US Estate and Trust Taxation

Definitions

Estate
Estate Tax
2014 and Beyond - Estate Tax
2014 - Estate Tax
Gift Tax (2014)
Generation-Skipping Transfer Tax (2014)
2012 Estate Tax
Gift Tax (2012)
Generation-Skipping Transfer Tax (2012)
2011 Estate Tax
Gift Tax (2011)
Generation-Skipping Transfer Tax (2011)
2010 Estate Tax
Gift Tax (2010)

Generation-Skipping Transfer Tax (2010)
Portability (for 2011 and beyond)
Summary Applicable Credit Amount
Generation-Skipping Transfer Tax - How It Works
Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return
Will
Testate
Intestate
Probate
Asset Transfer by Operation of the Law
Executor/trix, administrator/trix, personal representative
Form 1041 U.S. Income Tax Return for Estate and Trusts
Trust
Prudent Man Rule
Prudent Investor Rule

Income/Principal
Remaindermen

Estate

All the property you own including:

Real estate

Personal property (all property that is not real estate) which is divided into two types: tangible (any property you can touch such as furniture or jewelry) or intangible (property such as stocks, bonds, bank accounts, money other people owe you, insurance in which you have any incidents of ownership, medical insurance refunds due to you but not yet received)

Income earned but not yet paid (you get paid for the week every Friday, a dividend is between the ex-dividend date and the payable date, or a bond/bank account that accrues interest daily),

Certain transfers made during your life without an adequate and full consideration in money or money’s worth (for example, if you transfer assets to a trust over which you retain certain types of control)

Property over which you have a general power of appointment (you can specify who gets the property at your death),

Dower or curtesy (or statutory estate) of the surviving spouse (not in NH)

Estate Tax

A tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.

Estate tax law underwent a tremendous change under The Economic Growth and Tax Relief Reconciliation Act of 2001. The amount that a taxpayer could pass free to heirs increased substantially until it reached $3.5 million in 2009. In 2010, the estate tax was eliminated altogether. However, the Act contained a provision which caused the entire law to 'sunset' as of December 31, 2010. In effect, the law on January 1, 2011 would be as if the sweeping changes in 2011 never occurred, but the American Tax Payer Relief Act of 2012 was signed making the $5 million exclusion, adjusted each year for inflation, permanent. The Act of 2012 also amended the tax rates and the amounts they apply to. The 2012 Act also made permanent the portability of spouses' unified credits.The following details the estate law in 2010-2014 and thereafter, under the current law:

2014 and Beyond - Estate Tax

On January 2, 2014, the American Taxpayer Relief Act of 2012 became law.  It modified the Estate, Gift and GST Tax and made permanent the increase in the amount exempted by the estate and gift tax unified credits at $5 million (as adjusted for inflation in multiples of $10,000 after 2011). The 2012 unified credit was $5,120,000 and the 2014 unified credit is $5,340,000.   

        Paying estate tax: The Executor files Form 706 on estates of greater than the unified credit and pays estate tax according to the tax table as follows:

        TAX TABLE FOR 2014 AND BEYOND:

If the amount with respect to which the tentative tax to be computed is:
The tentative tax is:
Not over $10,000
18 percent of such amount.
Over $10,000 but not over $20,000
$1,800, plus 20% of the excess of the amount over $10,000
Over $20,000 but not over $40,000
$3,800, plus 22% of the excess of the amount over $20,000
Over $40,000 but not over $60,000
$8,200 plus 24% of the excess of the amount over $40,000
Over $60,000 but not over $80,000
$13,000, plus 26% of the excess of the amount over $60,000
Over $80,000 but not over $100,000
$18,200, plus 28% of the excess of the amount over $80,000
Over $100,000 but not over $150,000
$13,800, plus 30% of the excess of the amount over $100,000
Over $150,000 but not over $250,000
$38,800, plus 32% of the excess of the amount over $150,000
Over $250,000 but not over $500,000
$70,800, plus 34% of the excess of the amount over $250,000
Over $500,000 but not over $750,000
$155,800, plus 37% of the excess of the amount over $500,000
Over $750,000 but not over $1,000,000
$298,300, plus 39% of the excess of the amount over $750,000
Over $1,000,000
$395,800, plus 40% of the excess of the amount over $1,000,000

       
 
2014 - Estate Tax

The 2012 Act increased the estate exemption amount (not subject to estate tax) to $5,000,000 as adjusted for inflation. For deaths occurring in 2014, the exemption amount is $5,340,000. Estates greater than $5,340,000 are subject to a maximum estate tax rate of 40% (see table above). All estate assets receive a full step up in basis. Form 706 U.S. Estate (and Generation-Skipping Transfer) Tax Return is due nine months after the decedent's death.


Gift Tax (2014 and beyond)

The lifetime exemption amount for 2014 for gifts increase to $5,340,000 (adjusted for inflation) with a maximum tax rate of 40% on gifts in excess of that amount.

Generation-Skipping Transfer Tax (2014 and beyond)

The lifetime exemption amount is $5,340,000 (adjusted for inflation) with a maximum tax rate of 40% on taxable transfers.

2012 Estate Tax

The 2010 Act increased the estate exemption amount (not subject to estate tax) to $5,000,000 as adjusted for inflation. For deaths occurring in 2012, the exemption amount is $5,120,000. Estates greater than $5,120,000 are subject to a maximum estate tax rate of 35% (for amounts in excess of $500,000). All estate assets received a full step up in basis. Form 706 U.S. Estate (and Generation-Skipping Transfer) Tax Return is due nine months after the decedent's death. See Table below.

  TAX TABLE FOR 2012 AND 2011
If the amount with respect to which the tentative tax to be computed is:
The tentative tax is:
Not over $10,000
18% of such amount.
Over $10,000 but not over $20,000
$1,800, plus 20% of the excess of the amount over $10,000
Over $20,000 but not over $40,000
$3,800, plus 22% of the excess of the amount over $20,000
Over $40,000 but not over $60,000
$8,200, plus 24% of the excess of the amount over $40,000
Over $60,000 but not over $80,000
$13,000, plus 26% of the excess of the amount over $60,000.
Over $80,000 but not over $100,000
$18,200, plus 28% of the excess of the amount over $80,000.
Over $100,000 but not over $150,000
$23,800, plus 30% of the excess of the amount over $100,000.
Over $150,000 but not over $250,000
$38,800, plus 32% of the excess of the amount over $150,000.
Over $250,000 but not over $500,000
$70,800, plus 34% of the excess of the amount over $250,000.
Over $500,000
$155,800, plus 35% of the excess of the amount over $500,000.

Gift Tax (2012)

The lifetime exemption amount for 2012 for gifts increased to $5,120,000 with a maximum tax rate of 35% on gifts in excess of that amount.

Generation-Skipping Transfer Tax (2012)

The lifetime exemption amount is $5,120,000 with a maximum tax rate of 35% on taxable transfers.

2011 Estate Tax

The 2010 Act increased the estate exemption amount (not subject to estate tax) to $5,000,000 for deaths occurring in 2011. Estates greater than $5,000,000 were subject to a maximum estate tax rate of 35% (see table above). All estate assets receive a full step up in basis. Form 706 U.S. Estate (and Generation-Skipping Transfer) Tax Return is due nine months after the decedent's death.


Gift Tax (2011)

The lifetime exemption amount for 2011 gifts increased to $5,000,000 with a maximum tax rate of 35% on gifts in excess of that amount.


Generation-Skipping Transfer Tax (2011)

The lifetime exemption amount for 2011 is $5,000,000 with a maximum tax rate of 35% on taxable transfers.

2010 Estate Law

Under the 2001 Act, there was zero estate tax, regardless of the size of the estate, with a modified basis carryover system.

On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 became law. It retroactively changed the estate tax for deaths in 2010. This Act allowed Executors a choice between paying estate tax or electing out of estate law. Because the law was not passed until after any filing deadline for decedents dying in the first part of the year, the filing deadline was extended to September 19,2011. If the Executor filed an automatic extension for six months, the return is due March 19, 2012.

        Electing out of estate tax treatment: The Executor would follow a modified carryover basis system whereby $1.3 million in assets going to a  non-spouse beneficiary would receive a date of death value and $3 million in assets going to a spouse beneficiary would receive a date of death value.  The Executor will file Form 8939, which reports the basis of all assets as either the decedent's adjusted basis or at date of death values as limited above.  Form 8939 is due January 17, 2012.

Gift Tax (2010)

The lifetime exemption amount for gifts were limited to $1,000,000 in 2010 with a maximum tax rate of 35%.


Generation-Skipping Transfer Tax (2010)

Generation-skipping transfer tax was not applicable under the 2001 Act. The 2010 Act increased the lifetime exemption amount to $5,000,000 with a zero(0) tax rate for transfers in 2010.


Portability (for 2011 and beyond)

Portability allows the transfer of any unused estate tax exemption amount from the estate of the first spouse to die to the estate of the survivor. The exemption amount passed from the first decedent to the survivor is indexed for inflation, in multiples of $10,000.

Portability must be elected by timely filing Form 706 even if the estate is not otherwise required to file. If the Executor wants to elect out of portability, he must do so proactively by not filing Form 706, if not required, by writing he is electing out across the top of the page 1 of Form 706 or by attaching statement electing out.

    Portability Considerations

Relying on portability without the use of credit shelter trusts may cause an estate plan to fail if the current law is not extended.

An analysis must be done to ascertain if portability should be elected which takes into account:


            The amount of the couples combined estates
            The amount of assets in each spouse's name
            Potential appreciation in the survivor spouse's estate
            Future changes in the Estate tax law
            Asset protection (from creditors)
            Basis step-up in the survivor spouse's estate
            The potentially for the surviving spouse to re-marry (for instance, the spouse of a terminally ill younger client may be likely to          
             re-marry)

A complete Form 706 must be filed to make the election, even if it is not otherwise required, which causes additional expense for the preparation of the form.

    Portability Consequences

If portability is elected, the statute of limitations continues on the estate of the first spouse to die until the statute of limitations closes on the estate of the second spouse to die. Adequate disclosure rules do not run the statute (as pertaining to gifts made after 1997). This means the IRS can audit the estate tax return of the first spouse to die until barred by the second spouse's statute of limitations.

    Portability, Gift Tax and Generation-Skipping Transfer Tax

Portability also applies to gift tax for 2011 and beyond. However, portability does not apply to generation-skipping transfer tax.           


Summary Applicable Credit Amount

A credit against Federal Estate Tax which in effect allows you to pass a certain amount of property free of the Federal Estate Tax. The table below shows how much property you can pass tax free if you die during the specified year:


In the case of estates of decedents dying,
and gifts made, during:
The applicable exclusion amount is:
1998
$625,000
1999
$650,000
2000 and 2001
$675,000
2002 and 2003
$1,000,000
2004 and 2005
$1,500,000
2006, 2007 and 2008
$2,000,000
2009
$3,500,000
2010
None
2011
$5,000,000
2012
$5,120,000
2014
$5,250,000
2014 and beyond, increased for inflation in multiples of $10,000


Generation Skipping Tax - How It Works

A federal transfer tax imposed on property transfers which skip a generation. It is equal to the maximum estate tax payable if the property had been included in the skipped generation's estate.

For example, Grandma leaves $2,000,000 to a granddaughter. Generation skipping tax would impose a 35% (or current maximum estate rate) on the $2,000,000 as if it had been left to a daughter first, incurred an estate tax of 35% and then left to granddaughter.

Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return

Tax return to calculate the Federal Estate Tax due as imposed by Chapter 11 of the Internal Revenue Code. You must file Form 706 for any gross estate plus adjusted taxable gifts and specific exemption over the applicable credit amount for that year.

For example, if the decedent's gross estate is over $5,120,000 and  the decedent died in 2012,  the Executor will be required to file Form 706 regardless of if tax is due or not, on the 9th month anniversary of the death.

Will

A document you write during your life to direct the distribution of your property after your death.

Testate

When you have written a will prior to your death.

Intestate

When you die without having written a will.

If you die intestate, every state has written a “will” for you which specifies who gets your property. These laws are called intestacy laws and their purpose is to ensure the smooth transfer of property. Unfortunately, because the laws are necessarily very broad, they may neither distribute your property as you would wish nor allow for any tax savings (especially Federal Estate tax).

Probate

The process whereby the Probate Court supervises the administration of an Estate to ensure the orderly and correct transfer of property and to protect the rights of creditors.

Asset Transfer by Operation of the law

Some assets do not pass to heirs through probate but through a process called "operation of the law".

For example, life insurance, annuity and IRA proceeds are paid to the beneficiary the owner designated prior to death. A surviving owner of real estate or bank accounts owned with the decedent as joint-tenants-with-right-of-survival automatically becomes the sole owner of the property at the first owner's death.

A person cannot affect the disposition of these assets through her will at death (unless all named beneficiaries for life insurance, an annuity or an IRA predecease) and can only direct their ultimate disposition via the beneficiary designation or form of ownership.

Executor/trix, administrator/trix, personal representative

Titles of a person charged by the Probate Court with the responsibility of settling an estate.

Form 1041 U.S. Income Tax Return for Estate and Trusts

An income tax return for a trust or an estate.

Trust

Under Treasury Regulations SECTION 301.7701-4(a), a trust is defined as “...In general, the term "trust" as used in the Internal Revenue Code refers to an arrangement created either by a will or by an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts.”

For example, if you set up an inter vivos (or living) trust and put all your assets in the Trust, the Trustee would hold title to and manage the assets in accordance with the directions you give in your Trust for whomever you decide should be the beneficiary(ies) which can include yourself.

Prudent Man Rule

A case and statutory law that a trustee may invest trust funds in any way that a "prudent man" would invest the money of another person.


Prudent Investor Rule

Under NH RSA 564-B:9-901, a trustee may invest funds in any way that a "prudent investor" would invest the money of another person.

A prudent investor considers "...purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution. "The prudent investor would evaluate investment decisions"...in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust."

Income/Principal

A trust accounting concept that splits the interest in a trust between beneficiaries who may receive the income earned by the trust and the beneficiaries who ultimately receive the underlying assets (principal) which produce the income.

Remaindermen

The beneficiaries who receive the principal (the assets of the trust) after a specified period or event such as the death of the income beneficiary.
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