 |
 |
 |
|
|
|
 |
|
|||
A list of all trust officers and their bios Trust
Services Investment
Services Christopher
Stoneman's Investment
Services Socially Aware Investing Option |
THE BASIC TAX STRUCTURE: (2) THE ESTATE TAX (Continued) The complexity of the estate-tax provisions of the Internal Revenue Code is such that we should probably devote another article to them, with particular emphasis on two provisions of widespread application, the so-called “marital” and “charitable” deductions. As in the case of the gift tax, certain gifts to a decedent’s surviving spouse - most such gifts, in fact - are deductible in the transition from the “gross estate” (the sum total of everything that the Code ordains, which we touched on in the preceding article) to the “taxable estate” (against which the tentative estate tax is computed - i.e., the tax before the application of such of the various credits as are available in any given situation - unified credit, credit for state death taxes, etc.) Here are half a dozen examples of marital deduction gifts by the spouse who is first to die to his or her surviving spouse. 1. Outright. “If my wife survives me, I give her the sum of $_________;” or “If my husband survives me, I give him my collection of Audubon prints;” or “I give my residuary estate to my wife, if she survives me by 60 days” (the period of required survivorship, if any, may not exceed 6 months). 2. Joint tenancy (or tenancy by the entirety) with right of survivorship (WROS). H and W own their condominium as joint tenants WROS; H dies; W automatically becomes the sole owner (“by operation of law”) and there is a marital deduction in H’s estate for the amount included in his gross estate for the condo, normally one half of its value. 3. So-called “QTIP trust”. In his will the decedent creates a trust for the survivor’s exclusive benefit during her lifetime. The trust language must explicitly require that all of the income of the trust is to be paid to the widow at least annually. No one else may have any present interest in the trust while she is alive; at her death the trust property is to be distributed to whomever the decedent has directed; and the decedent’s executor must check a box on the estate tax return signifying that the estate elects to have the estate receive a marital deduction. Otherwise there will be none. Such an election may be made for just a part of the trust, which will give the estate a partial marital deduction. If these requirements are fulfilled, the trust to be funded is eligible for a marital deduction in the decedent’s estate. (“QTIP” is an acronym, not an advertisement: it stands for “qualified terminable interest property”, whose provenance is hereby mercifully declared to be beyond the scope of this article.) 4. Life insurance designation. At her death the decedent was insured under a $100,000 life insurance policy. She had retained the right to change the beneficiary, with the result that the policy proceeds were included in her gross estate. The beneficiary designation in effect at the time of her death named her son as the primary beneficiary, if he survived her, and her husband, if her son did not survive her but her husband did. The son predeceased the decedent; her husband survived. The policy proceeds qualify for a marital deduction in the wife’s estate. They would have been fully taxable had the son survived his mother. 5. Deferred compensation. The decedent and his employer enter into a deferred compensation agreement under which 10% of the decedent’s annual salary is held back by the employer and is to be paid to the decedent over the five-year period beginning on the decedent’s 65th birthday. If the decedent dies within that period any remaining payments are to be paid in a lump sum to whomever he names in his will, otherwise to his estate. The decedent designates his wife as the beneficiary, if she survives. If she does so, the value of the unpaid installments at the time of the employee’s death is a valid estate-tax marital deduction. The result would be the same if he had made no designation but left a will in which he bequeathed his entire estate to his wife. 6. I.R.A. An individual retirement account made payable to a surviving spouse qualifies for the marital deduction. I.R.A.’s will be the subject of one or more later articles. As noted in an earlier article, the marital deduction gives tax relief at the first spouse’s demise but may give rise to estate taxation at the second spouse’s death. In other words it is a deferral of tax, not normally a total elimination. The federal statute permits a marital deduction in cases where the gift is conditional upon up to six months’ survivorship and the spouse lives out the survivorship period. For example, Isaac may leave money to his wife, Rebecca, “if she survives me by 90 days. If she does not so survive, I give said sum equally to such of my brothers and sisters as survive my wife and me" (not just “me”). Isaac dies on March 1, survived by Rebecca and four siblings, one of whom dies on April 15. Rebecca goes to her reward on May 10. Isaac’s gift goes to his three siblings living at Rebecca’s death. Suppose that Rebecca made it to July 4; the condition would have been met and the gift would have been deductible in Isaac’s estate (but includible in Rebecca’s) even if Rebecca was not still alive when Isaac's executor actually made the distribution (which would have been made to her estate). Why might one consider adding a survivorship requirement to a gift - marital or other? At least one reason comes to mind. Although wishing to benefit the named beneficiary, the decedent may be concerned about the possibility that the beneficiary may in turn leave the subject matter of the gift to someone upon whom the decedent had no interest in conferring a benefit. Suppose, for example, Sarah leaves a sizeable amount to her husband, John. Sarah and John have no children. Sarah cannot abide John’s family. By adding a survivorship requirement to her gift (“...to my husband, John, if he survives me by six months...”) she reduces the chances of John’s inheriting the gift and then passing it on to his family, either before or upon his death. If he does survive by six months, Sarah’s estate may claim a marital deduction. Of course, if Sarah really wanted to prevent such a contingency, she could use a marital deduction trust (such as the QTIP discussed above) and specify what should happen to the trust property at John's death, thereby depriving him of the authority to pass it on to anyone else. Similar survivorship conditions may be used in the case of nonprobate property, such as life insurance (the proceeds "shall be paid to the wife of the insured, if she survives him by six months"). Charitable gifts are also given favorable estate tax treatment. They are fully deductible in computing a person’s taxable estate. This full deductibility is to be contrasted with the income tax treatment of such gifts which places percentage limitations upon the amount that may be deducted in the year of gift and requires that any excess over the statutory percentage must be carried forward to succeeding years if it is to be used to reduce taxable income. Just as in the case of marital gifts, there are various ways in which one may make bequests to charity, ranging from outright gifts and setting up wholly charitable trusts or “foundations” to so-called “split-interest” gifts, where the charity and one or more individuals share in a gift. Take the case of a potential donor who wants to provide for a family member for life but also wishes to leave money to a local library to start a fund in memory of a deceased relative. One way in which this can be done is by the setting up of a "charitable remainder unitrust" under the benefactor’s will or revocable trust (the term "unitrust" indicates that distributions may come from both income and principal). Under such an arrangement the trustee is directed to pay a certain percentage of the annually determined value of the trust each year to the individual for life. At the beneficiary’s death, the trust typically ends and is distributed to the charity or charities of the decedent’s choice. The decedent’s estate is entitled to an estate tax deduction for the value, determined in accordance with the Internal Revenue Service’s tables, of the charitable “remainder” as of the decedent’s death. As a rough example, take a charitable remainder unitrust which provides an individual who is 74 years old at the donor’s death with an annual “income” for life equal to 8 % of the value of the trust on the first business day in each year, with the trust going to the Boy Scouts of America at the individual’s death. Such a bequest will generate an estate-tax deduction of approximately 54% of the initial value of the trust. The less commonly encountered reverse of a charitable remainder trust is known as a “charitable lead trust”. Here the charity receives its interest from the outset and the noncharitable beneficiaries have to wait until the end of the designated period before they are paid their shares of the remainder. Dolores’s testamentary gift to the American Red Cross for 10 years, with the gift amount fixed at, say, 10% of the initial value of the trust and the remainder being distributed to the donor’s nephews and nieces living at the end of the 10-year period will produce a tax deduction of approximately 61% of whatever was first placed into the trust. Thus estate tax will be saved, but the nephews and nieces will have to wait patiently for their share of Aunt Dolores’s estate. The income tax, on the one hand, and the estate and gift taxes, on the other, are separate taxes and do not work in tandem. A charitable gift made during a person’s lifetime may well be preferable in some cases to the same gift postponed until the donor’s death, since it will often generate two deductions: one for income tax purposes, and the other for the estate tax: a bigger bang for the buck, as a pyrotechnic philanthropist might put it. The complete list of Christopher Stoneman articles is:
|
|||
