law t 510 - estate & gift tax - instructor: dwight drake estate and gift taxation law t 510...

Law T 510 - Estate & Gift Tax - Instructor: Dwight Drake

Estate and Gift Taxation

Law T 510

University of Washington School of LawLLM Program in Taxation

Instructor: Dwight Drake

Winter 2009


Contact Info – Office Hours• Email: [email protected]

• Phones: 206.616.6385, 425.281.1493, 425.222.5988, 360.778.1862

• URL:http://faculty.washington.edu/djdrake/EstateandGift/index.shtml

• Office Hours: Room 416

- Wednesday 3:30 p.m to 5:00 p.m.

- Whenever else you can catch me!


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


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


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!


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

LLM Corporate Tax Instructor: Dwight Drake

Federal Tax Sources

2001 2002 2003 2004 2005 2006 2007

Pers. Income 994.3 858.3 793.7 809.0 927.2 1,043.9 1,163.5 Corp. Income 151.1 148.0 131.8 189.4 278.4 353.9 370.2Social Insurance 694.0 700.8 713.0 733.4 794.1 837.8 869.6Excise Taxes 66.2 67.0 67.5 69.9 73.1 74.0 65.1Estate & Gift 28.4 26.5 22.0 24.8 24.8 27.9 26.0Misc. 57.2 52.5 54.4 53.9 56.4 74.0 65.1

Total Revenue 1,991.2 1,853.2 1,782.3 1,880.3 2,153.9 2,407.3 2,567.7

All in billions


Estate Tax Agenda Exem. Eq. UC Max Rate

2005 $1.5 million 47%

2006 $2.0 million 46%

2007 $2.0 million 45%

2008 $2.0 million 45%

2009 $3.5 million 45%

2010 N/A 0%

2011 $1.0 million 55%


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


Arguments For Estate Tax

• Rich people tax – 5% pay 91%

• Death is a great time to strike

• Big bucks down the road:

2002- 2010: $294 billion

2011- 2021: $750 billion

• We’re gonna need – Boomers are coming

• Easy way to redistribute wealth – Person is dead!


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


Dena & Mark

• Both age 61

• 3 kids, 6 grandkids

• Own ABC Inc.

- 350 employees

- Sales: $38 million

- Net After-Tax Profit: $1.1 million

- Owners Salaries: 400K


ABC Value• Adjusted EBITDA Calc:

- Net After-Tax: $1,100,000.

- Income Taxes: 560,000.

- Interest 800,000.

- Depr/Amort 340,000.

- Owner Add-Back 200,000.

Adjusted EBITDA $3,000,000.• EBITDA multiple: 6• Sales Price: $18 million (1/3 cash; 2/3 stock)


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: 0.

Last Death 2011

or beyond: $9,380,000.


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!


Dena & Mark Estate Plan

Daughter Trust

Daughter Trust

Son Trust

GC Trust - 1

GC Trust -2

GC Trust - 3

GC Trust - 4

GC Trust - 5

GC Trust - 6

FamilyL.L.C.

Dena & MarkLiving Trust

Per. Res.Trust

Char. Rem.Trust

AlmaMaters

DynastyTrust

LLCUnits

Invest.AssetsIncome

Home

Remainder

Term Use

Stock

Income

Charitable DeductRemainder

Cash

Income, Support


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


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


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)


Trust Lingo Players

He Who Sets Up

He Who holds legal title

He Who Gets Benefits

Revocable or irrevocableTestamentary or inter vivos

MandatoryDiscretionaryAscertainable standard

TrustorSettlorGrantorHoncho

TrusteeFiduciaryTitle Holder

BeneficiaryIncome BeneficiaryRemainder holderContingent, non-contingent


Trust Mechanics 1. Legal document2. Separate bank account3. Transfer documents4. Title insurance5. Tax ID number6. Separate tax return (Form 1041)7. Trustee communications8. Accounting requirements9. Income distributions10. Investment management11. Fiduciary obligations12. Corpus invasion issues13. Trustee succession14. Creditor protection and spendthrift limitations15. Domestic vs. Foreign – Import Law vs. Export Assets


Trust Taxes Three Income Tax Scenarios

1. Grantor Trust (671-678) – Income all taxes to Grantor by virtue of control.2. Simple Trust – Income taxable to beneficiaries; distribution mandatory.3. Complex trust – Income taxable to trust or Bs. T rate structure 15% to

35%. Max Rate kick in at low income level.

Estate Tax1. Generally “any interest” per 2033.2. Inclusion rules of 2035, 2036, 2037, 2038, 2041, 2043, 2044.

Gift Tax1. All completed gifts2. Present v. Future Interests

GST Tax1. Transfers to skip persons2. Direct skips, Taxable Terminations, Taxable Distributions


Gift Tax Computation Model

1. Value of gifts current year (§§2511-2519)2. Annual exclusion (§2503(b))3. Marital & charitable deductions (§§2522 & 2523)4. Taxable gifts from prior years5. Item 1. plus 4. minus 2. minus 3 = “Taxable Gifts”6. §2001(c) tax on 5.7. §2001 (c) tax on 4.8. Item 6 less 7 = “Gift Tax Pre-Credits”9. Maximum gift tax unified credit (§2505)10. Unified credit used in prior periods (§2505(a)(2)11. Item 9 less 10 = “Available Unified Credit”12. Credit for foreign gift taxes13. Item 8 minus 11 and 12 = “Gift Tax Due”


Estate Tax Computation Model 1. Gross Estate - (§§2031-2046) 2. Gift taxes on gifts within 3 yrs – (§2035(b)) 3. Estate deductions – (§§2051-2058) 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”


Mildred’s 2001 Gift

Current year gift: $2,400,000.

Annual exclusion: 0.

Deductions: 0.

Prior years taxable gifts 0.

§2001(c) Tax 976,800.

Less: Unified credit 220,550.

Gift Tax $ 756,250.


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?


Mildred 2009 Estate Tax Hit 2001 Gift No Gift

Taxable Estate 4,500,000. 7,656,250.

Post-76 Gifts 2,400,000. 0.

Tentative Tax 2,985,000. 3,325,312.

Post-76 Tax

(960,000 – 220,550) 739,500. 0.

Gross Estate Tax 2,245,500. 3,325,312.

Unified Credit 1,455,800 1,455,800.

Net Estate Tax 789,700. 1,869,512.


Recap Mildred Scenarios Gift No Gift

Gift Tax Paid 756,250. 0

Estate Tax Paid 789,700. 1,869,512.

Total taxes paid 1,545,950. 1,869,512.

Difference: $323,562.

WHY?


Jim’s 2004 Gift Taxes

Gifts value $3,000,000.

Annual exclusions 33,000.

Deductions 0.

Prior year taxable gifts 0.

Taxable gifts 2,967,000.

Tax under §2001(c) 1,244,960.

Less: Unified Credit 345,800.

Gift Tax 899,160.


Jim Dies 2009 - Estate Tax Taxable Estate: 9,000,000. Gift taxes within 3 yrs. 0. Post 76 Taxable gifts 2,967,000. Total 11,967,000. Tentative Tax 5,265,950. Tax on Gifts (1,215,950 – 345,800) 870,150. Gross Estate tax 4,395,800. Unified credit 1,455,800. Estate Tax 2,940,000.


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) $ 40,500

Total Transfer Taxes $ 220,500

Net Impact: Taxes equal to 110% of gift value

law t 510 - estate & gift tax - instructor: dwight drake estate and gift taxation law t 510...

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