Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

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Tuesday, October 21, 2014

Article on the Gift Tax

Wendy Gerzog

Wendy C. Gerzog (University of Baltimore School of Law) recently published an article entitled, A Simplified Verifiable Gift Tax (October 20, 2014).  Provided below is the abstract from SSRN:

The purpose of this article is to create a simpler and more accountable federal gift tax. The proposed tax would simplify gift completion rules, adopt a hard-to-complete rule of transfer taxation, reduce the annual exclusion while expanding the consumption exclusion, and, by replicating the portability reporting rules, employ gift tax preference inducements to increase gift tax compliance. The proposed gift tax reaffirms basic principles of transfer taxes, encourages simple, outright gifts, and eliminates some of the major valuation abuses in the current gift tax regime.

October 21, 2014 in Articles, Estate Planning - Generally, Gift Tax | Permalink | Comments (0) | TrackBack (0)

Minor Beneficiary May Disclaim Without Gift Tax

 TaxesIn a recent Private Letter Ruling, a taxpayer who is a beneficiary of two trust that were created prior to taxpayer's birth may severe her interest in discretionary payments and contingent beneficial interest. The minor beneficiary intended to to disclaim any right to beneficial interest within nine months of the age of majority, and the IRS concluded in Private Letter Ruling 2014400071 that as long as all other applicable laws are followed the disclaimer may successfully be made without creating federal gift tax liability.

See Debra Doyle, Disclaimers of Distribution Rights Aren't Transfer to Gift Tax, Wealth Management, Oct. 10, 2014.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

October 21, 2014 in Estate Planning - Generally, Gift Tax, New Cases, Trusts | Permalink | Comments (0) | TrackBack (0)

Thursday, October 16, 2014

Now's the Time for a Charitable Lead Trust

Charity 2

Wealthy families who wish to give to charity while minimizing gift and estate taxes should consider a charitable lead trust (CLT).  These trusts are very effective in a low-interest-rate environment, and although interest rates have gone up in recent years, they still remain very low.

A CLT provides a regular income stream to one or more charities during the trust term, after which the remaining assets pass to your children or other noncharitable beneficiaries.  If your beneficiaries are able to wait for several years before receiving their inheritance, a CLT is a great planning tool.  This is because the charity’s upfront interest in the trust reduces the value of your beneficiaries’ interest for gift or estate tax purposes.

There are two types of CLTs: the first is a charitable lead annuity trust (CLAT), which makes annual payments to charity equal to a fixed dollar amount or a fixed percentage of the trust assets’ initial value.  The second is a charitable lead unitrust (CLUT), which pays out a set percentage of the trust assets’ value, recalculated annually.  CLATs are most effective when interest rates are low because when you fund a CLAT, you make a taxable gift equal to the initial value of the asset you contribute to the trust, less the value of all charitable interests.  If a CLAT is appealing, the sooner you act, the better.

See E. Hans Lundsten and Joseph Marion, III, Now’s the Time for a Charitable Lead Trust, JD Supra.   

October 16, 2014 in Estate Planning - Generally, Estate Tax, Gift Tax, Trusts | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 15, 2014

Gift Tax Basics

Gift 2

The federal government limits the amount of assets that can be transferred from one person to another in a given year without tax consequences.  Transfers of assets or property above a certain amount are subject to the “gift tax.”  The annual gift-giving exclusion is $14,000 for individuals and $28,000 for married couples. 

What happens if you go over this amount?  Any year in which you exceed the annual gift tax exclusion amount, you are required to file IRS Form 709 as part of your federal income tax return.  This alerts the IRS that you have gone over your annual allotment of gift-giving and subsequently reduces the amount of your lifetime gift tax exemption. 

Although your income tax bill is unlikely to be affected by financial gifts, they could have a financial impact on your estate after you die.  This is because the amount of lifetime gifts you have made over and above your annual gift exclusion determines whether or not your estate will be subject to the estate tax.  When making financial gifts, each individual can take advantage of the unified credit, which applies the lifetime gift tax exemption to estate taxes.  This means that as long as gifts made both during one’s lifetime and after death do not exceed a specified amount, they will not be subject to taxes. 

Fortunately, for 2014, the first $5.34 million of an individual’s estate is exempt from estate taxes.  This means that, unless you have an estate larger than that amount or you have substantially exceeded the annual gift tax exclusion over your lifetime, you will likely owe nothing in taxes.  Anything above $5.34 million limit is taxed at 40% and is portable between spouses. 

See Adam Zoll, Gift and Estate Taxes: Why You Might Never Owe a Penny, Morningstar News, Oct. 10, 2014. 

October 15, 2014 in Estate Planning - Generally, Estate Tax, Gift Tax | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 14, 2014

The Crummey Trust: Not So Crummy


Traditionally, estate-planning trusts contained “Crummey” withdrawal powers to ensure that contributions qualify for the annual gift tax exclusion.  Today, the exclusion allows you to give up to $14,000 per year, and $28,000 for married couples, to any number of recipients. 

Although fewer people must worry about gift and estate taxes, for many, the annual exclusion is still an important estate planning strategy.  Consequently, Crummey powers are still relevant and useable. 

There are two important reasons to make annual exclusion gifts: if your wealth exceeds the exemption amount and if annual gifting guarantees that the amounts you give are permanently removed from your taxable estate. 

The annual exclusion is obtainable only for gifts of “present interests.”  However, a contribution to a trust is a future interest.  Thus, to bypass this obstacle trusts provide beneficiaries with Crummey withdrawal powers. These powers give beneficiaries the right to withdraw trust contributions for a limited period of time (30-60 days), making it possible to convert a future interest into a present interest, even if the withdrawal rights are never exercised. 

A trust must give beneficiaries real withdraw powers in order to effectuate Crummey powers.  This means you cannot have an agreement with your beneficiaries—express or implied—that will not exercise their withdraw rights.  The trust should also contain sufficient liquid assets so beneficiaries can exercise their withdraw rights.

See E. Hans Lundsten and Joseph Marion, III, The Crummey Trust: Still Relevant After All These Years, Insight on Estate Planning, October/November 2014. 

October 14, 2014 in Estate Planning - Generally, Estate Tax, Gift Tax, Trusts | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 24, 2014

Dividing Art in Contentious Times


During divorce proceedings or when a family member leaves behind a large estate, some of the most contentious fights that erupt are over the artwork.  “I’d put it in the same category as child-custody battles,” says family attorney Suzanne Landers.  “It takes far longer to decide who gets what painting or sculpture than it does to divvy up houses, cars or even money.” 

However, there are a few basic principles on how to decide (peaceably and equitably) who gets what.  For divorcing couples, the first step is to develop a detailed list of all the art bought before and during the marriage.  Art bought or obtained before the marriage, or acquired after the couple has separated or filed for divorce is not considered marital property and belongs to the same spouse who purchased it originally.   It may also be a good idea for couples to hire an appraiser.  Artworks may then be divided equally by value, or other assets can be made part of the bargaining—the house, the vacation home, etc. 

Decisions about art should be ingrained within the estate planning process.  Like houses, art that passes at death receives a step-up in value for tax purposes.  Sometimes collectors will sell art to help cover the cost of estate taxes.  By placing the art in a tax-exempt charitable remainder unitrust, the collector can receive distributions from the sale for the rest of his or her life, taxable as ordinary income, allowing the collector to avoid a 28 percent capital-gains tax.  When the collector dies, remaining distributions go to a designated charity.  If an art collection is donated to a nonprofit, the gift can be made all at once or in installments. 

See Daniel Grant, Tips for Dividing Art in a Divorce or Death, The Wall Street Journal, Sept. 21, 2014. 

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

September 24, 2014 in Estate Administration, Estate Planning - Generally, Gift Tax, Trusts | Permalink | Comments (0) | TrackBack (0)

Friday, September 19, 2014

EU Finds Spain's Taxes Discriminatory

EU Court

The European Court of Justice recently ruled that Spanish authorities cannot charge different rates of inheritance tax for residents and non-residents.  In Spain, there are a complex range of tax relief options that can reduce the tax to zero for residents, however, these have previously been unavailable to non-residents.

 Non-residents who have been discriminated against by paying more tax than Spaniards for inheritances or gifts of property will likely be owed a refund of the difference.  The verdict earlier this month could open the floodgate to thousands of people reclaiming their tax.  Thus far, the Spanish authorities have not responded to the ruling.  Spain has six months to change its laws, which should come by January 2016.   

The reason for the decision rested on the notion that charging other members of the EU different rates to Spanish residents went against the spirit of the European union.  The court said the Spanish legislation was discriminatory and there was no reason why inheritance tax should be charged at a higher rate for non-Spaniards than for Spaniards. 

See Liz Phillips, EU Court Rules Against Spain Over Discriminatory Tax Rules, The Telegraph, Sept. 18, 2014.

September 19, 2014 in Estate Planning - Generally, Gift Tax, New Cases, Travel | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 17, 2014

Article on Gain from the Value of a Good Valuation

Tax QuestionsEdward A. Renn, James I. Dougherty & Marissa Dungey recently published an article entitled, Gain from the Value of a Good Valuation, 28 Probate & Property No. 5 (Sept. & Oct. 2014).  Provided below is an excerpt from the introduction of the article:

Estate, gift, and generation-skipping transfer (GST) taxes all target and tax the transfer of property from a donor to a done. Obtaining a value of the property when computing the potential tax liability and structuring transfers is essential to tax-efficient planning and proper tax reporting. With easy-to-value assets, such as cash or marketable securities, valuations are straightforward. For other assets such as closely held business interests or art, determining the correct value is a task easier said than done. If hard-to-value assets are overvalued, the taxpayer will overpay on taxes (or unnecessarily use a portion of the taxpayer’s lifetime exemption). If the assets are determined to be undervalued by the IRS on audit, in addition to the time and expense of the audit and additional tax or use of credits, the taxpayer will have to pay interest on the underpayment of tax and may be subject to penalties.

September 17, 2014 in Articles, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 16, 2014

Making Charitable Donations With Life Insurance

Life insurance

Each year millions of Americans make donations of cash and property to the charities of their choice.  While these donations can provide valuable tax deductions, many donors wish that they could do more for the charities they support.  Thus, it would be wise for some donors to consider using their life insurance as a more effective means of leveraging the support they provide. 

One way of doing this is to gift a life insurance policy, which can in turn greatly reduce the donor’s taxable estate and save thousands of dollars in estate taxes.  There is no limit on the size of the policy that may be donated, since charitable donations have no ceiling for estate tax purposes.

Naming a charity as a beneficiary of your life insurance policy is the simplest way to provide a charity with the death benefit proceeds from a policy.  However, this strategy does not offer the income tax advantages that come with the gifting policy, although it still reduces the donor’s estate by the amount of the death benefit. 

It is also possible for policyholders to receive the dividends paid to their life insurance policies in cash and donate them to a charity.  The dividends donated are deductible in the same manner as premiums paid on a gifted policy.

See Mark P. Cussen, Using Life Insurance to Make Charitable Donations, Investopedia.

September 16, 2014 in Estate Planning - Generally, Estate Tax, Gift Tax, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 10, 2014

Estate and Income Tax Advantages of 529 Plans

Student loan

Taking advantage of 529 plans is appropriate for parents and grandparents seeking to amass funds for run-away college tuition costs.  Contributions to a 529 plan are treated as gifts for tax purposes and the contributions qualify for the $14,000 annual gift tax exclusion.  Contributions can be pre-funded for five years, meaning $70,000 per parent.  Hence, funds in the 529 are removed from the donor’s estate faster than if contributions were made each year. 

For federal income tax tactics, the investment grows tax-free, and distributions to pay for the beneficiary's college costs are tax-free. Keep in mind, state law can affect the state income tax treatment.

There are other advantages, such as the donor controls the funds in the 529.  The only disadvantage for 529’s is if an individual is relying on financial aid, the 529 can be considered an asset, depending on who set up the plan. 

See 529 Plans: Estate Tax and Income Tax Advantages, The National Law Review, Sept. 9, 2014.

September 10, 2014 in Estate Planning - Generally, Estate Tax, Gift Tax | Permalink | Comments (0) | TrackBack (0)