Question

1. Briefly describe the principal characteristics of the Estate and Gift taxes and how they differ from the income tax. 2. List and briefly describe those transfers that constitute gifts subject to the Gift tax and those which may be exempt from either inclusion and/or taxation. 3. List and briefly describe those items that are included in arriving at the Gross Estate of a decedent. 4. What is the Unified Credit and describe how it affects the computation of the Gift and Estate taxes? 5. How do deductions affect the computation of the Gift and Estate taxes and for which are deductions more prevalent? 6. Why may it not be advisable for one spouse to leave his or her entire Estate to the other spouse? 7. What is the general nature of a Trust and how do they come into existence? Briefly discuss the difference between a living and testamentary trust. 8. Briefly describe how the income of a trust is subject to tax and how a trust with income can avoid paying tax on that income.

Answer 1

1. An estate tax is levy on estates whose value exceeds an exclusion limit set by law. Only the amount that exceeds threshold is subject to tax.  Estate tax is a tax on property (cash, real estate, stock or other assets) transferred from deceased persons to their heirs. Estate tax is levied on fair value of the assets transferred. Assets transferred to spouses are exempt from estate tax.

Gift tax - A gift ta is a federal tax applied to an individual giving anything of value to another person. For something to be considered a gift , the receiving party can not pay the giver full value of the gift, but may pay an amount less than its full value. It is the giver of the gift who is required to pay the gift tax. The receiver of the gift may pay the gift tax, or a percentage of it, on the giver's behalf, in the event that the giver has exceeded his/her annual personal gift tax deduction limit.

Income tax is paid on the income and profit earned during the year whereas as explained above estate tax and figt tax is paid on fair value of assets transferred.

2. Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

Exclusions from gift tax:

a) Gifts that are not more than the annual exclusion for the calendar year.

b) Tuition or medical expenses you pay for someone

c) Gifts to your spouse

d) Gifts to a political organisation for its use

In addition to this, gifts to qualifying charities are deductible from the value of the gist made.

3. Items included in value of gross estate

a) Annuities - Value of any annuity or other forms of payments receivable by a beneficiary who survives the decedent.

b) Joint interest - The entire amount of jointly held property is included in the gross estate of the decedent if the other holder is not a spouse of the decedent and did not furnish his own money to acquire the property.

c) Power of appointment - A power of appointment is a right to control the ultimate disposition of the property.

d) Life insurance - Insurance proceeds payable on the life of the decedent are included if they are paid to a beneficiary.

e) Life estate

f) Gifts within three years of death

4. A unified tax credit is a certain amount of assets that each person is allowed to gift to other parties without having to pay gist tax and estate tax. The unified tax credit integrates both the gift and estate taxes into one tax system. It is a tax credit that decreases the tax bill of the individual or estate.