ESTATE and gift tax basics
• Form 706 must be filed: 1) To elect portability regardless of the size of estate, to transfer deceased spouse unused exemption (DSUE) to surviving spouse; 2) Gross estate plus adjusted taxable gifts and specific gift exemption valued in excess of $5,490,000 if death take place in 2017 or $5,450,000 if in 2016.
• Exclusion amount. The DSUE from the estate of the predeceased spouse and basic exclusion is the total exclusion amount.
• The exclusion amount could be applied to taxes due from lifetime gifts and transfers at death.
• The return Form 706 and payment of tax is due within 9 months after death..
• Form 4768 is used to file an extension to file and pay estate and generation skipping transfer taxes.
• Form 709 must be filed by April 15 after making the gift.
• Form 8892 is used to file an extension of time to file Form 709 and payment of gift generation skipping transfer tax.
• Filing of gift tax return is generally not required if gift is not more than the annual exclusion $14,000 for gifts made in year 2013 through 2017.
• Gift splitting allows married couple to gift someone up to $28,000. Both couple must file gift tax return to show gift splitting agreement even if gift split is less than annual exclusion amount.
• Estate is a taxable entity separate from the deceased person and is created upon death of an individual until assets final distribution to beneficiaries.
• Administration of the estate start from the time of death and continues to exist until the estate assets are distributed to the beneficiaries.
• Income earned during the administration period of the estate must be accounted and reported by the estate.
• Must file Form 1041 estate income tax return: 1) estate gross income is more than $600; 2)even if less than $600 if at least one beneficiary of domestic estate is a nonresident alien or NRA.
• Estate allowable deductions that passes from the decedents estate include: funeral expenses paid out of estate, decedent debts owed at the time of death, marital deduction or property that passes to the surviving spouse, charitable deduction generally the value of the property that passes to a qualifying charity, and state death tax deduction (estate, inheritance, legacy, succession taxes).
What is IDGT or intentionally defective grantor trust?
• IDGT is an irrevocable trust frequently created to benefit grantors spouse and heirs.
• For income tax purposes in general, grantor trust is ignored. Treatment for income and deductions belongs directly to the grantor.
• The IDGT is funded by 1) irrevocable gift to the trust or 2) sale of asset in an installment sale to the trust; and are disregarded for income tax purposes.
• Advantages: Irrevocable gift to the trust by the grantor of appreciating assets 1) income is retained by the trust and passes to beneficiaries; 2) avoids transfer taxes on the assets if there is significant increase in value of the assets.
• Installment sale of appreciating assets to the trust by the grantor: 1) there is no taxes due from gain on sale of asset, treated as the grantor sold the assets to self; 2) receive an interest-bearing promissory note in exchange for the asset; 3) interest can be used to pay income taxes or leave in the trust increasing grantors gift; 4) there is no gift tax liability if value of the property sold is the same as the value of the promissory note.
Disclaimer: Any accounting, business or tax advice contained in this communication is not intended as a thorough, in-depth analysis of specific issues, or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
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Al-os & Associates Accountancy Corporation provides accounting and tax services to individuals, corporations, LLCs and business entities. The Firm has a niche in defending taxpayers audited by the IRS and other governmental agencies.