Unit 8, part 4 Complex Estate Planning and Tax issues

Economic Growth and Tax Relief Reconciliation Act

Gift Tax Issues under EGTRRA

$1,000,000 lifetime exclusion

Taxable gifts

Advantages of lifetime giving

$11,000 exclusion (2002) per donee Exclude appreciation from estate Gift taxes paid reduce taxable estate

Gift Tax Issues under EGTRRA

Disadvantages of lifetime giving

May not be a taxable estate Loss of step up in basis
Contra - may not get step up in basis at death

Gifts within 3 years of death

Filing Gift Tax Returns

3 year statute of limitation

Gift and estate tax, if error not more than 25% of reported gift

6 year statute of limitation if > 25% No statute of limitation for unreported gifts
Dinners, clothing, and the new Porsche

Gifts included within gross estate

Gifts within 3 years of death Gifts with retained life estate or other interest

Other Gift Tax Exclusions

Marital deduction No limited Terminable interests excluded unless a QTIP election is made

Other Gift Tax Exclusions

Educational or medical payments Paid directly to qualified educational organization Does not include payments to qualified tuition programs or Coverdell education savings accounts Paid directly to medical provider Includes health insurance premiums No gift tax return required

Valuation of Closely Held Corporations and LLCs

Minority interest discounts Marketability discounts Gifts of shares or interests: factors to consider
Statute of limitations Retained interest Affect on basis

Valuation of Closely Held Corporations and LLCs

Step up in basis
Not applied to appreciated assets held in the corporate, LLC, or partnership name
Unless the LLC or partnership terminates at death

Applies to shares or interest of the decedent

Carryover Basis Rules

Gifts
Donors basis plus gift tax paid
Cannot exceed FMV

Carryover Basis Rules

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

Carryover Basis Rules

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

Repeal of Qualified FamilyOwned 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 12 years) - Conference Report

EGTRRA actually repeals recapture provision

Installment Payment of Estate Tax

5 years interest only; followed by up to 10 annual installments 2% rate on first $1,060,000 (2001, amount indexed for inflation) Eligibility expanded under EGTRRA

Special Use Valuation

Reduces value from FMV to use value in farming or closely held business Reduction in value limited to $800,000 (2001, indexed) Qualified use for 5 of 8 years before decedents death Substantial portion of assets in estate

Conservation Easements Statutory Authority

Uniform Conservation Easement Act (UCEA)

Common law restrictions abolished Exemption from marketable title acts Meets IRS requirements

Conservation and Historic Preservation Agreements Act

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

Conservation Easements Federal Estate Tax Treatment

Estate tax exclusion

Reduction - difference less than 30%
2% for each 1% below 30%

Acquisition indebtedness excluded 3 year holding period prior to death Geographic limitations repealed (through 2010)

Conservation Easements Federal Income Tax Treatment

Purchases
Capital gain reported Basis allocated proportionally Installment sales

Conservation Easements Federal Income Tax Treatment

Donations
Deduction for FMV 50% limitation
Spread over subsequent 5 years

Basis allocated proportionally

Bargain sales

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

Conservation Easements - State Income Tax Benefits

Charitable deduction Credit

Conservation Easements - Real Estate Tax Benefits

Reduced FMV/reduced appraisal Reduced appreciation

Conservation Easements Appraisal & Valuation Issues

FMV at time of donation or purchase

Reduced by resultant increase in value of retained property No deduction - benefits to donor exceed public benefits

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

Conservation Easements - LikeKind Exchanges (sec. 1031)

Conservation easements may be exchanged for a fee simple interest Basic requirement for nonsimultaneous like-kind exchanges
Like-kind property Like-kind exchange permitted in sales contract Qualified intermediary used to hold funds

Reverse like-kind exchanges permitted