Tax Implications of Family Wealth Transfers

Transcription

1 Tax Implications of Family Wealth Transfers Jill Choate Beier, Esq. Federal and Estate Gift Tax Overview Estate Tax Formula: Less: Plus: Equals: Decedent s Gross Estate Allowable Deductions Adjusted Taxable Gifts Taxable Estate Less: Less: Calculate Tentative Estate Tax (applying tax rates) Applicable credit amount (including any DSUE) Other allowable credits Equals: Estate Tax Due 1

2 Decedent s Gross Estate 2033 interest in property at the time of death Decedent retains some rights in the property 2035 transfers/gift taxes paid within 3 years of death 2039 survivor annuities Decedent s Gross Estate 2040 concurrently-owned property 2041 general powers of appointment 2042 life insurance 2043 property transferred for less than adequate consideration 2044 QTIP property 2

3 Decedent s Gross Estate Valuation as of date of death Alternate Valuation Date Step-up in Basis Estate Deductions Funeral expenses, administration expenses, claims, debts 2055 Charitable deduction 2056 Marital deduction State death tax deduction 3

4 Estate Tax Exclusions $5,000,000 basic exclusion amount (indexed for inflation) for estates of decedents dying after January 1, 2013 In 2013, exclusion is $5,250,000 Portability - Deceased Spousal Unused Exclusion Portability Election required DSUE must be computed DSUE is computed as the lesser of: Basic exclusion amount in effect in year of death OR Excess of 1) Decedent s applicable exclusion amount over 2) Sum of taxable estate plus adjusted taxable gifts for which gift tax was not paid 4

5 Example In 2002, having made no prior taxable gift, H makes a taxable gift valued at $1 million and timely files a gift tax return with no gift tax due. H dies on September 29, 2011, survived by W. H s taxable estate is $1 million. The executor of H s estate timely files H s estate tax return, electing portability Example W may benefit from H s DSUE which is calculated as the lesser of: H s BEA of $5 million in 2011 OR H s $5 million AEA less $2 million ($1 million taxable estate plus $1million adjusted taxable gifts for which he did not pay gift tax) H s DSUE = $3 million 5

6 Example Same as previous facts except H made taxable gifts of $2 million in 2002 and paid gift tax on $1 million. On H s death, DSUE calculated as lesser of: H s BEA $5 million OR H s AEA $5 million less $2 million ($1 million taxable estate plus $1 million taxable gifts ($2 million taxable gifts reduced by $1 million for which H paid gift taxes)) H s DSUE $3 million Portability General rule: surviving spouse limited to DSUE of last deceased spouse If surviving spouse has applied DSUE of one or more last deceased spouses to the surviving spouse s transfers during life, then AEA at surviving spouse s death is: DSUE of surviving spouse s last deceased spouse PLUS DSUE of each other deceased spouse of the surviving spouse, to extent DSUE was applied to one or more taxable gifts of surviving spouse 6

7 Example H1 dies on January 15, 2011, survived by W. Neither made taxable gifts during life. H1 s executor elects portability of H1 s DSUE of $5 million. On December 31, 2011, W makes taxable gifts to her children of $ 2 million. W is considered to have applied $2 million of H1 s DSUE to the taxable gifts so W owes no gift tax. W marries H2. H2 dies in June H2 s executor elects portability of H2 s DSUE, which is computed as $2 million. W dies in October Example DSUE included in W s AEA is: $5 million $2 million $2 million W s BEA H2 s DSUE H1 s DSUE applied to W s 2011 taxable gifts $9 million 7

8 Estate Tax Credits Federal estate tax on prior transfers Foreign death taxes Gift tax paid on pre-1977 gifts Federal and Estate Gift Tax Overview Estate Tax Formula: Less: Plus: Equals: Decedent s Gross Estate Allowable Deductions Adjusted Taxable Gifts Taxable Estate Less: Less: Calculate Tentative Estate Tax (applying tax rates) Applicable credit amount (including any DSUE) Other allowable credits Equals: Estate Tax Due 8

9 Gift Tax Exemptions Transfers of property by gift, whether direct or indirect Annual exclusion amount for 2013 is $14, Exclusion for educational or medical expenses paid on behalf of donee 2522Charitable deduction 2523 Marital deduction Gift tax is unified with estate tax so exemption amount is $5,250,000 for 2013 New York State Estate and Gift Tax NY exemption amount is $1 million Estate tax rate is 16% No gift tax 9

10 Generation-skipping Transfer Tax GSTs happen in one of three ways: Direct skips Taxable terminations Taxable distribution Generation-skipping Transfer Tax Skip person defined as either: a person two generations or more younger than the transferor OR a trust for the benefit of one or more skip persons 10

11 Generation-skipping Transfer Tax Computation: Applicable Fraction = GST exemption amount allocated to the transfer Amount of the Transfer Inclusion Ratio = 1 Applicable Fraction Applicable Rate = Inclusion Ratio x Maximum Rate Example T dies in She bequeathed $100,000 to G, her grandson. T s executor allocates $75,000 of her GST exemption to the bequest on a timely-filed return. Applicable Fraction: $75,000/$100,000 =.75 Inclusion Ratio: =.25 Applicable rate:.25 x.40 =.10 GST tax: $100,000 x.10 = $10,000 11

12 Income Taxation of Estates Estate is a separate taxable entity Generally, all income for the tax year must be reported on Form 1041, which must be filed by the fiduciary. Estate is treated as a conduit with respect to distributed income and is allowed a deduction for the portion of gross income that is currently distributable to the beneficiaries or is properly paid or credited to them. Income Taxation of Estates Estate is allowed deductions similar to individuals standard deduction is zero 2% floor on itemized deductions Knight decision Personal exemption is $600 12