Taxation for Decision Makers, 2012 Edition

chapter 12

Wealth Transfer Taxes

CHAPTER OUTLINE

Setting the Stage—An Introductory Case

Overview of Wealth Transfer Taxation

The Federal Gift Tax

Tax Consequences for Donees

The Taxable Estate

Transfer Tax Planning

Fiduciary Income Tax Issues

Expanded Topics—The Tax Calculations

Revisiting the Introductory Case

Summary

Key Terms

Test Yourself

Problem Assignments

Answers to Test Yourself

The federal transfer tax system consists of the gift tax, the estate tax, and a third lesser-known tax called the generation-skipping transfer tax. Transfer taxes are assessed on the transferor of the property. The recipient receives the property free of taxes.

A number of provisions exclude all or a portion of gifts and inheritances from transfer taxation. They include the annual gift exclusion (currently $13,000 per donee), a lifetime exclusion (currently $5 million), the charitable contribution deduction, and the unlimited marital deduction. By the wise use of these exclusions, most individuals can transfer their wealth without paying transfer taxes.

One of the major dilemmas facing very wealthy individuals is whether to make lifetime gifts or hold property until their death. Making lifetime gifts removes both income and appreciation subsequently realized on the transferred assets from the donor's estate and transfers the taxation of income to the donee. If, however, the heirs receive appreciated assets as testamentary transfers, the assets normally take their fair market values as bases; thus, ...