Unit 8, part 4 Complex Estate Planning and Tax issuesGift Tax Issues under EGTRRASlide 3Filing Gift Tax ReturnsGifts included within gross estateOther Gift Tax ExclusionsSlide 7Valuation of Closely Held Corporations and LLCsSlide 9Carryover Basis RulesSlide 11Slide 12Repeal of Qualified Family-Owned Business DeductionInstallment Payment of Estate TaxSpecial Use ValuationConservation Easements - Statutory AuthorityConservation Easements - Federal Estate Tax TreatmentSlide 18Conservation Easements - Federal Income Tax TreatmentSlide 20Slide 21Conservation Easements - State Income Tax BenefitsConservation Easements - Real Estate Tax BenefitsConservation Easements - Appraisal & Valuation IssuesSlide 25Conservation Easements - “Like-Kind” Exchanges (sec. 1031)Unit 8, part 4Complex Estate Planning and Tax issuesEconomic Growth and Tax Relief Reconciliation ActGift Tax Issues under EGTRRA$1,000,000 lifetime exclusion•Taxable giftsAdvantages of lifetime giving•$11,000 exclusion (2002) per donee•Exclude appreciation from estate•Gift taxes paid reduce taxable estateGift Tax Issues under EGTRRADisadvantages 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 deathFiling Gift Tax Returns3 year statute of limitation•Gift and estate tax, if error not more than 25% of reported gift6 year statute of limitation if > 25%No statute of limitation for unreported gifts•Dinners, clothing, and the new PorscheGifts included within gross estateGifts within 3 years of deathGifts with retained life estate or other interestOther Gift Tax ExclusionsMarital deduction•No limited•Terminable interests excluded unless a QTIP election is madeOther Gift Tax ExclusionsEducational 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 requiredValuation 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 basisValuation of Closely Held Corporations and LLCsStep 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 decedentCarryover Basis RulesGifts•Donor’s basis plus gift tax paid•Cannot exceed FMVCarryover Basis RulesDate 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 decedent’s final tax year•Unused net operating losses from decedent’s final tax year•Losses that would have been realized had decedent sold assets immediately before death•Additional $3,000,000 for surviving spouseCarryover Basis RulesRecord keepingBasis reporting requirements added•Lifetime gifts - to donee within 30 days•Donor contact information•Gift tax return information•Transfers at death•Reported to IRSRepeal of Qualified Family-Owned Business DeductionEffective after December 31, 2003Exclusion amount goes up to $1,500,000 in 2004•QFOB deduction & applicable exclusion were limited to $1,300,000Recapture left in place (10 or 12 years) - Conference Report•EGTRRA actually repeals recapture provisionInstallment Payment of Estate Tax5 years interest only; followed by up to 10 annual installments2% rate on first $1,060,000 (2001, amount indexed for inflation)Eligibility expanded under EGTRRASpecial Use ValuationReduces value from FMV to use value in farming or closely held businessReduction in value limited to $800,000 (2001, indexed)Qualified use for 5 of 8 years before decedent’s deathSubstantial portion of assets in estateConservation Easements - Statutory AuthorityUniform Conservation Easement Act (UCEA)•Common law restrictions abolished•Exemption from marketable title acts•Meets IRS requirementsConservation and Historic Preservation Agreements ActConservation Easements - Federal Estate Tax TreatmentPosthumous donations•By will•Consent by interest holdersEstate tax exclusion•Capped •2001 - $400,000•2002 - $500,000, or•40% of remaining value, whichever is lessConservation Easements - Federal Estate Tax TreatmentEstate 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 TreatmentPurchases•Capital gain reported•Basis allocated proportionally•Installment salesConservation Easements - Federal Income Tax TreatmentDonations•Deduction for FMV•50% limitation•Spread over subsequent 5 years•Basis allocated proportionallyBargain salesConservation Easements - Federal Income Tax TreatmentRequirements for deductibility•Perpetuity•Conservation purpose•Reservation of rights•Pesticide use/clear cutting•Surface mining banned•Subordination of indebtedness•Plan for monitoring and enforcementConservation Easements - State Income Tax BenefitsCharitable deductionCreditConservation Easements - Real Estate Tax BenefitsReduced FMV/reduced appraisalReduced appreciationConservation Easements - Appraisal & Valuation IssuesFMV at time of donation or purchase•Reduced by resultant increase in value of retained property•No deduction - benefits to donor exceed public benefitsConservation Easements - Appraisal & Valuation IssuesValuation methods•Comparable sales•Typically insufficient sales of PDRs•“Before and after” method•FMV prior to donation less FMV after donation•Two appraisals requiredSubstantiation requirement•Licensed appraiserConservation Easements - “Like-Kind” Exchanges (sec. 1031)Conservation easements may be exchanged for a fee simple interestBasic requirement for nonsimultaneous like-kind exchanges•Like-kind property•Like-kind exchange permitted in sales contract•Qualified intermediary used to hold fundsReverse like-kind exchanges
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