12. Miscellaneous Planning Flashcards
IRD assets
Deferred Annuity
Immediate Annuity with Period Certain
Employer-Sponsored Qualified Retirement Plan (401k, TSA, Company Pension Plans)
IRAs
EE Bonds
Salary, bonus, commission, rental income, lottery winnings, or any other income
Section 691: IRD
IRD taxed as income to the recipient of these assets (not capital assets which receive a step up or down in basis on the date of death)
IRD: Tax Deduction
The income tax deduction for any estate tax paid is treated as an itemized deduction, only with a surviving spouse that the income tax liability can be postponed until a later date - with a non-spouse beneficiary, the income tax liability on these assets is spread out over longer periods of time.
Disclaimer/renunciation
unqualified refusal by a potential beneficiary to accept benefits given through a testamentary or lifetime transfer of property
does not need or does not want the bequest- often used when the bequest would otherwise increase the amount of federal estate tax that would be due from the estate.
To be fully effective for both state and federal purposes, the disclaimer must also comply with the applicable state law and may have to meet separate rules for state gift or state death taxes.
Use of Disclaimers
- if a bequest increases the intended beneficiary’s potential estate tax liability. The beneficiary who disclaims cannot control who will receive the property, as the disclaimed assets will pass to the transferor’s contingent beneficiaries.
-If the contingent beneficiaries are in lower income tax brackets, a disclaimer can shift the income taxation to the lower brackets.
-When the property is left to a spouse who doesn’t need or want it, disclaiming the portion not needed may facilitate utilization of all or a portion of the estate tax exclusion amount.
-A trust with an interest passing to a charity that does not meet the requirements for a charitable deduction can use a disclaimer by other beneficiaries to qualify the trust interest for a charitable deduction. /If property is disclaimed by a person in favor of a surviving spouse or charity, the marital or charitable deduction will be permitted provided the property would otherwise qualify for these deductions.
-Disclaiming retirement plan assets in favor of a younger contingent beneficiary allows the retirement benefits to be distributed over a longer period of time with a concurrent reduction in the income tax liability.
-The potential disclaimant may be entitled to receive an annuity or unitrust payment from a charitable remainder trust but does not need the payment. In this situation, a disclaimer of that interest will allow the transferor a 100% charitable deduction instead of a deduction limited to the value of the charitable remainder.
IRC Section 2518 / Disclaimer requirements
disclaimer must be qualified for purposes of the estate, gift, and generation-skipping transfer taxes:
- irrevocable and unqualified refusal to accept an interest in property.
- refusal must be in writing.
- transferor, his or her legal representative, or the holder of legal title to the property must receive the writing.
- refusal must be received no later than nine months after the day on which the transfer creating the interest is made or, if later, nine months after the day on which the donee or beneficiary attains the age of 21.
- disclaimer must be made prior to acceptance of the interest or any of its benefits.
- interest must pass to a person other than the disclaimant without any direction on the part of the disclaimant. However, a valid disclaimer by a surviving spouse may be made even though the interest passes to a trust in which she has an income interest.
-The interest disclaimed may be an entire interest, but can be an undivided fractional part of the proposed gift.
-The beneficiary of a gift or bequest who is insolvent or in bankruptcy may disclaim the gift or bequest to avoid claims of creditors. However, local law must be consulted to assure this will be effective.
Tax Implications
- disclaimer of a property interest or a power is not treated as a gift for gift tax purposes.
- disclaimed interest in property is not considered to be a transfer by a disclaimant or decedent for estate tax purposes and will not be included in his or her estate as a transfer with a retained life estate.
-If a person disclaims property in favor of a surviving spouse or charity, the marital or charitable deduction will be permitted, provided the property would otherwise qualify for these deductions. - income received on the disclaimed property will be chargeable to the person in whose favor the property was disclaimed.
Issues in Community Property States
Where the entire community property is subjected to probate upon the death of only one spouse, the surviving spouse should exercise caution to disclaim only the community property interest of the decedent. A disclaimer of both halves would probably result in a taxable gift to the individual who receives the interest as the result of the disclaimers
Executor role
-must locate and probate the decedent’s will,
-Prove that it was the decendent’s will and that it in fact was his or her last will,
-Collect the decedent’s property, pay debts, taxes and expenses, and
-Distribute any remaining assets to the beneficiaries specified in the decedent’s will.
Fiduciary
Legal capacity requirements: US Citizen, and state law requirements of majority age, mental capacity and domicile
Executor fees
- statutory law of the state where the estate is probated,
-Local county rules or customs governing what the personal representative is entitled to charge for services rendered to the estate, - professional executors, such as banks or trust companies, an advertised fixed and scheduled fee, and
-Provisions in the will or in separate contractual agreements between the testator and the nominated executor
-An attorney specializing in estate administration for large estates
Should take into account:
-Nature of the executor’s tasks,
-Time spent,
-Complexity of the problems and decisions that have to be made,
-Professional background and competence of the executor, and
-Ultimate results and benefits obtained for the heirs.
Selecting a Trustee
trustee’s duty to ensure that the trust achieves its goals
The trustee’s responsibilities commonly last for at least one generation and often last beyond two or three generations: tax sensitive
Co-Trustees
Need to consider drawbacks/issues
Selecting an Attorney
Duties depend on the client’s stage in the estate planning process, whether accumulation, conservation, or distribution
An estate planning attorney must gather data regarding the client and his or her family or other potential beneficiaries and their circumstances
For which type of trusts does it not matter who is selected as trustee?
revocable trust has a neutral impact on taxes at both federal and state levels
The estate planning attorney must be able to ascertain the client’s current position and the extent of his or her weaknesses in which the following areas?
Transfer costs
Special needs
Disposition of assets
Liquidity
Adequacy of capital and assets
Stability and maximization of value
