BU - Estate Planning Flashcards
Ownership Titling: Separate or Individual
1 owner
asset is transferable with owner’s control
no automatic survivorship
100% probate exposed
100% included in gross estate
Ownership Titling: JTWROS
2 or more owners
transferable with out approval of JT
automatic survivorship at death of JT
not exposed to probate
50% of FMV if owners are spouses is included in gross estate
if owners are not spouses, then FMV x % of contribution
POA: non-durable
effective immediately until incapacitated
also used if a principal needs an agent to complete a task while on vacation
Ownership Titling: Tenancy by Entirety
2 owners; spouses
transferable with approval of JT
automatic survivorship to other owner
No probate
50% of FMV in gross estate
Ownership Titling: Tenancy in Common
Several owners
Transferable by each owner, separately and based on interest
No automatic survivorship, follows will or probate
exposed to probate, FMV of interest
FMV % of ownership is included in gross estate
Ownership Titling: Community Property
2 owners, spouses
transferable with both spouse’s approval
Automatic survivorship if titled WROS or Joint
Assets that do not transfer are exposed to probate
50% of the value of decedent’s interest is includible
POA: Durable
effective immediately until death
POA: general
effective immediately until disabled or incapacitated
authority to make broad array of decisions
POA: springing
effective when the principal is CONFIRMED incapacitated
can be timely
POA: special
agent only acts for a specific matter, ends when task is completed or time has expired
Step Up Basis Spousal JTWROS and Non-spousal JTWROS
Spouses split basis 50/50, and the surviving spouse receives full step up of dead spouse
non-spouses split basis based on % of contribution, the surviving tenants the dead tenants full step up
What is Testamentary Capacity (3)
The creator must know they are executing a will
The creator must be aware of what assets they own
The creator must know and remember their relationship with their beneficiaries
What causes a will to be invalid?
Fraud
The testator being subject to undue influence by someone benefiting from the will
Mistakes in the will clauses
Will not properly executed
Types of Will
Mutual will - agreement with another person to dispose of certain property interest
Reciprocal Will - each person designates all property be distributed to the other
Holographic Will - handwritten will
Nuncupative Will - oral will
How to avoid probate
Trusts
Law - JTWROS, Tenancy by the Entirety, joint bank, POD/TOD, life estates
Contract - named beneficiaries on insurance policies, retirement, pension, annuities
Per Capita
Assets distributed evenly amount all survivors
Per Capita by Generation
Assets distributed evenly by generations (similar to grandma’s)
Per Stirpes
Transferred to a deceased beneficiary’s children evenly
AVD
To receive lower valuation of the estate - reducing taxation
Executor makes the election
Valuation dates is 6 months from death
Selected 1 year of return filing - including extensions
Used on form 706
Assets excluded from AVD
Depreciating assets whose value declines over time, such as cars, patents, life estates and remainder interests
Property transferred via Will & subject to probate
Solely owned personal or real property
Tenancy in Common
Community Property
Property passing from the will into a testamentary trust
Property transferred by a pour over will into a trust
Life ins policy owned by the decedent who was not the insured
Property not transferred by will & subject to probate
Intestate property
Life ins proceeds payable to decedent’s estate
Homestead and exempt property allowances
Annual Exclusions apply only to present interest gifts
- Present gifts in Trusts: irrevocable trust and beneficiary will immediately receive income for life or certain term
- Present gifts to Minors:
UGMA/UTMA
529 Plans
2503(b) trust (multiple beneficiaries)
2503(c) trust (one beneficiary, income accumulates until 21)*exception
Future Interest Gifts Examples - do not apply for annual exclusion
Remainder interest in property
Trust that accumulates income (except 2503(c))
Non-income producing property in trusts: unless the trustee can sell and buy income producing property
Trust has a sprinkle or spray provision
Gift Splitting
Spouses only & would apply to ALL gifts that calendar year
Form 709 is filed separately by each spouse if the split value exceeds the annual exclusion;
Form 709 is filed by the donor spouse if the split gifts are less than the annual exclusion (ex: 20K), and the other shows “consent”
Form 709 is not filed if the entire gift is less than the annual exclusion
Qualified Disclaimers & Requirements
Treated as if the property went directly from the original transferor to the person who ended up receiving the property
Requirements: refusal or rejection in writing
The writing must be received no later than nine months after the later of:
- the date on which the transfer creating the interest is made, or
- the date the person disclaiming reaches age 21.
- The person disclaiming must not have accepted the property interest or any benefits of the property.
- Someone other than the disclaimant receives the disclaimed property interest. The person making the disclaimer cannot in any way influence the potential recipient of the property.
When to use a qualified disclaimer
Transfers involving large gifts
Tax-free to the contingent donee
Spouse is donee and doesn’t want the gift
You cannot benefit from the gifted property first, and then elect to treat the property as a qualified disclaimer. The election to use a qualified disclaimer to transfer the property is permanent and cannot be undone.
If gifted property with gains…
The donee will assume the donor’s basis & holding period
If gift taxes are paid by donor, there is a gift tax adjustment made to the donee’s basis
Gift tax adjustment = (FMV-OG basis / FMV or FMV-annual exclusion) x gift tax pd + basis
If gifted with a loss…
Wait and see what happens with the final sale
Need to know FMV on date of gift, original basis and final sale price
If Final Sale > original basis → original basis and holding period are used
If Final Sale < FMV on date of gift → FMV and date of gift are used
If Final Sale is between original basis & FMV on date of gift → no gain or loss
When can you elect ADV
Has to be elected by the executor
When the ADV will reduce gross estate value AND reduce gross estate tax and GSTT
Form 706 has to be filed by 1 year of date of death
Transfers with no limits (2)
Medical bills paid directly to the medical facility
Tuition paid directly to the school
Calculating Taxable Estate
Gross Estate - expenses, debts, taxes losses
Adj. Gross Estate - marital deduction - charitable deduction
=Taxable Estate
Generation Skipping Transfer
Skip person is 2 or more generations below the transferor GST task is addition to gift tax and estate tax GSTT annual exclusion of $16k and exemption of $12MM Flat tax is 40%
3 Types of GST
Direct skips
Taxable Distributions
Taxable Terminations
Direct Skips
Subject to an estate and gift tax - direct, no trusts involved
Transferor pays GST tax
Taxable Distributions
A distribution of income or corpus from a trust to a skip person, not otherwise subject to estate or gift tax G1 creates trust and G3 receives income
Transferee pay GST
Taxable Termination
Death, lapse of time, release of power or an interest in property held in a trust resulting in a skip person holding all the interest in the trust
G1 creates trust, G2 can receive income, upon G2’s death, the G3s hold all the interest
Trustee pays GST
Federal Estate Tax Calculation Steps (5)
- Determine the value of the gross estate (everything owned and owed)
- Arrive at the adjusted gross estate
- Determining the taxable estate
- Calculating the federal estate tax payable before credits
- Apply allowable credits to arrive at the net federal estate tax
What form used for estate taxes
Form 706 Filed by the executor and due within 9 months of the death
$12MM exclusion = $4.7M in taxes
Estate Formula
Gross Estate
- Expenses, debts, taxes & losses
Adjusted Gross Estate
- Marital deduction
- Charitable deduction
Taxable Estate
Marital Deduction
Unlimited for most gifts made to a spouse
Except non-citizen spouse is limited to $164k
Also not available for Terminable Interest Property
Charitable Gift Annuities (CLAT)
Donor transfers cash or property to a charity and the charity pays the donor (or other donees) an annuity payment each year for life
Gift tax charitable deduction is the PV of the charity’s remainder interest
Gift annuities payments to others: gift tax is the PV of the annuity payment
Pooled Income Funds
A donor gifts property to a charity and receives an annual pro-rate share of income from the charity’s commingled funds, for life
Add’l gifts can be made to the fund to increase donor’s income stream
Charity manages the fund and cannot invest in tax-exempt securities
Donor takes an income tax deduction for the PV of the charity’s remainder interest
Donor pays income tax on the income received from the fund
Private Foundation
Separate legal entity, either a not-for-profit or tax-exempt trust
Family members who make gifts to the foundation may take an income tax deduction limited to 30% for cash and 20% for LTCG property
Foundation must distribution 5% of the assets to public charities annually
Donor-Advised Funds
Maintained by charities, community foundations or mutual fund companies
Donor may contribute cash, stock or other property to their individual fund accounts and select the charities they want to receive grants
Estate Planning Process
- Gather significant data from the client.
- Establish and prioritize estate planning objectives.
- Identify the factors that limit or affect the selection of estate planning techniques.
- Identify estate planning weaknesses before selecting a technique.
- Select an appropriate estate planning technique.
- Implement the estate planning technique.
- Monitor the plan for revisions and modifications.
Simple Trust v Complex Trust
Simple:
No distribution of principal
MUST distribute all income
$300 Income exemption
No charitable beneficiary/deduction permitted
Complex:
Yes distribution of principal is permitted
No all income doesn’t have to be distributed
$100 income exemption amount
Yes allowed a charitable beneficiary/deduction
Revocable Trusts
Grantor has the right to terminate
Transfer of assets does NOT constitute a completed gift
Assets in the trust are subject to estate tax at grantor’s death
Used for estate planning, avoiding probate and fully amendable
Irrevocable Trusts
Can not revoke once created
Transfers of assets are generally considered a completed gift
Assets in the trust are generally not subject to estate tax at grantors death
Uses: estate planning, asset protection, avoids probate, medical planning, tax deductions, amendable somewhat*
Types of Trusts
Living (Inter-Vivos) Trust - established during grantor’s lifetime and effective immediately, avoids probate
Testamentary Trust - created through a will, funded after death, reduces estate taxes, provides professional investment management
Revocable Trusts
Irrevocable Trusts - property not included in gross estate
If you make a revocable trust, irrevocable and then die within 3 years, the property is brought back into the gross estate
Standby Trust - manages assets if creator becomes incapacitated, grantor is the trustee and beneficiary
Filing Requirement of Trusts
Form 1041 by the fiduciary if there is any taxable income, gross income of $600 (regardless if taxable) or beneficiary is a non-resident
Use Trust Tax tables on income THAT REMAINS IN THE TRUST, otherwise the beneficiary will pay taxes on the income received
Trust Accounting Income
Items of income and expense that are used to determine the amount the income beneficiaries are entitled to receive from the trust each year
Does not determine the trust’s taxable income or who will pay
Trust document will usually specify what account income is
Trust Taxable Income
Determined by subtracting from income deduction such as distributions, charitable contributions, investment interest, investment fees
In addition, the trust is entitled to the appropriate personal exemption
Distributable Net Income (DNI)
Allocated the taxable income between beneficiary and the trust
DNI represents the max that can be taxed to the beneficiary
The beneficiary will be responsible for taxes on the lesser of the DNI allocation, or the amount required to be distributed
Example: if trust earns $10k, and distributions $12k, the first $10k is income and taxed, the remaining is tax free distribution of corpus
Trustee Holds ____ Title
Beneficiary Holds _____ Title
Trustee Holds LEGAL Title
Beneficiary Holds EQUITABLE Title
GRATS & GRUTS
Irrevocable trusts which the grantor places assets and retains interests for set term
The principal at the end of term pass to non-charitable beneficiaries
GRAT - Grantor retained annuity trust
Fixed payment at least annually based on % of initial valuation
No add’l assets permitted Conservative
GRUT - Grantor retained unitrust
Fixed payment at least annually based on % of annual valuation
Add’l assets permitted
Moderate to aggressive
Purpose of GRATs/GRUTS
Transfer property in the trust at a reduced (or zero) gift tax value
Pass appreciation to beneficiaries without incurring add’l gift tax
Reduce value of the grantor’s gross estate
Charitable Lead Trusts
If “grantor-CLT” there is a large, front loaded tax deduction, non-grantor gets no deduction
Charity lead - means charity gets benefit of trust first, then beneficiaries get remaining corpus
CLAT - annuity payment, risk-averse.
CLUT - % payment, annually revaluated, can add additional assets and inflation hedged. Moderate to aggressive risk tolerance
Charity Remainder Trusts
Charity benefits after set term. FMV - PV of income stream
CRAT - annuity payments
CRUT - % payment, revaluated annually, can add additional funds and inflation hedgeing
TIPS
Terminable Interest Property
Interest in property that may terminate on the happening or failure of some event or contingency
Example: spouse receives income interest in trust for life or a term of years, afterwards the trust passes on to beneficiary
Marital deduction is not available except for 2 exceptions
Exception 1. Surviving spouse is given a life estate and given general power of appointment over corpus
Exception 2. donor spouse “qualifies” the TIP or the executor elects Q-TIP
Gift Tax and Estate Tax Consequences for TIPS
Gift: Donor spouse cannot take a marital deduction for gifting TIP, but can take annual exclusion for the present interest
Estate: surviving spouse will not include in their estate at death, donor spouse will remove the property from their estate
Estate Equalization
Estate is dived into two parts and taxed at a lower rate rather than remaining as a whole and taxed at a higher rate.
This division may be necessary because of the progressive nature of the federal estate tax
A-Trust
marital trust that provides the surviving spouse with general power of appointment, access to income and ability to invade the corpus during life
B-Trust (By-pass Trust)
spouse trust that avoids “over-qualifying” the decedent spouse’s estate for the marital deduction by utilizing the maximum unified credit.
Allows the surviving spouse to obtain income as needed.
Trust assets are not included surviving spouse’s estate at death
QTIP
privies the beneficiary spouse with income for life, qualifies the trust for the marital deduction and gives the trust corpus to children from a previous marriage
Disclaimer Trust
estate planning technique where married couple incorporates an irrevocable trust which is funded if the surviving spouse chooses to “disclaim” or refuse to accept the outright distribution of certain assets following the deceased spouse’s death
Ascertainable Standard
added to trust to give the trustee guidance as far as when and how they need to make distributions to the beneficiaries. A trustee can make distributions to a beneficiary for health, education, maintenance, and support
Estate Trust
qualifies property for a marital deduction in the decedent’s estate.
Used if the beneficiary spouse has substantial wealth and does not need the trust income or corpus.
Tool used to minimize total estate tax liability for combined estates
estate equalization
Surviving spouse to receive all income at least annually
A Trust or QTIP
Surviving spouse receives income IF NEEDED
B or Estate Trust
Decedent spouse to receive a marital deduction
A Trust
QTIP
Estate Trust
Outright gift to spouse
Surviving spouse chooses beneficiaries
A Trust
Estate Trust
Surviving spouse determines what portion of the decedent’s estate to transfer into a trust to use the decedent’s unified credit
disclaimer trust
surviving spouse has access to trust income for HEMS without including in their estate
Ascertainable standard
QDOT
Qualified domestic trust
unlimited marital deduction does not apply to non-citizen spouses UNLESS assets go into a QDOT
QDOT ensures that the assets will not ultimately leave the US without being taxed
ILITs
Irrevocable Life Insurance Trust
Provides liquidity for payment of all death taxes with life ins policy
If grantor transfers an existing policy into the trust, there is a 3 year rule, otherwise policy is included in grantor’s estate
Owner of the policy is the trust
Beneficiary of the policy is the trust Insured in the grantor
Unfunded ILITs
Includes only the life insurance policy
Grantor transfers money into the trust each year to pay the premiums
Crummy powers are given to beneficiary’s to qualify for the annual gift exclusion
Funded ILITs
Includes a life insurance policy and income producing property like bonds
Does not require crummy powers
Grantor is taxed on trust income
Special Needs Trusts
Used to preserve eligibility for government benefits and pay for extra services not covered
Can be funded with assets or life insurance premiums
Covers medical expenses not covered by Medicaid, supplemental attendant and custodial care, add’l therapies and respite for family caregivers
Also pays for telephones, computers, cable, basic household furnishing and travel + companion
2503(b) Trusts
Bring Beneficiaries Bucks
Income must distribute at least annually
Corpus may be withheld form the beneficiary until death Income interest is eligible for annual exclusion
Corpus will be excluded from donor’s estate, if not a trustee
Corpus may also be excluded from the beneficiary if the income interest terminates at beneficiary’ death
2503(c)
Cease Current Cash Income is not required to be distributed
Corpus must be distributed no later than age 21
Entire gift is eligible for annual exclusion
Income accumulated in the trust is taxed to the trust
If beneficiary dies before 21, accumulated trust income and corpus must go to their estate
Family Limited Partnerships - what is it?
Pass-through entity established under state law - consisting entirely of family members
Allows senior family members to transfer property to junior family members at significant reduced costs
Family Limited Partnerships - Advantages and disadvantages
Advantages:
Control - general partners (senior family) retain control of property
Income tax reduction - shares are shifted to junior family members at lower tax brackets. Earnings from the assets in the FLP are taxed at the recipient’s income tax bracket.
Protection from creditors
Valuation discounts- 30-70 for lack of marketability and minority owners
Gifting - ease of gifting assets that are difficult to distribute - transfers qualify for annual exclusion
Disadvantages:
Income shifting to younger family may be limited to kiddie tax
Add’l costs for setting up FLP
Gifts do not receive step up basis
Retained interests continue to appreciate in senior family member estates
Why would you use Sale-leaseback or gift-leaseback
Must be irrevocable and based on FMV
Must be legally enforceable lease agreement with reasonable lease payments
- to provide income stream to family members
- to remove the business property from the owner’s estate
Sale- Leaseback
Business owner sells the business property to an adult child and then leases it back
Owner receives lump sum payment or installment payments from the child and continues to use the property in the business
Owner deducts monthly lease payments made to the child as an expense
Lease payments are taxed in the child’s lower tax bracket
Business property is removed from the business owner’s estate
Gift-Leaseback
Owner gifts property into an irrevocable trust then leases the property back
Owner receives business deductions for the lease payment made to the trust
Trustee distributes lease payments to family beneficiaries in lower tax brackets
Business property is removed from the owner’s estate
Installment Sale
Used to sell the business to a family member or a 3rd party and provide a secured income for the seller.
The promissory installment note is secured and does not require a set sale price
The buyer does not need a down payment and payment amounts can vary, even skipped or spread out over several years
At least one payment must be made to the owner after the taxable year in which the sale occurs
The PV of any outstanding installments are included in the seller’s gross estate
Self-Cancelling Installment Note (SCIN)
Partially or fully cancels the installment note before the note matures
The seller can cancel the installment note in the will - the unpaid balance of the note is NOT included in the seller’s gross estate
The seller can cancel the entire note at once, which is subject to capital gains and gift taxes
The seller can cancel the note in increments of $16k per year to avoid or reduce taxable gifts
Private Annuity:
A seller receives a fixed annuity income stream for life and removes the property from their gross estate
Payments from the sale are structured as an annuity and are either single life or joint and survivor annuity
Single annuity: remaining payments are not included in the seller’s estate
Joint and survivor annuity: payments continue for two lives. The PV of the survivor’s future annuity payments is included in the seller’s estate, but the marital deduction is available to offset tax
NOTE: if the buyer dies before the seller - the buyer’s estate must make payments to the seller for life. If the seller outlives their calculated life expectancy, the buyer must continue to pay the seller
Intra-Family Transfer: Outliers
Private Annuties has no collateral
SCINs cancel at death and removed from the estate of the seller
Installment Notes unpaid may be included in seller’s estate
Quasi-community property
property acquired by spouses while residing in a common-law state, which is treated as community property after they move to certain community property states
IRD (Income Respect of Decedent)
No step up
Attempts to value gifts of large blocks of stock based on the price the property would bring if the stock were liquidated in a reasonable time in some way outside the usual marketing channels.
The blockage rule
Appointed by the probate court if executor is not named or chooses to not serve
Administrator
Plenary guardianship
manages both the ward’s property and personal affairs
standby trusts
revocable inter-vivos trusts
grantor is also the trustee and beneficiary
Advantages of a Codicil
- Convenient
- Simple
- Inexpensive
sprinkling trust can distribute
spray trust can distribute
sprinkle = income
spray = both income and corpus
item of income in respect of a decedent (IRD) may have which of tax liabilities
estate and income tax
65-Day Rule
allows fiduciaries to make distributions within 65 days of the new tax year and be counted for the previous year (April 6th)
Section 645 election
allows the executor of an estate and the trustee of a revocable trust to elect to treat the estate and the trust as one for tax purposes
