, Taxable Distributions
Law T Estate & Gift Tax - Instructor: Dwight Drake

23. Gift Tax Computation Model
Value of gifts current year (§§ )
Annual exclusion (§2503(b))
Marital & charitable deductions (§§2522 & 2523)
Taxable gifts from prior years
Item 1. plus 4. minus 2. minus 3 = “Taxable Gifts”
§2001(c) tax on 5.
§2001 (c) tax on 4.
Item 6 less 7 = “Gift Tax Pre-Credits”
Maximum gift tax unified credit (§2505)
Unified credit used in prior periods (§2505(a)(2)
Item 9 less 10 = “Available Unified Credit”
Credit for foreign gift taxes
Item 8 minus 11 and 12 = “Gift Tax Due”
Law T Estate & Gift Tax - Instructor: Dwight Drake

24. Estate Tax Computation Model
1. Gross Estate - (§§ )
2. Gift taxes on gifts within 3 yrs – (§2035(b))
3. Estate deductions – (§§ )
4. Sum of 1 & 2, less 3 = “Taxable Estate”
5. Taxable gifts post 12/31/76 not included in estate
6. Tax on sum of 4 & 5 = “Tentative Tax” (§2001(b)(1))
7. Gift tax payable on post 12/31/76 gifts (§2001(b)(2))
8. Subtract 7 from 6 = “Gross Estate Tax”
9. Compute and sum:
- Unified credit (§2010)
- Credit for pre-’77 gift taxes (§2012)
- Credit for taxes on prior transfers (§2013)
- Credit for foreign death taxes (§2014)
10. Subtract 9 from 8 = “Net Estate Tax”
Law T Estate & Gift Tax - Instructor: Dwight Drake

25. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Mildred’s 2001 Gift
Current year gift: $2,400,000.
Annual exclusion:
Deductions:
Prior years taxable gifts
§2001(c) Tax ,800.
Less: Unified credit ,550.
Gift Tax $ 756,250.
Law T Estate & Gift Tax - Instructor: Dwight Drake

26. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Fact Changes
Scenario 1: Mildred makes 2001 gift, dies in 2009 with taxable estate of $4.5 million
Scenario 2: Mildred makes no 2001 gift, dies in 2009 with taxable estate of $7,656,250.
(Sum of $4.5 million and 2001 gift amount and gift tax)
2009 Estate Tax Hit Under Each?
Law T Estate & Gift Tax - Instructor: Dwight Drake

27. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Mildred 2009 Estate Tax Hit
2001 Gift No Gift
Taxable Estate ,500, ,656,250.
Post-76 Gifts ,400,
Tentative Tax ,985, ,325,312.
Post-76 Tax
(960,000 – 220,550) ,
Gross Estate Tax ,245, ,325,312.
Unified Credit ,455, ,455,800.
Net Estate Tax , ,869,512.
Law T Estate & Gift Tax - Instructor: Dwight Drake

28. Recap Mildred Scenarios
Gift No Gift
Gift Tax Paid ,
Estate Tax Paid , ,869,512.
Total taxes paid ,545, ,869,512.
Difference: $323,562.
WHY?
Law T Estate & Gift Tax - Instructor: Dwight Drake

29. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Jim’s 2004 Gift Taxes
Gifts value $3,000,000.
Annual exclusions ,000.
Deductions
Prior year taxable gifts
Taxable gifts ,967,000.
Tax under §2001(c) ,244,960.
Less: Unified Credit ,800.
Gift Tax ,160.
Law T Estate & Gift Tax - Instructor: Dwight Drake

30. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
Jim Dies Estate Tax
Taxable Estate: ,000,000.
Gift taxes within 3 yrs
Post 76 Taxable gifts ,967,000.
Total ,967,000.
Tentative Tax ,265,950.
Tax on Gifts
(1,215,950 – 345,800) ,150.
Gross Estate tax ,395,800.
Unified credit ,455,800.
Estate Tax ,940,000.
Law T Estate & Gift Tax - Instructor: Dwight Drake

31. Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake
The GST Nightmare
Grandparent gives 200k ball to grandchild
- All unified credits and GST exemption gone
- Max 2001(c) rate of 45% (2009 rate)
Gift tax on transfer $ 90,000
GST tax on direct skip $ 90,000
The 2515 Whammy – Gift
Tax on GST Tax (45% of 90k) $ ,500
Total Transfer Taxes $ 220,500
Net Impact: Taxes equal to 110% of gift value
Law T Estate & Gift Tax - Instructor: Dwight Drake