unit 8 estate planning part 4

8/13/2019 Unit 8 Estate Planning Part 4

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Unit 8, part 4

Complex EstatePlanning and Tax issues

Economic Growth and TaxRelief Reconciliation Act


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Gift Tax Issues underEGTRRA

$1,000,000 lifetime exclusion

Taxable gifts

Advantages of lifetime giving

$11,000 exclusion (2002) perdonee

Exclude appreciation from estate

Gift taxes paid reduce taxableestate


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Gift Tax Issues underEGTRRA

Disadvantages of lifetime giving

May not be a taxable estate

Loss of step up in basis

Contra - may not get step up in basisat death

Gifts within 3 years of death


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Filing Gift Tax Returns

3 year statute of limitation

Gift and estate tax, if error notmore than 25% of reported gift

6 year statute of limitation if >25%

No statute of limitation forunreported gifts Dinners, clothing, and the new Porsche


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Gifts included withingross estate

Gifts within 3 years of death

Gifts with retained life estate orother interest


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Other Gift TaxExclusions

Marital deduction

No limited Terminable interests excluded

unless a QTIP election ismade


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Other Gift TaxExclusions

Educational or medical payments

Paid directly to qualified educational

organization Does not include payments to

qualified tuition programs or Coverdelleducation savings accounts

Paid directly to medical provider Includes health insurance premiums

No gift tax return required


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Valuation of Closely HeldCorporations and LLCs

Minority interest discounts

Marketability discounts

Gifts of shares or interests: factorsto consider

Statute of limitations

Retained interest Affect on basis


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Valuation of Closely HeldCorporations and LLCs

Step up in basis

Not applied to appreciated assetsheld in the corporate, LLC, orpartnership name

Unless the LLC or partnershipterminates at death

Applies to shares or interest of thedecedent


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Carryover Basis Rules

Gifts

Donors basis plus gift tax paid

Cannot exceed FMV


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Date of death

Step up through 2009

2010 - no step up, except:

Amounts added to basis:

$1,300,000 ($60,000 for nonresident aliens)

Unused capital losses from decedents final tax

year

Unused net operating losses from decedents

final tax year Losses that would have been realized had

decedent sold assets immediately before death

Additional $3,000,000 for surviving spouse


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Record keeping

Basis reporting requirements added

Lifetime gifts - to donee within 30 days

Donor contact information

Gift tax return information

Transfers at death

Reported to IRS


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Repeal of Qualified Family-Owned Business Deduction

Effective after December 31, 2003

Exclusion amount goes up to

$1,500,000 in 2004 QFOB deduction & applicable exclusion

were limited to $1,300,000

Recapture left in place (10 or 12years) - Conference Report

EGTRRA actually repeals recaptureprovision


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Installment Payment ofEstate Tax

5 years interest only; followed by upto 10 annual installments

2% rate on first $1,060,000 (2001,amount indexed for inflation)

Eligibility expanded under EGTRRA


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Special Use Valuation

Reduces value from FMV to usevalue in farming or closely held

business Reduction in value limited to

$800,000 (2001, indexed)

Qualified use for 5 of 8 years beforedecedents death

Substantial portion of assets inestate


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Conservation Easements -Statutory Authority

Uniform Conservation EasementAct (UCEA)

Common law restrictionsabolished

Exemption from marketable title

acts Meets IRS requirements

Conservation and Historic

Preservation Agreements Act


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Conservation Easements -Federal Estate Tax Treatment

Posthumous donations

By will

Consent by interest holders

Estate tax exclusion

Capped

2001 - $400,000

2002 - $500,000, or

40% of remaining value, whichever is

less


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Conservation Easements -Federal Estate Tax Treatment

Estate tax exclusion

Reduction - difference less than30%

2% for each 1% below 30%

Acquisition indebtedness excluded

3 year holding period prior to death Geographic limitations repealed

(through 2010)


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Conservation Easements -Federal Income Tax Treatment

Purchases

Capital gain reported

Basis allocated proportionally

Installment sales

C


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Conservation Easements -Federal Income Tax

Treatment

Donations

Deduction for FMV

50% limitation

Spread over subsequent 5 years

Basis allocated proportionally

Bargain sales


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Conservation Easements -Federal Income Tax Treatment

Requirements for deductibility

Perpetuity

Conservation purpose

Reservation of rights

Pesticide use/clear cutting

Surface mining banned

Subordination of indebtedness

Plan for monitoring and

enforcement


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Conservation Easements - StateIncome Tax Benefits

Charitable deduction

Credit


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Conservation Easements - RealEstate Tax Benefits

Reduced FMV/reduced appraisal

Reduced appreciation


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Conservation Easements -Appraisal & Valuation Issues

FMV at time of donation orpurchase

Reduced by resultant increase invalue of retained property

No deduction - benefits to donor

exceed public benefits


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Conservation Easements -Appraisal & Valuation Issues

Valuation methods

Comparable sales

Typically insufficient sales of PDRs

Before and after method

FMV prior to donation less FMV after

donation Two appraisals required

Substantiation requirement

Licensed appraiser


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Conservation Easements - Like-Kind Exchanges (sec. 1031)

Conservation easements may beexchanged for a fee simple interest

Basic requirement for nonsimultaneouslike-kind exchanges

Like-kind property

Like-kind exchange permitted in sales contract

Qualified intermediary used to hold funds

Reverse like-kind exchanges permitted

unit 8 estate planning part 4

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