Course Objectives

1
Estate and Gift Taxation Law T 510 University
of Washington School of Law LLM Program in
Taxation Instructor Dwight Drake Winter 2009
2
Contact Info Office Hours

• Email djdrake_at_u.washington.edu
• Phones 206.616.6385, 425.281.1493,
  425.222.5988, 360.778.1862
• URLhttp//faculty.washington.edu/djdrake/Estatean
  dGift/index.shtml
• Office Hours Room 416
• - Wednesday 330 p.m to 500 p.m.
• - Whenever else you can catch me!

3
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

4
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

5
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!

6
Grade Criteria

• 24 Hour Final 100
• Use anything that isnt living
• Not a time for research
• Nothing that hasnt been covered in class
• No tricks or gimmicks
• Combination short essay and analytical problems

7
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
278.4 353.9 370.2 Social Insurance
694.0 700.8 713.0
733.4 794.1 837.8 869.6 Excise
Taxes 66.2 67.0
67.5 69.9 73.1 74.0
65.1 Estate Gift 28.4
26.5 22.0 24.8 24.8
27.9 26.0 Misc.
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
8
Estate Tax Agenda

• Exem. Eq. UC Max
  Rate
• 1.5 million 47
• 2006 2.0 million
  46
• 2.0 million 45
• 2.0 million 45
• 2009 3.5 million
  45
• 2010 N/A
  0
• 2011 1.0 million
  55

9
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 Americas income from capital
• - 1 own 56 of financial assets
• - 1/3 of Americas elderly have no income
  producing assets
• - Average 50 yr old has 40k in financial
  assets

10
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
• Were gonna need Boomers are coming
• Easy way to redistribute wealth Person is dead!

11
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 Americans position as worse savers
  in the industrial world
• Destroys businesses and jobs

12
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

13
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)

14
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.

15
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!

16
Dena Mark Estate Plan
Remainder
Daughter Trust
Family L.L.C.
Per. Res. Trust
Daughter Trust
Term Use
Invest. Assets
Income
Son Trust
Home
Char. Rem. Trust
GC Trust - 1
LLC Units
Dena Mark Living Trust
GC Trust -2
Stock
GC Trust - 3
Income
Remainder
GC Trust - 4
Charitable Deduct
Cash
GC Trust - 5
Alma Maters
Dynasty Trust
GC Trust - 6
Income, Support
17
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

18
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

19
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)

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Trust Lingo
Players
Trustor Settlor Grantor Honcho Trustee Fiduciary
Title Holder Beneficiary Income
Beneficiary Remainder holder Contingent,
non-contingent
He Who Sets Up
Revocable or irrevocable Testamentary or inter
vivos
He Who holds legal title
Mandatory Discretionary Ascertainable standard
He Who Gets Benefits
21
Trust Mechanics

• Legal document
• Separate bank account
• Transfer documents
• Title insurance
• Tax ID number
• Separate tax return (Form 1041)
• Trustee communications
• Accounting requirements
• Income distributions
• Investment management
• Fiduciary obligations
• Corpus invasion issues
• Trustee succession
• Creditor protection and spendthrift limitations
• Domestic vs. Foreign Import Law vs. Export
  Assets

22
Trust Taxes

• Three Income Tax Scenarios
• Grantor Trust (671-678) Income all taxes to
  Grantor by virtue of control.
• Simple Trust Income taxable to beneficiaries
  distribution mandatory.
• Complex trust Income taxable to trust or Bs. T
  rate structure 15 to 35. Max Rate kick in at
  low income level.
• Estate Tax
• Generally any interest per 2033.
• Inclusion rules of 2035, 2036, 2037, 2038, 2041,
  2043, 2044.
• Gift Tax
• All completed gifts
• Present v. Future Interests
• GST Tax
• Transfers to skip persons
• Direct skips, Taxable Terminations, Taxable
  Distributions

23
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 years
5. 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 taxes
13. Item 8 minus 11 and 12 Gift Tax Due

24
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

25
Mildreds 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.

26
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?
  

27
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.

28
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?

29
Jims 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.

30
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.

31
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