IG_C27 - CHAPTER 27 THE FEDERAL GIFT AND ESTATE TAXES...

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CHAPTER 27 THE FEDERAL GIFT AND ESTATE TAXES LECTURE NOTES TRANSFER TAXES—IN GENERAL 1. Excise taxes are transaction taxes imposed upon the transfer of goods and services. Often they are based on the quantity of the commodity transferred. Thus, Federal and state excise taxes on motor fuel (e.g., gasoline) are based on the number of units sold (e.g., a flat rate per gallon of gasoline purchased). 2. Federal tax law imposes a tax on the gratuitous transfer of property either by gift or through an estate. Although the Federal gift and estate taxes are excise taxes, they differ from many other transaction taxes in several respects. a. Tax base is the value (and not the quantity) of the property transferred. b. Tax rates are progressive (and not constant) in nature. c. Consequently, the Federal gift and estate taxes may be properly described as excise taxes on the transfer of wealth either by gift or by death. Nature of the Taxes 3. Congressional policy toward gift and estate taxes can be summarized as follows. a. Prior to 1976, lower gift taxes favored transfers during the donor’s lifetime. b. TRA of 1976 unified the transfer taxes for gifts and estates and applied the same rate to both types of transfers. The unified credit was created. c. TRRA of 2001 introduced a favored treatment of transfers at death by phasing out the estate tax while maintaining the gift tax. Unified credit for gifts became lower than for estate taxes. 27-1
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27-2 2009 Comprehensive Volume/Instructor’s Guide with Lecture Notes d. After 2010, the estate tax will be reinstated and placed on parity with gift taxes by returning to the rules that existed prior to the TRRA of 2001. 4. Federal gift tax is imposed on the right to transfer property by one person (donor) to another (donee) during life for less than full and adequate consideration. a. Tax is payable by the donor. b. If the donor fails to pay the tax when due, the donee may be held liable for the tax to the extent of the value of the property received. c. Gift tax is to be determined by using the fair market value of the property as of the date of the gift. d. A gift by a corporation is considered made by the individual shareholders. 5. The Federal estate tax is imposed on the right of a decedent to pass all property at death. a. The administrator or executor of the estate is obligated to make sure the estate tax due is paid. b. Federal estate tax is determined by using the fair market value of the property on the date of death (or on the alternate valuation date, if available and if elected). 6. Both gift and estate taxes apply to all donors and decedents who are citizens or residents of the U.S. Location of the property transferred is immaterial. 7. There are two types of death taxes – estate taxes and inheritance taxes. The former is levied against the estate of a decedent while the latter is imposed upon the heir. Some states and other countries impose an inheritance tax, but this form of death tax is not part of the Federal tax structure.
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