These lectures cover federal gift tax, federal estate tax, transfer tax and alternate valuation date election.

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Nature of the Taxes

Historical Background The Code imposes a tax on the gratuitous transfer of property. If the transfer occurs during the owner’s life (e.g., by a cash transfer or the use of a trust), it is subject to the Federal gift tax. If the property passes by virtue of the death of the owner (e.g., under the terms of a will or life insurance policy), the Federal estate tax applies. If the recipient (i.e., the donee, heir, or beneficiary) of the transfer is two or more generations younger than the person making the transfer, the generation-skipping transfer tax also applies.1 A single, cumulative applies to all gratuitous transfers of assets by an individual, regardless of how or when the transfers are made. The gift, estate, and generation-skipping transfer taxes operate as a single, cumulative tax over the course of one’s lifetime. In general, planning techniques relative to transfer taxes attempt to avoid or defer the payment of any gift tax liabilities during lifetime, as such payments essentially act as a prepayment of the estate tax on a given asset, and to avoid the payment of the tax on generation-skipping transfers, which acts as a tax penalty on aggressive family wealth transfers.

Types of Tax at Death

Taxes payable by virtue of a person’s death fall into two categories: estate and inheritance. The U.S. government, some states, and several other countries impose estate taxes. Inheritance taxes are imposed by some states and other countries. Some states and countries use both types of taxes. The Federal estate tax differs in several respects from the typical inheritance tax. First, the Federal estate tax is levied on the decedent’s taxable estate. It is a tax on the right to pass property at death. Inheritance taxes apply to the right to receive property at death and are therefore levied on the heirs. Second, the relationship of the heirs to the decedent usually has a direct bearing on the amount of the inheritance tax. In general, the more closely related the parties, the larger the exemptions and the lower the applicable rates. Except for transfers to surviving spouses that may result in a marital deduction, the relationship of the heirs to the decedent has no effect on the Federal estate tax.

Formula for the Gift Tax

The Federal gift tax is reported annually on Form 709. Like the income tax, which uses taxable income (and not gross income) as a tax base, the gift tax usually does not apply to the full amount of the gift. Deductions and the annual exclusion may be allowed to arrive at the .

Valuation for Federal Transfer Tax Purposes

The value of the property on the date of its transfer generally determines the amount that is subject to the Federal gift, GST, or estate tax. For this purpose, fair market value is used. Under certain conditions, however, an executor can elect to value estate assets on the . The election is made by the executor of the estate and is irrevocable. There is no alternate valuation date election available for the gift tax. The alternate valuation date election was designed as a relief provision to ease the economic hardship that could result when estate assets decline in value between the date of death and the payment of the estate tax liability. If the election is made, all assets of the estate are valued six months after death or on the date of disposition if this occurs earlier.12 The election covers all assets in the gross estate and cannot be applied to only a portion of the property.