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Flashcards in chapter 3 Deck (21):

short term gain for capital assets- tax rate

As a general rule, short-term capital gains are taxed at the same rate as for ordinary income. There are a variety of specific rates for long-term capital gains and the recapture of depreciation previously deducted on real estate. Since the capital gain taxation rates have been controversial, they have had a tendency to change frequently.


gift tax- revocable trust

if you retain the power to revoke a trust, it is not taxable as a gift because IT IS NOT A GIFT.


gift tax- irrevocable trust

if you relinquish power to revoke and it is a present interest, then you have to pay gift tax on the amount
usually the remainder interest is taxable on a revocable trust but the interest income is eligible for gift tax deduction


remainder interest

taxable if irrevocable
non taxable b/c not a gift if revocable


gift of stock

FMV- annual exclusion= taxable amount


contributions to political orgs

are not taxable gifts


gift tax on remainder interest- irrevocable trust

Since the remainder interest in the trust is a gift of a future interest the annual exclusion cannot be used to reduce the gift.


Gross Estate

includes property owned by the decedent at death and certain property transfers


property owned by the decedent

property owned at the date of death is included in the probate estate


Property transferred by the decedent at death

is included in gross estate:
Transfer of property occurs probate through operation of law.
other forms of property that pass by operation of law inclue revocable gifts/transfers triggered by death and life insurance


valuation of property

included in gross estate at FMV
valuation date is the date of death or the alt. valuation date
- six months after date of death or on the date the property is disposed of if earlier
- only available to elect if it causes the gross estate tax payable to decline


Life insurance- estate

proceeds are included in the gross estate
- decedent had incidents of ownership like the right to designate the beneficiary
- the decedent's estate or executor is the beneficiary of the policy


joint property owned- included in gross estate

value of decedent's interest as a tenant in common is included in gross estate
- for jointly owned property by husband and wife (RIGHT OF SURVIVORSHIP OR TENANCY IN ENTIRRETY) 50% of the value of property will be included in the first spouses' estate who died.
- for unmarried tax payers with right of surviorships, the amount includible is the portion of property equal to the proportion of consideration that the decedent provided to acquire the property.


Retained interests

property transferred where the decedent retianed an interest or power


Marital deduction- estate

the spouse must receive property outright and bee able to control it's ultimate destination.
1. property that passes to surviving spouse as a result of joint tenancy
2. only the net value of property subject to mortgage qualifies
3. property rights that are terminable do not qualify.
DEDUCTION IS UNLIMITED FOR SPOUSES if the property qualifies.


Qualified terminable interest property will qualify for the deduction

an election is made to use the marital deduction for a transfer to a spouse of less than a complete interest in trust.
surviving spouse must receive all the trust income annually for life
the property must be included in the surviving spouse's estate at VALUE when the survivor dies


non marital deduction applies to spouses

who are non-citizen spouses


Deductions from gross estate

debts of estate- mortgages and accrued taxes- DEDUCTIBLE
final expenses are deductible
casualty and theft losses- deductible without any floor limitation
charitable contributions- are deductible without any limitation.


Estate Computation

1. taxable estate is increased by adjusted taxable gifts
2. apply current tax rates to total transfers (Max = 40%)
3. reduce the tentative transfer tax by gift taxes paid or payable
4. subtract the unified credit or other credits
5. credits against estate=
---$5,430,000- unified credit
foreign death tax credit is subtracted and taxes on prior transfers


Filing Requirements

estate tax is levied on the estate but installment payment of estate taxes is available for closely held business interests
- Form 706 is due after 9 months of death
estate tax return must be filed if the gross estate plus adjusted taxable gifts equal or exceed the exemption of $5 mill


Generation Skipping Tax

prevents avoidance of transfer taxes by skipping a generation-
in addition to the gift and estate taxes.