The Generation-Skipping Transfer Tax is imposed separately and in addition to gift and estate taxes on transfers directly or in trust for the sole benefit of a person at least two generations younger than the transferor.

A generation-skipping transfer is defined as a taxable termination, a taxable distribution, or a direct skip [Sec. 2611(a)]. A taxable termination is the termination of a non-skip person’s interest held in trust, after which only a skip person has an interest [Sec. 2612(a)(1)]. A taxable distribution means any distribution from a trust to a skip person if it is not a taxable termination or a direct skip [Sec. 2612(b)]. A direct skip is a transfer subject to the estate tax or the gift tax of an interest in property to a skip person. A skip person is a natural person assigned to a generation that is two or more generations below the generation assignment of the transferor or a trust where all interests are held by skip persons [Sec. 2613(a)].

Younger generations refer to generations younger than the transferor’s generation. An individual who is a lineal descendant of a grandparent of the grantor is assigned to that generation that results from comparing the number of generations between the grandparent and such individual with the number of generations between the grandparent and the transferor [Sec. 2651(b)(1)]. An individual who has been married to the transferor is assigned to the transferor’s generation [Sec. 2651(c)(1)].

If age difference falls within the 37 1/2-year to 62 1/2-year range constitutes two generations.

Estate Income Tax

Estate Income Tax – Imposed on the income of estates. Imposed on the estate level or beneficiary level

An estate (or trust) with a gross income of at least $600 is required to file Form 1041, Income Tax Return for Estates and Trusts, no later than the 15th day of the 4th month following the close of the entity’s tax year.

Neither trust nor an estate is allowed a standard deduction on the fiduciary income tax return. A personal exemption deduction, however, is allowed: $600 for an estate; $300 for a simple trust; $100 for a complex trust.

The distinction between the trust or estate income and the principal is an important one. Tax is imposed on the taxable income (TI) of trusts or estates, but not on items treated as fiduciary principal. The Revised Uniform Principal and Income Act specifies that certain items, including business income, interest, rents, and taxable dividends, are to be treated as income to the trust or estate. The act also lists certain items to be treated as principal, including consideration for property (e.g., gain on sale), stock splits, stock rights, and liquidating dividends.

Administration expenses (and debts of a decedent) are deductible on the estate tax return, and some may also qualify as deductions for income tax purposes on the estate’s income tax return. Double deductions are disallowed. A waiver of the right to deduct them on Form 706 is required in order to claim them on Form 1041.

Similar to individuals, the taxable income of trusts and estates is the excess of gross income over deductions.

Gross Income
Capital gains are taxed. Income in respect of a decedent is taxed as income Life insurance proceeds are excluded from income

Deduction

Expenses attributable to tax-exempt income are not deductible. A capital loss is deductible to the extent of capital gains plus $3,000. Personal Exemptions are available.

Losses from a passive activity cannot be used to offset portfolio income

Deduction for Distribution = Allocates taxable income of the trust between Trust and the beneficiary. The deduction is lesser of:
a) Amount of required distributions; or
b) Distributable Net Income

Estate Tax

Estate Tax – Imposed on the property of estates. Imposed on the estate only

A decedent’s gross estate includes the FMV of all property, real or personal, tangible or intangible, wherever situated, to the extent the decedent owned a beneficial interest at the time of death. Included in the gross estate are such items as cash, personal residence and effects, securities, other investments, and other personal assets, such as notes and claims and business interests.

A decedent’s gross estate includes property held jointly at the time of the decedent’s death by the decedent and another person with the right of survivorship.

The gross estate includes assets transferred during life that, at death, the decedent retained the power to revoke, such as transfers made to a revocable trust.

The executor can elect to value the estate at the FMV on
The decedent’s date of death
6 months after the decedent’s death

Deductions from Gross Estate

Expenses for selling property of the estate if the sale is necessary (1) to pay the decedent’s debt, (2) pay the expenses of estate administration, (3) pay taxes, (4) preserve the estate, and (5) effect distribution
1) Administrative and funeral expenses
2) Claims against the estate (e.g., debts of the decedent)
3) Unpaid mortgages on the property
4) State death taxes
5) Casualty or theft losses
6) Charitable contributions
7) Marital transfers

The gift tax is a tax of the transfer of a gift imposed on the donor. A gift is complete when the donor has so parted with dominion and control as to leave him or her no power to change its disposition. The amount of a gift made in property is the fair market value of the property at the date of the gift.

The first $15,000 of gifts of present interest to each donee is excluded from taxable gift amounts. Gifts of future interests in property, such as the remainder interest, do not qualify for the annual exclusion, nor are such gifts a deduction for gift tax.

Gift Splitting

For married couples, each spouse may treat each gift made to any third person as made one-half by the donor and one-half by the donor’s spouse. Each spouse may exclude $15,000 (for 2019) annually of gifts to each donee for a combined gift of $30,000. Gift splitting is not available to a couple if they legally divorce after the gift and one of the spouses remarries before the end of the calendar year.

Medical or Tuition Costs Deduction

Amounts paid directly to the third party on behalf of another individual for (1) medical care costs or (2) tuition costs are excluded from taxable gifts.

Marital deduction
Gifts between married spouses are deductible in full (after applying the annual exclusion)

Charitable deduction
FMV of gifts to a qualified charitable organization is deductible in full (after applying the annual exclusion)

A gift tax return is due on the 15th day of April following the calendar year in which a gift was made. This is due without regard to the donor’s income tax year. A gift tax return for a year of death is due not later than the estate tax return due date.

Simple Trust – A simple trust is formed under an instrument that (1) requires current distribution of all its income, (2) requires no distribution of the res (i.e., principal, corpus), and (3) provides for no charitable contributions by the trust.

Complex Trust – A Complex Trust is a Trust that permits accumulation of current income, provides for charitable contributions, or distributes principal during the taxable year.

Grantor Trust – A grantor trust is any trust to the extent the grantor is the effective beneficiary. Incomes from grantor trusts are taxed to the grantor (not the trust).

A grantor type trust is a legal trust under applicable state law that is not recognized as a separate taxable entity for income tax purposes because the grantor or other substantial owners have not relinquished complete dominion and control over the trust.

Simple Grantor Trust – A simple trust requires current distribution of all its income, requires no distribution of the res (i.e., principal, corpus), and provides for no charitable contributions by the trust. A grantor trust is any trust to the extent the grantor is the effective beneficiary

A taxpayer may elect to defer recognition of gain if property is involuntary converted into money or property that is similar or related in service or use. An involuntary conversion of property results from destruction, theft, seizure, requisition, condemnation, or threat of imminent requisition or condemnation.

When a property is converted involuntarily into nonqualified proceeds and qualified property is purchased within the replacement period, an election may be made to defer realized gain.

In an Involuntary Conversion, Recognized Gain = Lesser of the gain realized or reimbursement not reinvested.

Deferred Gain = Realized gain − Recognized gain

Basis of Acquired Property = FMV of acquired property − Deferred gain

Section 121 provided an exclusion upon the sale of a principal residence. No loss may be recognized on the sale of a principal residence.

Two tests to qualify for exclusion of gain upon principal residence are:

1. Ownership test – Taxpayer has owned the residence for 2 of the 5 prior years
2. Use test – Taxpayer has used the residence for 2 of the 5 prior years

Section 121 allows an exclusion of up to $250,000 for single taxpayers on the sale of a principal residence they have owned and lived in for 2 of the last 5 years. An exclusion of up to $500,000 is allowed for married taxpayers filing jointly on the sale of a principal residence.

The proration applies when
(1) The ownership test and the use test are not met, but the sale is due to a change in place of employment, health, or unforeseen circumstances, or (2) The residence sold was not used as the principal residence of the taxpayer for part of the prior 5 years.

Limited Tax Avoidance Rules limit tax avoidance between related parties.

Gain recognized on an asset transfer to a related person in whose hands the asset is depreciable is ordinary income.

Loss realized on the sale or exchange of property to a related person is not deductible.

Under Sec. 267, losses are not allowed on sales or exchanges of property between related parties. However, the Sec. 267(d) disallowed loss is used to offset the subsequent gain on the sale of the property.

Related Parties include:

Ancestors, descendants, spouses, and siblings
Trusts and beneficiaries of trusts
Controlled C corporations, S corporations, and partnerships (greater than 50% direct or constructive ownership)

Stock qualifies as Section 1202 stock if it is received after August 10, 1993, the corporation is a domestic C corporation, the seller is the original owner of the stock, and the corporation’s gross assets do not exceed $50 million at the time the stock was issued. Additional requirements do exist. However, the total gross assets requirement is $50 million.

Under Sec. 1202(a), an individual may exclude from gross income 50% of any gain from the sale or exchange of qualified small business stock held for more than 5 years. The exclusion increased to 75% for purchases between February 17, 2009, and September 28, 2010, and 100% after that.

Self Employed Business Income and Expenses

Self Employment Income is generally reported by Sole proprietors and Independent contractors

The three requirements for an expense from a trade or business to be deductible from self-employment income are Ordinary, Necessary, and Reasonable

Business Expenses may include:

1. Rent
2. Business Meals
3. Travel
4. Foreign Travel
5. Entertainment
6. Automobile Expenses
7. Taxes
8. Insurance Expense
9. Bad Debts
10. Loan Costs
11. Business Gifts
12. Employee Achievement Awards
13. Start-Up and Organizational Costs
14. Vacant Land
15. Medical Reimbursement Plans