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Austin Estate Planning Deck Flashcards

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1
Q

Gifting Strategies

A
  1. Never gift property when the fair market value is less than the adjusted basis. Rather, sell the property and let the donor recognize a capital loss for income tax. The donor can then gift the cash proceeds to the donee who can then purchase the property with the proceeds.
  2. Consider gifting property with the greatest appreciation potential to the youngest donee available who has the most time for the asset to appreciate.
  3. When making gifts to charities, always gift appreciated property to avoid the capital gain taxes on the difference between the fair market value and the donor’s adjustable taxable basis. For such property, the donor may able to deduct the fair market value as a charitable deduction, subject to the income tax limitations.
  4. Gift income-producing property to the donee in the lowest marginal income tax bracket so that the income is subject to the lowest possible income tax.
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2
Q

Exceptions to the terminable interest rule

A
  1. A six-month survival contingency.
  2. A terminable interest, either outright or in trust, over which the surviving spouse has a general power of appointment.
  3. A Qualified Terminable Interest Property (QTIP) Trust.
  4. A Charitable Remainder Trust (CRT) where a spouse is the only noncharitable beneficiary.
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3
Q

Summary of Installment Payment for Estate Tax (Section 6166)

A

Estate can pay tax over 10 annual installment payments IF:
1. Up to 1,640,000
2. 1st installment MUST be made within 5 years of estate tax return
3. 2% interest on first $1,640,000

Eligibility
1. Value of closely held business interest > 35% of the AGE. Must be a sole proprietorship or partnership in which the decedent owned 20% capital interest or 20% voting share.
2. If more than one business, they can be aggregated to meet the 35% of AGE if the decedent owns 20% of the capital interest, or voting shares, in the closely held business.

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4
Q

Avoiding the Generation Skipping Transfer Tax (GSTT)

A
  1. GSTT annual exclusion is $16,000 per donee per donor, gift splitting is available if both spouses elect.
  2. The predeceased parent rule applies. This means that if a parent dies before a child, the child would no longer be a skip person
  3. Lifetime exemption available during life or at death equal to the applicable estate tax equivalency of $12,060,000 for 2022.
  4. Qualified transfers are excluded (medical and education) (medical if not cosmetic)
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5
Q

Generation Skipping Transfer Tax
1. Define
2. Transfers Subject to GSTT
3. GSTT Tax Rate

A

Key Points
1. Designed to tax large transfers between skipped generations (i.e., grandparent to grandchild).
2. It is separate from, and additional to, the gift and estate tax systems.
Transfers Subject to GSTT
1. Direct skips: (Transferor is liable for tax)
2. Taxable termination: (Transferor is liable for tax)
3. Taxable distribution: (Recipient is liable for tax)
GSTT Rate
1. The GSTT rate is the highest marginal rate for the unified gift and estate tax rates (40% for 2022).
2. Any GSTT paid will be added to the fair market value of the gift to determine total taxable gifts for the federal gift tax.
Define Skip Person:
1. Someone two or more generations younger than the transferor
2. A beneficiary who isn’t related by blood, marriage, or adoption if they’re more than 37½ years younger than the person making the gift.

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6
Q

Relevant tax numbers for estate
1. Gift/Estate Lifetime exclusion
2. Gift/Estate Lifetime credit
3. Annual Gifting exemption
4. Annual gifting to non-citizen spouse
5. Max gift and estate rate

A
  1. Gift/Estate Lifetime exclusion $12,060,00
  2. Gift/Estate Lifetime credit $4,769,800
  3. Annual Gifting exemption $16,000 (S); $32,000 Gift Split
  4. Annual gifting to non-citizen spouse $164,000
  5. Max gift and estate rate 40%
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7
Q

Estate Vocabulary
1. Testate
2. Intestate
3. Testamentary Trust
4. Inter-Vivos Trust
5. Uniform Simultaneous Death Act (USDA)
6. Legatee
7. Divisee
8. Common Law State
9. Life Estate
10. Complex Trusts

A

1. Testate: Dying WITH a valid will
2. Intestate: Dying WITHOUT a valid will (or complete will)
3. Testamentary Trust: A trust created after the death of the grantor is referred to as a testamentary trust.
4. Inter-Vivos Trust: A trust created and established during the life of the creator
5. Uniform Simultaneous Death Act (USDA): Presumption when the order of death is not known… someone must survive the other by 120 hours… if not USDA kicks in
6. Legatee: Person who inherits property under will
7. Devisee: Gift of real property through a will
8. Common Law: Opposite of community property states; this means that property follows Tenancy by Entirety Rules
9. Life Estate: An interest in a property that terminates upon death of the owner
10. Complex Trusts: Allow trustee discretion over distribution and accumulations within the trust (normally income is distributed annually

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8
Q

Types of Wills:
1. Holographic Will
2. Noncupative Will
3. Statutory Will
4. Mutual Will “Sweetheart Will”
5. Will Substitute (Not a real will)

A

Holographic Will:
1. Handwritten (not typed) by the testator and include the material provisions of a will.
2. Must be dated and signed by the testator
3. Valid in most states; most states do not require a witness.
Noncupative Will:
1. Oral, dying declarations made before a sufficient number of witnesses.
2. In some states, nuncupative wills may only be effective to pass personal property, not real property, and the dollar amount transferred via this method may be limited.
3. The use of nuncupative wills is fairly restricted and is not valid in most states.
Statutory Will:
1. Drawn by an attorney, and comply with the statutes for wills of the domiciliary state.
2. Referred to as witnessed or attested wills.
3. Must be typed or be in writing, be signed by the testator (generally in front of witnesses), and be signed by the witnesses.
Mutual Will:
1. Will where 2 persons leave everything to eachother
Will Substitute:
1. Anything that allows asset to pass outside probate

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9
Q

Per Capita VS Per Stirpes

A

Per Capita (“By the Head”):
1. Each beneficiary receives EQUAL benefit amount
2. if a parent dies, then each of their children are given EQUAL percentage of everyone else
3. Original inheritants WILL HAVE DIFFERENT benefit amounts
Per Stirpes (“By the Roots”):
1. Benefit continues down the blood line
2. If a parent dies, their portion is split equally by chilren
3. Other inheritant’s benefit ARE NOT impacted

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10
Q

Power of Attorney

A
  1. A stand alone document that allows an agent to act for the principal and may include the power to appoint assets
  2. Power to act
  3. Ends at the death of the principal
  4. May be general or limited
  5. May be revoked at any time by the principal
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11
Q

Power of Appointment

A
  1. A power, usually included in a trust or power of attorney, allowing the power holder to direct assets to another
  2. Power to transfer assets
  3. May survive the death of the grantor
  4. May be general or limited
  5. May be revoked by the principal during life or at death (via last will and testament)

If agent dies before the principal, then the assets that the agent has appointment over will go to the agent’s estate

Powers MUST be exercised in accordance with the provisions of the power/ will/ or trust

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12
Q

Sole Ownership (Fee Simple)

A
  1. Full outright ownership by one person.
  2. Transfers via probate by will or intestacy law.

Estate: DOES pass through probate:
* The fair market value of property owned as fee simple is fully included in a decedent’s gross estate, but if the property is transferred to the surviving spouse, the fair market value of the property is eligible for the unlimited marital deduction.
* 100% included in owner’s gross estate and probate estate.

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13
Q

Tenancy In Common

A
  1. Joint interest in property between two or more individuals.
  2. Owners can choose to partition their interests without the consent of the other owners.
  3. Each person holds an undivided, but not necessarily equal, interest in the whole property. (DIFFERENT % OWNERs)
  4. Step up Calculation: (Ownership % of decedent) X (FMV at death)

Estate: DOES pass through probate:
* The fair market value of a decedent’s ownership interest in tenancy in common property is included in the decedent’s gross estate.
* DOES get step up in basis at death
* If the property is transferred by probate to the decedent’s surviving spouse, the fair market value of the decedent’s interest in the property is eligible for the unlimited marital deduction.
How much is included in gross estate:
1. (Contribution %) X (FMV @ death)

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14
Q

Joint Tenancy With Rights of Survivorship (JTWROS)

A
  1. Interest in property held by two or more related or unrelated parties.
  2. Each owns an undivided, equal interest in the whole…..each person owns EQUAL % of the property
  3. Each owner generally shares in income and expenses in proportion to his interest.
  4. Individuals can choose to partition their interest without the consent of the other joint tenants (then becomes fee simple)

Estate: DOES NOT pass through probate
* At the death of one joint tenant, his interest automatically passes to the surviving property owners
* Property is included in the decedent’s gross estate to the extent of the decedent’s original contribution percentage (actual contribution rule).
* Basis of Decedent ONLY is stepped up at death
* Spouses are AUTOMATICALLY 50% (can use UMD)

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15
Q

Tenancy By Entirety

A
  1. Tenancy by the entirety is joint ownership of property only between a husband and wife that cannot be partitioned without the consent of the other spouse.

Estate: DOES NOT pass through probate:
* At the death of the first spouse, the property automatically transfers to the surviving spouse
* 50% of the fair market value of the property is included in a decedent’s gross estate.
* Eligible for U.M.D

Can ONLY be terminated by:
1. Death (survivor takes ENTIRETY)
2. Mutual agreement (Consent)
3. Divorce (converts to tenancy in common)

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16
Q

Community Property

A
  1. Ownership form available only to spouses.
  2. Each spouse is deemed to have contributed, and to own, 50 percent of the property and the interest cannot be partitioned without the consent of the other party.
  3. Value going through probate = basis = 50% of FMV at Death
    Estate: DOES GO THROUGH PROBATE:
    * Decedent’s interest is included in the probate estate and BOTH HALVES of community property are stepped to fair market value even though the decedent only owned 50 percent of the property.
    * No automatic right of survivorship to the surviving spouse, but if the property is transferred to the surviving spouse by will or intestacy, the value of the property transferred to the spouse is eligible for the unlimited marital deduction.
    * Earnings during the marriage are community property.
    Property acquired before the marriage and property acquired by gift or inheritance during the marriage is separate property.
    Community Property RETAINS its character when a couple moves to a common law state
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17
Q

Probate:
1. What Passes THROUGH Probate
2. What AVOIDS Probate

A

What MUST GO THROUGH Probate:
1. Fee Simple
2. Tenancy in Common
3. 1/2 Community Property
4. Property not in trust: Automobiles; Household goods
5. Invalid Beneficiary designations
What can AVIOD Probate:
1. Contract Law: Beneficiary; POD (Bank); TOD (Investment)
2. Trust Law: Trusts
3. Title Law: JTWROS; Tenancy By Entirety

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18
Q

Annual Gift Exclusion

A
  1. Annual Exclusion (Single): $16,000 per person per year
  2. Gift Spliting (MFJ): $32,000 Per person per year (must file form 709)
  3. Non-Citizen Spouse: $164,000 per year
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19
Q

Crummey Provision (Crummey Trust) and 5/5

A

Crummey Provision:
1. Explicit right of a trust beneficiary to withdraw some, or all, of any contribution to a trust for a limited period of time, generally 30 days, after the contribution.
2. Beneficiary is given power of apointment
3. Makes a gift of PRESENT INTEREST (so exclusion can be taken)
4. if 1 of the beneficiaries doesnt sign; reduce future contributions so only the person who signed can take out annual exclusion amount
5/5 Lapse Rule
1. If a trust has more than one beneficiary, the 5/5 Lapse Rule must be applied
2. a taxable gift is deemed to have been made when a power to withdraw an amount in excess of the greater of $5,000 or 5% of the trust assets has lapsed, or not been used by a beneficiary.

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20
Q

No Tax Transfers

A
  1. Political Organizations
  2. Qualified Transfers: Direct Payment to educational institution and Medical provider
  3. Payment of Legal Support
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21
Q

Gifts Made within Three Years of Death that are INCLUDED in a Decedent’s Gross Estate (Section 2035)

A
  1. Any gift tax paid on gifts made within 3 years of the decedent’s date of death,
  2. The value of any property gifted within three years of the decedent’s date of death if the decedent retained an interest
  3. The death proceeds of any life insurance policy insuring the decedent’s life that was gifted within 3 years of the decedent’s date of death.
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22
Q

Alternative Valuation Date

A

6 month anniversary of date of death
To Qualify
1. The total value of the gross estate must depreciate after the date of death, and
2. The total estate tax must be less than the estate tax calculated using the date of death values.
Valuation if properly elected
1. All assets valued at the alternate valuation date
Except:
1. Assets distributed or sold before 6 months which are valued at the date of distribution or sale, and
2. Wasting assets (annuitized annuities, patents, royalties, installment notes, lease income) must be valued at the date of death.
General: MUST REDUCE BOTH GROSS ESTATE AND TAX

23
Q

Gross Estate Deductions (reduces gross estate)

A
  1. Funeral expenses;
  2. Last medical expenses;
  3. Administrative expenses;
  4. Debts of the decedent;
  5. Losses during estate administration
  • Top Federal Tax Rate for Estate: 40%
  • Federal Estate Tax Range: 18% - 40%

NOT DEDUCTIBLE:
1. Attorney Fee’s are NOT deductible on estate tax return

24
Q

SCIN vs Private Annuity
1. Term of Payment
2. Deduction of Interest
3. Buyers Adjusted Basis
4. Can Seller Keep Collateral Interest
5. Is transaction Secured?

A

Self Cancelling Installment Note (SCIN)
1. Term of Payment - Determined by Seller
2. Deductibility of Interest - Depends on Property
3. Buyer’s Adjusted Basis - Purchase Price of Property
4. Seller May Keep Collateral Interest - Yes
5. Is transaction Secured - YES

Private Annuity:
Term of Payment - Life of Annuitant
Deductibility of Interest - None
Buyer’s Adjusted Basis - Sum of Annuity Payments Paid
Seller May Keep Collateral Interest - No
Is transaction secured - NO

25
Q

Trusts to a Minor (2503) (ALWAYS IRREVOCABLE)
1. 2503(b) Trust
2. 2503(c) Trust

A

2503(b) Trust: Bad Boy Trust
1. may hold property in trust for the lifetime of the beneficiary (or beneficiaries)
2. must make income distributions to the beneficiary (or beneficiaries) on an annual basis
3. Once distributed, the income can be placed in a custodial account for the benefit of the child, or may be used for the child’s benefit.
4. Gifts made to a 2503(b) trust will partially qualify for the gift tax annual exclusion (P.V of income interest is gift exclusion)
2503(c) Trust: Church Boy Trust
1. 2503(b) trust, allows income to be accumulated in the trust, and allows the grantor to qualify the entire gift to the trust up to the annual exclusion amount for the gift tax annual exclusion
2. The trustee may, but is not required to, make principal and income distributions for the benefit of the child
3. trust must terminate when the child reaches age 21, or, at a minimum, the child must be given the right to receive the trust assets at age 21.
4. REMEMBER: CHILD MUST BE the ONLY income and remainder beneficiary to the trust (benefit only 1 person)
5. DOES NOT NEED : Crummey Powers

25
Q

Grantor Retained Annuity Trust (GRAT)

A
  1. an irrevocable trust that pays a fixed annuity (income interest) to the grantor for a defined term and pays the remainder interest of the trust to a noncharitable beneficiary at the end of the GRAT term.
  2. The GRAT is funded by the grantor with a transfer of property, and the annuity can be a stated dollar amount, fixed fraction, or a percent of the initial fair market value of the property transferred to the GRAT.
  3. MUCH MORE STRICT THAN: GRUT
  4. If donor dies during GRAT Term: Entire amount is included in estate and assets have carryover basis
25
Q

Qualified Personal Residence Trust (QPRT)

A
  1. a special form of a GRAT but contains donor’s Residence
  2. Grantor receives use of the personal residence as the annuity interest component.
  3. At the end of the trust term, the residence passes to the remaindermen, and if the grantor is still living, he may then lease, at a fair market value rent, the property from the remaindermen and continue to use it as his personal residence.
  4. If the grantor dies before the expiration of the trust term, the fair market value of the residence is included in the grantor’s gross estate.
  5. A QPRT can only hold one residence, but an individual can have two QPRTs.
    Gift and Estate Tax Consequences:
    * The original transfer of the residence is treated as a gift to the extent that the fair market value of the residence exceeds the present value of the grantor’s retained interest (the use).
25
Q

Tangible Personal Property Trust (TPPT)

A
  1. Similar to QPRT but for personal property

Gift and Estate Tax Consequences (TPPTs)
1. The original transfer of the personal property to the trust is treated as a gift to the extent that the fair market value of the personal property exceeds the present value of the grantor’s retained interest.
2. if the grantor dies during the term of the TPPT, the full fair market value of the trust property will be included in the grantor’s gross estate.

26
Q

Family Limited Partnership (FLP)

A
  1. a limited partnership created under state law with the primary purpose of transferring assets to younger generations using valuation discounts.
  2. Usually, one or more family members transfer highly appreciating property to a limited partnership in return for both the one percent general and the 99 percent limited partnership interests
  3. General Partner has UNLIMITED liability; but has management rights
  4. Limited Partner are “passive investors” with limited liability and no management rights
    Gift and Estate Tax Consequences
  5. Upon creation of the partnership, there are neither income nor gift tax consequences because the entity created is owned by the same person who owned it before the transfer
  6. Once the FLP is created, the owner of the general and limited partnership interests values the limited partnership interests.
  7. The original transferor (grantor) then begins an annual gifting program utilizing the discounts, the gift tax annual exclusion, and gift-splitting (where applicable) to transfer limited partnership interests to younger generation family members.
27
Q

Irrevocable Life Insurance Trust (ILIT)

A
  1. The purpose of an ILIT is to prevent an insured party from having incidents of ownership in the life insurance policy on his life.
  2. When an ILIT is created, the grantor often wants to qualify the gifts to the ILIT for the gift tax annual exclusion so that his applicable gift tax credit amount will be available for other planning either during lifetime or at death
  3. Since an ILIT is irrevocable, transfers to the ILIT are usually made subject to a Crummey withdrawal right on behalf of the beneficiaries
    An ILIT Accomplishes:
  4. Vehicle that avoids generation skipping transfer tax
  5. Makes proceeds available to surviving spouse
  6. Excludes proceeds from the probate of BOTH spouses
  7. Shelters premiums up to gift tax exclusion
28
Q

Bypass Trust “B-Trust” (Credit Shelter Trust)

A
  1. The bypass trust can be structured so that all of the income of the trust is payable to the surviving spouse
  2. In addition, the trustee can be given the right to make discretionary distributions of principal for the surviving spouse’s health, education, maintenance, and support (an ascertainable standard)
  3. Distribution: Greater of $5,000 or 5% of Principal
  4. Upon Spouses Death: Assets in trust ARE NOT included in the gross estate of the spouse and pass to children
  5. Payments CANT be made to creditors (or cc company)

Creating an inter vivos bypass trust can yield even bigger benefits because the earlier you contribute appreciable assets, the more they can appreciate

29
Q

Qualied Terminable Interest Trust “C-Trusts” (QTIP)

A
  1. Q-Tip is AN ELECTION
  2. Grants the surviving spouse a lifetime right to the income of the trust while transferring the remainder interest to individual(s) of the grantor’s choosing.
  3. Qualifies for the unlimited marital deduction even though the spouse does not receive outright access to the assets.
  4. allows a decedent to qualify a transfer for the marital deduction at his death yet still control the ultimate disposition of the property.
  5. Trustee may invade principal for spouse HEMs
  6. EXCLUDED from the gross estate
    Requirements:
  7. property transferred to the trust must qualify for the unlimited marital deduction
  8. Must be in estate of FIRST to die
  9. During the surviving spouse’s lifetime, no one can have the right to appoint the property to anyone other than the surviving spouse.
  10. MUST file form 709
  11. Surviving Spouse CANNOT appoint assets in trust
30
Q

Grantor Retained Income Trusts (GRITs)

A
  1. trusts created by a person who keeps an income interest in the trust.
  2. Trust produces income for the grantor for a period of time, then the remainder interest transfers to beneficiaries
  3. Creates a discount on the value of remainder interest given to beneficiary (Temporal Discount)
31
Q

Charitable Remainder Trusts
1. CRATs
2. CRUTs
3. CLTs (Lead Trusts)

A

CRATs:
1. Provide a fixed annuity to the donor (MUST pay annually)
2. Term of the annuity may be life of donor OR no more than 20 years. At Death, Charity is Remainder Beneficiary
3. The CRAT has a significant cost advantage (only requires ONE Valuation at funding)
CRUTs:
1. Basically a much more flexible CRAT
2. Can make contributions AFTER initial establishment (MUST be valued annually
3. If the client’s primary objective is to maximize the income payments to the noncharitable beneficiaries (self)
CLTs (Lead Trusts):
1. gives an income stream to a charity for a fixed period of time followed by a transfer of the remainder interest in the trust to a third party or back to the grantor.
2. the grantor will receive an income tax deduction at the inception of the trust.

32
Q

Totten Trusts (NOT REALLY a Trust)

A
  1. bank accounts that include payable on death beneficiary clauses (PODs).
  2. transferred to the named beneficiary upon the death of the owner and ESCAPES probate.
33
Q

Marital Deduction Qualifications (U.M.D)

A
  1. The property must be included in the decedent’s gross estate.
  2. The property must be transferred to the surviving spouse.
  3. The interest must not a terminable interest unless it meets one of the exceptions.
  4. If the surviving spouse is not a U.S. citizen, additional requirements must be met in order to qualify for the unlimited marital deduction.

If property is not included in the gross estate of the decedent, the decedent will not be permitted to deduct the value of that property from the gross estate as a marital deduction.

Husband and Wife are a single economic unit

34
Q

Terminable Interest

A

Terminable Interest General:
* Terminable Interest is any interest in property passing from a decedent to surviving spouse where the surviving spouse’s interest will terminate at some poin in the future
* Property that qualifies for the Unlimited Marital Deduction should have a terminable interest for the spouse
Exceptions to Terminable Interest Rule (things that qualify for UMD without terminable interest:
1. 6 month survival contingency
2. Terminable interest is outright or in confines of a trust IF spouse has general power of appointment
3. QTIP Trust
4. Charitable Remainder Trust

35
Q

Qualified Domestic Trust (QDOT)

A

Requirements:
1. At least one of the QDOT trustees must be a U.S. citizen or U.S Corporation
2. trust must prohibit a distribution of principal unless the U.S. citizen trustee has the right to withhold estate tax on the distribution
3. The trustee must keep a sufficient amount of the trust assets in the United States to ensure the payment of federal estate taxes
4. The executor of the citizen-spouse’s estate must elect to have the marital deduction apply to the trust

36
Q

Buy Sell Agreement Types
1. Stock Redemption
2. Cross Purchase

A

Stock Redemption Buy-Sell:
1. The stock redemption buy-sell agreement is structured between the owners of a firm and the company
2. business entity purchases both life insurance and disability insurance policies on the owners of the business.
3. Business is beneficiary
4. The business then uses the policy proceeds to purchase the stock or partnership interest owned by the deceased or disabled owner
Cross Purchase Buy-Sell:
1. Each co-owner holds a life insurance policy and/or a disability policy on his or her fellow co-owners
2. This is a buy-sell strategy used for firms with few owners.
3. Cross Purchase Formula: (# Owners) X (#-1)

37
Q

Disclaiming Assets (Define and Requirements)

A

Definition:
* A disclaimer is an irrevocable and unqualified refusal to accept a gift or bequest.
Requirements:
1. the disclaimer must be in writing,
2. the disclaimer must be made within nine months of the date on which the transfer creating the interest was made or the day on which the disclaiming party reaches the age of 21,
3. the disclaimant cannot specify the party to whom the property will be transferred as a result of the disclaimer
4. The disclaimant cannot benefit
5. CAN disclaim any % of an asset OR 1 asset from a grouping of assets
6. Disclaimant CANT receive interest and disclaim principal OR hve benefited in any way from the asset

38
Q

Pooled Income Funds (PIFs)

A
  1. Donor transfers property to the charity which is then commingled in the trust with the property transferred by other donors.
  2. Interest of the trust can be sent to the donor as income
  3. The annual payment to the beneficiary is a pro rata share of the trust income
  4. CANNOT invade principal/ corpus
  5. CANNOT invest in tax exempt securities
39
Q

Self Cancelling Installment Notes (SCINs)

A
  1. The buyer (obligor) can deduct the interest paid on the SCIN sale (unlike a private annuity).
  2. The value of the installments canceled at the note holder’s death is not included in the gross estate.
  3. An owner can accept a SCIN in a sale of assets when seeking an income stream, income tax deferral, and estate tax reduction.
  4. The buyer can depreciate assets based on the purchase price.
  5. With a SCIN, buyer can pay more than FMV of Item
  6. Seller DOES HAVE collateral interest
40
Q

Private Annuity

A
  1. Private annuities are appropriate vehicles for a sale when the property owner is seeking an income stream, income tax deferral, and estate tax reduction.
  2. The property is transferred to the recipient for a promise (payments are not secured).
  3. No value of the private annuity is included in the owner’s estate (estate taxes are avoided)
41
Q

General Gift for Insurance

A

Gift Tax Value of Life Insurance
* Interpolated Terminal Reserve PLUS Unearned premium
* If someone owns a policy on a different life, and names a beneficiary (husband has policy on wife and names child as beneficiary); it is deemed that husband gave gift to child

42
Q

Income w/ Respect to Decedent Assets (IRD)

A

General:
* Assets tht would have been included in the decedent’s income that now MUST be included in the income of the recipient/ beneficiary
* IRD Assets DO NOT receive a step up in basis at death
* IRD Assets WITH NAMED BENE can avoid probate

List of IRD Assets:
1. IRA’s; Roth’s; 401(k)s; Qualified Plans
2. Annuities
3. Income due to decedent that they should have been paid, but death got in the way (never got taxed at income)

43
Q

Pre-Nuptual Agreements

A

Use When:
1. when each party has significant wealth and wishes to protect his or her financial independence
2. when there is a significant difference in wealth bewteen both parties
3. When one or both parties have significant obligations coming into the marriage

Requirements:
1. Both parties MUST be comfortable disclosing all income and assets to the other party

44
Q

Common Clauses and Others
1. Attestation
2. Exordium (introduction clause)
3. Residuary Clause
4. Ademption
5. In Terrorem
6. Advance Medical Directive
7. Pour-over Provision
8. Codicil
9. Spendthrift

A

1. Attestation: presuming that any statutory requirements have been satisfied; usually verified by witnesses
2. Exordium: Introductory Clause of a will…declares that document is a will
3. Residuary Clause: a provision in a will or trust that instructs how to transfer assets not specifically mentioned elsewhere. this is a “catch all” for residual assets
4. Ademption: Extinction of legacy; when an asset is placed in a will, but no longer relavent (property that was sold before death)
5. In Terrorem: No contest clause: Dont challenge the will or risk losing all inheritance
6. Advanced Medical Directive: Addresses ending of life sustaining treatment (DIFFERENT from a H.C POA)
7. Pourover Provision: transfer of assets from an estate into a trust created prior to the “pour over” provision.
8. Codicil: A document used to alter/ change a will
9. Spendthrift: For financially irrresponsible beneficiaries; limits trust assets for bene

45
Q

Probate General

A
  1. Trusts created by a will (testamentary) WILL have to go through the probate process (QTip; GPOA Trust; Testament)
  2. Inter-Vivos Trusts: NEVER go through probate
  3. Anything that falls under CONTRACT LAW (operation of the law) will NOT pass through probare (anything with a beneficiary listed… IRAs etc) CAN qualify for unlimited marital deduction
  4. Ancilliary Probate: When property is owned outside of resident state
  5. Probate: Claims of creditors MUST be presented timely (once probate is closed, creditors lose opportunity)
  6. UTMA/UGMA Accounts of Donors DO NOT go through probate
46
Q

Role Of Executor/ Administrator

A

Executor:
1. When someone is considered to have died TESTATE and DOES have a will
2. Receives Letters Testamentary
Administrator:
1. When someone is considered to have died INTESTATE and DOES NOT have a will ( or will is significantly incomplete)
2. Receives Letters of Administration
Responsibilities of Executor/ Administrator:
1. Marshal/ Protect the assets of the estate
2. Post Legal Notice
3. Pay Debts; Costs; Taxes of the Estate
4. Compile Inventory of Assets
5. Distribute Specific and any Remainder Assets

47
Q

Intentionally Defective Trust

A
  1. Tool used to freeze certain assets of an individual
  2. ensures that THE GRANTOR continues to pay income taxes, BUT the trust will be EXCLUDED from Grantor’s estate
48
Q

Adjustable Taxable Basis to Heirs:
1. General Rule
2. Gifts made 1 year before
3. JTWROS
4. Community Property
5. IRD

A

General Rule:
1. Basis = FMV at death OR Alternate Date of Death
Exceptions:
1. Gifts that were made within 1 year of death: (carryover basis)
2. JTWROS: (If Spouse; 50% times FMV step up); (If NON-Spouse: Actual Contribution% times FMV = step up)
3. Community Property: 50% goes into gross estate BUT WHOLE Property gets step up
4. Income with Respect of Decedent (IRD): No step up; income tax gets paid by bene

49
Q

Portability (2x Estate/ Gift Exemption)

A

Define:
1. Portability is how spouses combine their exemption from estate and gift tax
2. Surviving spouse can use the UNUSED portion of the unused estate tax exemption of their deceased spouse
General:
1. Deceased spouses estate must file a return that makes the exemption WITHIN 9 MONTHS
2. ONLY APPLIES to the gift anf estate tax exemption
3. DOES NOT apply to GSTT (Generation Skip Tax)
4. ONLY can use on your LAST spouse. Cant re-marry and keep accumulating

50
Q

Section 303 Redemption

A

General: For shares of closely held business when decedent is a major shareholder:
1. A decedent’s estate can sell enough stock back to a closely held corporation to pay for Federal and Estate taxes without IRS treating transaction as a divident
2. Primary benefit is that it provides liquidity for estate to pay taxes
Requirements:
1. Business must buy back the securities
2. Value of securities must EXCEED 35% of the decedent’s estate
3. NOT available for public companies; only
4. CAN be Common or Preferred
5. closely held business MUST have positive cash flow

Austin CFP Flashcards (10 decks)

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