106-10 Postmortem Estate Planning Techniques

Question 1

Disclaimer

Answer 1

An unqualified refusal by a potential beneficiary to accept any benefits of property bequeathed by a decedent (usually family member)

If the beneficiary accepts the bequest and then gives it to someone else, a taxable gift may occur\
-Workaround for this: if the person executes a qualified disclaimer, the person will be treated as if he had never received the disclaimed property and, thus, no taxable gift takes place

Question 2

Requirements for making a qualified disclaimer

Answer 2

1. the disclaimer must be an irrevocable and unqualified refusal to accept the interest
2. the disclaimant (person making the disclaimer) must not have previously accepted or enjoyed any interest in the benefits from the property
3. the disclaimer must be in writing
4. the disclaimer must be received by the decedent’s estate within 9 months after the later of the date on which the transfer creating the interest was made or the day on which the person disclaiming the interest reaches age 21
5. As a result of the disclaimer, the interest must pass without the disclaimant’s attempt to direct the interest to someone else

Question 3

Alternate Valuation Date (AVD) Election

Answer 3

Under Section 2032, the decedent’s personal representative may also elect to report the assets at their FMV 6 months after the decedent’s date of death

Several restrictions apply to the AVD election by the executor:

• the AVD must be applied to all assets included in the gross estate
• the AVD election cannot be made unless it results in a reduction to the total value of the decedent’s gross estate
• the AVD election cannot be made unless it also results in a reduction of the amount of the federal estate tax owned by the decedent’s estate

Question 4

Partial Qualified Terminable Interest Property (QTIP) Election

Answer 4

Normally, a terminable interest in property left to a surviving spouse does not qualify for the estate tax marital deduction. However, certain types of terminable interests may qualify for the marital deduction if the executor makes the QTIP election on IRS Form 706

If the executor chooses to make the QTIP election in whole or in part, the estate tax is reduced in the decedent’s estate, but taxes may be higher in the surviving spouse’s estate because the QTIP assets are added to the surviving spouse’s gross estate to the extent they are not consumed or spent during the surviving spouse’s lifetime

Question 5

Reverse QTIP Election

Answer 5

This is a special election available under the GSTT rules that treats the transfer as if it were made by the decedent instead of the surviving spouse

This permits the decedent to use the GSTT exemption (which, like the QTIP election, may be used in total, in part, or not at all)

Question 6

Homestead Exemption

Answer 6

State property law election

Protects surviving family members of the decedent from losing certain property because of claims of unsecured creditors of the decedent

Includes the decedent’s residence (and, sometimes, significant underlying land) and other exempt property, such as household furnishings, clothing, and an auto

Some states place a dollar limit on the amount of the property that may be protected

Question 7

Family Allowance - Dower and Curtesy

Answer 7

State property law allowance

Typically a sum of money that is paid from the estate to the surviving spouse and dependent children, either in a lump sum or in installments, during probate

Designed to help support the family until probate is finalized

Some states recognize a surviving spouse’s right to receive a life estate in certain real estate owned by the decedent’s spouse
Surviving wife’s right to this interest in called dower, while a surviving husband’s right is called curtesy

Question 8

Electing against the will

Answer 8

Common-law property states protect the surviving spouse from potentially being disinherited by the decedent through a statutory provision known as electing against the will

These provisions allow a surviving spouse to elect to receive a specified share of the decedent’s assets in lieu of the share provided under the will

The surviving spouse may not be totally disinherited if she was married to the decedent at his date of death

Question 9

Family Settlement Agreements

Answer 9

Encouraged under most state statues

Such an agreement is entered into by the collective agreement of all of the decedent’s heirs consenting to distribute the decedent’s property in a certain manner among them

Question 10

Will Contest

Answer 10

Often the consequence of an estate planning mistake made by the decedent during the decedent’s lifetime

Example - parent who leaves a wayward son or daughter out of a will

To avoid the possibility of a challenge to the will by the disinherited child, some estate planning attorneys recommend mentioning the son or daughter in the will and leaving them a nominal bequest such as $1

Question 11

Types of Special Liquidity Elections for the Closely Held Business Owner/Decedent

Answer 11

1. The installment payment of estate taxes provision
2. A redemption of closely held stock in payment of estate taxes and/or estate administration expenses
3. the special use valuation of farmland real property

Question 12

Installment Payment of Estate Taxes

Answer 12

1. The closely held business owner must have been a U.S. citizen or resident of the date of death and actively carrying over the business at that time
2. The value of the closely held business owner’s interest in the estate must exceed 35% of the value of her adjusted gross estate (AGE)
3. In meeting the 35% of AGE requirement, all closely held business interests owned by the decedent may be aggregated, but the decedent must own at least 20% of the total value of each business at the date of death
4. the amount of federal estate tax that may be deferred is limited to the tax attributable to the value of the closely held business (or businesses)

Question 13

Closely Held Stock Redemption

Answer 13

Generally, if a shareholder sells shares to the corporation that issued it, the transaction is treated as a stock redemption and the payment is considered an ordinary dividend, not sales proceeds

Under a Section 303 stock redemption, a closely held corporation can redeem some of a decedent’s shares and have the transaction treated as a sale
This means any gain realized on the sale is treated as a capital gain
Because the estate receives a stepped-up basis in the stock equal to its FMV on decedent’s date of death, the estate realizes little, if any, capital gain on the sale

To qualify for favorable tax treatment under Section 303:

• only closely held stock must be included in the decedent’s estate
• the value of this stock must exceed 35% of the decedent’s adjusted gross estate
• Only an amount equal to the total of the decedent’s estate taxes + administration expenses is eligible for this favorable treatment; any amount in excess of this total must be treated as a dividend

Question 14

Special Use Valuation of Family Farmland

Answer 14

A 3rd liquidity-generating provision to be used by the closely held business owner, particularly the family farmer, is the special use valuation under Section 2032A

This provision permits an executor to value qualifying real property in a decedent’s estate on the basis of its actual use rather than its highest and best use, which is otherwise the standard

In other words, land used as a family farm can be valued as farmland

The maximum reduction of the decedent’s gross estate using the Section 2032A valuation method is $1.16 million (in 2019)

Question 15

3 tax returns that may be necessary after a decedent’s death

Answer 15

1. IRS Form 706 (U.S. Estate and Generation-Skipping Transfer Tax Return)
2. IRS Form 1041 (U.S. Fiduciary Income Tax Return)
3. IRS Form 1040 (U.S. Individual Income Tax Return)

Question 16

IRS Form 706

Answer 16

The federal estate tax return is generally due 9 months after the date of death, although an extension of an additional 6 months is usually approved by the IRS

IRS Form 706 must be filed if the decedent’s total gross estate plus lifetime adjusted taxable gifts (ATGs) equals or exceeds the applicable exemption equivalent or exclusion amount ($11.4 million in 2019)

Filing is required even if no estate tax is actually due

To make portability available to the surviving spouse, the predeceased spouse’s estate must file a Form 706 even if the estate is not subject to estate tax

Question 17

IRS Form 1041

Answer 17

An estate is a separate taxable entity for income tax purposes and may be required to report its income on IRS Form 1041

Question 18

IRS Form 1040

Answer 18

A taxpayer’s tax year ends on the date of the taxpayer’s death
The final return for the decedent for the part of the calendar tax year ending on the date of death is filed on IRS Form 1040, 1040A, or 1040EZ and is required if the decedent otherwise meets the filing requirement during lifetime

The surviving spouse may then elect qualifying widow(er) status for 2 years after the close of the year in which the decedent died if the surviving spouse remains unmarried and maintains a household that, for the entire tax year, is the home of a child who qualifies as the surviving spouse’s dependent

Question 19

Interest Deductions

Answer 19

Certain deductions for interest may be taken on either the decedent’s final income tax return or on the estate’s income tax return

Question 20

Income in Respect of a Decedent

Answer 20

Gross income to which the decedent was entitled at the date of death but had not yet received

IRD is considered an asset for estate tax purposes and is reported on IRS Form 706

IRD assets, however, are not eligible for a step up in basis