2. Estate, gift, and generation-skipping transfer taxation

(a) In general

Application of the estate and gift tax

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U.S. citizens and resident noncitizens are subject to estate tax on the transfer of their worldwide estate at the time of death. Estate tax also is imposed on the transfer of property belonging to nonresident noncitizens which, at the time of death, is situated in the United States.70 EGTRRA repealed the estate tax for estates of decedents dying after December 31, 2009. However, EGTRRA included a “sunset” provision, pursuant to which the estate tax repeal "sunsets" one year later. Thus, the estate tax is repealed for 2010 and then is reinstated for estates of decedents dying after December 31, 2010.

U.S. citizens and resident noncitizens are subject to gift tax on transfers of property by gift made directly or indirectly, in trust or otherwise." Nonresident noncitizens are subject to gift tax with respect to transfers of tangible real or personal property that is situated in the United States at the time of the gift. In general, no gift tax is imposed on gifts made by nonresident noncitizens of intangible personal property situated within the United States (e.g., U.S. stocks and bonds). EGTRRA did not repeal the gift tax for any year.

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Residency for purposes of estate and gift taxation is determined under rules different from those applicable to the income tax. In general, an individual is considered to be a resident of the United States for estate and gift tax purposes if the individual is "domiciled" in the United States. An individual is domiciled in the United States if the individual lives in the United States, for even a brief period of time, with no definite present intention of later leaving the United States.

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The gift tax and the estate tax are unified so that a single graduated rate schedule applies to cumulative taxable transfers made by a taxpayer during his or her lifetime and at death. The highest marginal rate is 49 percent for 2003, phasing down to 45 percent by 2007." A unified

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Treas. Reg. sec. 20.0-1(b)(1).

For gifts made during 2010, when the estate tax is repealed under present law, a separate gift tax rate schedule applies, with rates beginning at 18 percent on the first $10,000 of taxable gifts and reaching a maximum marginal rate of 35 percent on taxable gifts over $500,000. Sec. 2502(a).

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credit is available with respect to taxable transfers by gift and at death. The unified credit amount effectively exempts from estate tax transfers totaling $1 million in 2002 and 2003, $1.5 million in 2004 and 2005, $2 million in 2006, 2007, and 2008, and $3.5 million in 2009." In 2010 the estate tax is repealed, and in 2011 and thereafter the estate tax is reinstated with a unified credit exemption equivalent amount of $1 million. For gift tax purposes, the effective exemption never increases above $1 million." Both the estate tax and gift tax provide an unlimited deduction for certain amounts transferred from one spouse to another spouse, provided that the recipient spouse is a citizen of the United States.

(b) Estate tax

U.S. citizens and resident noncitizens

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An estate tax is imposed on the taxable estate of any person who is a citizen or a resident noncitizen of the United States at the time of death. The taxable estate is equal to the decedent's worldwide gross estate, less allowable deductions (including the marital deduction). Certain credits are allowed, including the unified credit, which directly reduce the amount of the

estate tax.

The gross estate generally includes the value of all property in which a decedent had an interest at death.81 The amount included in the gross estate generally is equal to the fair market value of the property at the date of the decedent's death, unless the executor elects to value all property in the gross estate at the alternate valuation date (which is six months after the date of the decedent's death).82 The estate tax generally is due nine months after the date of the decedent's death." The IRS may grant a reasonable extension for a period not to exceed six months.

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76 The benefit of the unified credit applies at the lowest estate and gift tax rates. For example, in 2002, the unified credit applied between the 18-percent and 39-percent estate and gift tax rates. Thus, in 2002, taxable transfers, after application of the unified credit, were subject to estate and gift tax rates beginning at 41 percent.

The gross estate includes the value of certain properties not owned by the decedent at death if certain circumstances are met. These generally include pre-death transfers for less than adequate and full consideration if: (1) the decedent retained the beneficial enjoyment of the property during his life; (2) the property was previously transferred during the decedent's lifetime but the transfer takes effect at the death of the decedent; and (3) the decedent retained the power to alter, amend, revoke, or terminate a previous lifetime transfer.84 Beneficial interests

in a trust that the decedent owns at the time of his death and which do not terminate with his death generally also are includible in his or her gross estate.

Nonresident noncitizens

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The estate of a nonresident noncitizen generally is taxed at the same estate tax rates applicable to U.S. citizens, but the taxable estate includes only property situated within the United States that is owned by the decedent at death. This includes the value at death of all property, real or personal, tangible or intangible, situated in the United States. Property situated within the United States (i.e., U.S.-situs property) also includes stock issued by a U.S. corporation, transfers within three years of death, and certain revocable transfers if such property was situated in the United States either at the time of transfer or at death. Special rules apply which treat certain property as being situated outside the United States for these purposes.

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To the extent provided by treaty, the estate of a nonresident noncitizen is allowed a pro rata portion of the generally applicable unified credit. The amount allowable in this case is the amount that bears the same ratio to the unified credit as the portion of the gross estate situated in the United States bears to the total gross estate. Absent treaty relief, the estate of a nonresident noncitizen is allowed a unified credit of $13,000 (which effectively exempts the first $60,000 of the estate from tax).90

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88 See, e.g., sec. 2105 (certain life insurance proceeds, bank deposits, and debt instruments).

(c) Gift tax

U.S. citizens and resident noncitizens

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U.S. citizens and resident noncitizens are subject to gift tax on any transfer of property by gift made directly or indirectly, in trust or otherwise. Thus, the gift tax applies to transfers of property, regardless of where such property is situated (in the United States or outside the United States). The amount of a taxable gift is determined by the fair market value of the property on the date of gift. An annual exclusion from the gift tax applies for gifts up to $11,000 ($22,000 if the non-donor spouse consents to treat the gift as having been made one half by each spouse), adjusted periodically for inflation.

Nonresident noncitizens

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Nonresident noncitizens are subject to gift tax with respect to certain transfers by gift of U.S.-situated property. Such property includes real estate and tangible property located within the United States. Nonresident noncitizens generally are not subject to U.S. gift tax on the transfer of intangibles, such as stock or securities, regardless of where such property is situated. (d) Generation-skipping transfer tax

In general

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A separate transfer tax is imposed on generation-skipping transfers in addition to any estate and gift tax that applies to such transfers." This tax generally is imposed on transfers, either directly or indirectly or through a trust or similar arrangement, to a beneficiary in more than one generation below that of the transferor. The generation-skipping transfer tax is imposed at the maximum Federal estate tax rate, i.e., a flat rate of 49 percent for 2003, on generationskipping transfers in excess of a $1.1 million lifetime generation-skipping transfer exemption for 2003. The generation-skipping transfer exemption amount is adjusted periodically for inflation.

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Nonresident noncitizens

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Nonresident noncitizens are subject to generation-skipping transfer tax only on transfers of property situated within the United States." Nonresident noncitizens are allowed the $1.1 million generation-skipping transfer tax exemption."

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3. Income taxation of trusts, estates, and their beneficiaries

(a) Taxation of trusts and estates

In general

A trust or estate generally is treated as a conduit for income purposes in that the trust or estate is allowed a deduction for distributions to its beneficiaries during the year. The trust or estate is taxed on its income, reduced by the distribution deduction, as a separate taxable entity with certain exceptions."

Grantor trusts

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The grantor of a trust is taxed as the owner of the trust (or a portion thereof) if he or she retains certain powers or rights over the trust. A U.S. person who transfers property to a foreign trust generally is treated as the owner of a portion of the trust. The portion of the trust

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In addition to the distribution deduction, these exceptions include: (1) a separate tax rate schedule applies to estates and trusts; (2) an unlimited charitable deduction is allowed for amounts paid to (and, in the case of estates, amounts permanently set aside for) charity; (3) a personal exemption of $600 is allowed to an estate, $300 to a trust that is required to distribute all of its income currently, or $100 to any other trust; and (4) no standard deduction is allowed.

100 Secs. 671 through 679. A grantor of a trust generally is treated as the owner of any portion of a trust if: (1) the grantor has a reversionary interest in either the corpus or the income from the corpus, if certain conditions are satisfied; (2) the grantor has a power of disposition without the approval or consent of any adverse party; (3) the grantor can exercise certain administrative powers over the trust; (4) the grantor or a nonadverse party has the power to revoke, i.e., revest in the grantor title of a portion of the trust; and (5) without prior approval of an adverse party, the income from the trust may be distributed to or for the benefit of the grantor or the grantor's spouse.

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For income tax purposes, a foreign trust is any trust, except if (1) a court within the United States is able to exercise primary supervision over the administration of the trust, and (2) one or more U.S. persons have the authority to control all substantial decisions of the trust. Sec. 7701(a)(31). Trusts that meet these two exceptions are treated as U.S. persons for income tax purposes. Sec. 7701(a)(30).