CFP Flashcards
1
Q
Grantor Retained Unitrust (GRUT)
A
Irrevocable trust into which the grantor places assets and a right to payment of income (at least annually) for a chosen period. The grantor retains the right to payment of a fixed percentage of the value of the trust property (determined annually) for a number of years.
2
Q
GRUT advantages
A
Estate tax reduction; if grantor outlives term, property in GRUT rec’s no estate tax.
Provides income to the grantor.
Additional assets are permitted.
Offers support for the grantor & beneficiaries
3
Q
GRUT Disadvantages
A
*Initial gift is taxable (FMV – annuity payments); Income payments are taxable to the grantor.
*Beneficiaries receive carryover basis.
*The grantor loses control over the property.
*Income generated is subject to creditor claims.
*Payment must be paid to the grantor even if the trustee has to use trust corpus or borrow funds.
4
Q
TYPES OF OWNERSHIP
A
Individual or Separate Ownership
Joint Tenancy with Right to Survivorship (JTWROS)
Tenancy by the Entirety
Tenancy in Common
Community Property
5
Q
QPRT- Qualified Persona Residence Trust
A
irrevocable trust that holds a person’s residence, allowing couples or individuals to live in the house rent-free for a specified period. At the end of the term, the home will pass gift-tax free to the trust beneficiaries.
6
Q
Advantages of QPRT
A
Tax reduction: Potentially removes a highly valued asset out of one’s estate
Property Use: Permits grantor’s continued use of property during trust term
Support for beneficiaries.
7
Q
Disadvantages of QPRT
A
*Possible estate inclusion (i.e., FMV on date of death if grantor does NOT outlive the trust term).
*Taxes (income).
*If beneficiaries intend to sell the home, the original basis is transferred, increased by a portion of any gift taxes paid.
*Maintenance expenses on property.
*When the grantor survives the trust term, they must either: move, or rent.
8
Q
Marital Deduction:
A
An unlimited marital deduction is available for most gifts made to a donee spouse.
An unlimited marital deduction can NOT be used for gifts made to a non-citizen spouse.
The annual exclusion for a gift to a non-citizen spouse is $164,000 in 2022.
Not available for Terminable Interest Property (TIP).
9
Q
Charitable Lead Annuity Trusts (CLATs)
A
A Charitable Lead Trust (CLT) pays an income stream to a qualified charity for a period of years, usually not exceeding 20. At the expiration of the lead period, the remainder interest passes to one or more noncharitable beneficiaries.
A Charitable Lead Annuity Trust (CLAT) is a type of CLT that is designed to provide annual payment of a fixed amount to a qualified charity with the remainder going to a non-charitable beneficiary.
Charitable Lead Trusts are considered ‘non-tax-exempt entities.’ Income earned by the trusts is taxed to the grantor.
10
Q
Charitable Lead Unitrusts (CLUTs)
A
A Charitable Lead Trust (CLT) pays an income stream to a qualified charity for a period of years, usually not exceeding 20. At the expiration of the lead period, the remainder interest passes to one or more noncharitable beneficiaries.
A Charitable Lead Unitrust (CLUT) is type of CLT that provides payment of a periodic sum, usually a percentage of the trust assets (revalued annually) to a qualified charity, with the remainder going to a noncharitable beneficiary. This creates annual payments that go ‘up and down’ based on the annual valuation.
11
Q
Advantages of CLUT
A
Qualify for income tax, gift tax, and estate tax deductions.
If using a ‘grantor-CLT,’ there is a large, front-loaded tax deduction that can offset taxation.
Flexibilty: can be either inter-vivos or testamentary.
Means to support philanthropic goals and support beneficiaries.
Additional assets permitted.
Income stream serves as an ‘inflation hedge.’
12
Q
Disadvantages of CLUT
A
Trust principal is invaded if income is insufficient to make payments to charity, which ultimately leaves less for the trust beneficiaries.
An income tax deduction is only available for ‘grantor-CLTs.’ Non-grantor CLTs do not qualify.
Lead trusts are ‘non tax-exempt entities.’ Income earned by the trust is taxed to the granto
13
Q
Spousal Transfers: aka Bypass Trusts (B-Trusts), credit shelter trust, family trust,
A
designed to receive property that is not allocated to the A-Trust, the estate trust, or the QTIP trust. An amount up to the lifetime exemption amount ($12.06 MM in 2022) can be placed in this trust
*Allows the surviving spouse to obtain income as needed.
*Trust assets are not included in the surviving spouse’s estate at death.
* Can have 5x5 power- $5000 or 5% annual
14
Q
Spousal Transfers: A-Trusts
A
The marital trust or A-trust (or, Power of Appointment Trust). If the marital trust is a testamentary trust, then the trust only takes effect upon the death of the grantor. The A-Trust consists of property that qualifies for the unlimited marital deduction for the decedent. The trust is included in the gross estate of the surviving spouse.
*surviving spouse receives all income at least annually
*surviving spouse determines beneficiaries
15
Q
A-B Trust
A
An arrangement designed to give the surviving spouse full use of the family’s economic wealth, minimizing, to the extent possible, the total federal estate tax payable at the deaths of both spouses.
Avoids “overqualification” of the estate for the marital deduction because of “underutilization” of the lifetime exemption amount/unified credit in the estate of the first-to-die spouse.
Has the right to all income and corpus from the A-trust and income if needed from the B-trust.
Only the property from the A-trust is included in the surviving spouse’s estate.
A marital deduction is available for the A-trust.
The lifetime exemption amount/unified credit is used for the B-trust.
The estate tax liability is zero.
16
Q
QTIP (Qualified Terminable Interest Property) Trusts
A
trusts are established when the decedent spouse wants to:
Provide the beneficiary spouse with income for life.
Receive an estate tax marital deduction.
Give trust corpus to children from a previous marriage.
17
Q
Disclaimer Trust
A
An estate planning technique in which a married couple incorporates an irrevocable trust in their planning, which is funded only if the surviving spouse chooses to “disclaim,” or refuse to accept, the outright distribution of certain assets following the deceased spouse’s death.
18
Q
Examples of Marital Objectives and Corresponding Estate Planning Solutions:
A
To minimize their total estate tax liability for their combined estates: Estate equalization.
Surviving spouse to receive all income annually: A or Q-TIP.
Surviving spouse to receive income if needed: B or Estate Trust.
Decedent spouse to receive a marital deduction: A, Q-TIP, Estate Trust, an outright gift to the spouse.
Surviving spouse to choose trust beneficiaries: A or Estate Trust.
Surviving spouse to determine what portion of the decedent’s estate to transfer into a trust to use the decedent’s unified credit: Disclaimer trust.
Surviving spouse to access trust income for health, education, maintenance, and support (i.e., HEMS) without including the assets in their estate: Ascertainable standard.
19
Q
Qualified Domestic Trusts (QDOTs)
A
A QDOT qualifies assets transferred to a non-citizen spouse for the unlimited marital deduction.
20
Q
Irrevocable Life Insurance Trust (ILIT)
A
Unfunded ILIT: Includes only the grantor’s life insurance policy.
The grantor must transfer money into the trust each year so the trustee can pay the life insurance premiums.
The beneficiaries are given Crummey powers: The right to withdraw some, or all, of a grantor’s contribution to an irrevocable trust each year. Turn a future interest gift into a present interest gift, thus, qualifying for the annual gift exclusion amount.
The withdrawal amount is usually limited to the lesser of:
The annual exclusion.
The annual contribution made to the trust.
The greater of $5,000 or 5% of the amount transferred into the trust.
Funded ILIT: Transfer a life insurance policy and income-producing property into the ILIT.
Trust income will pay for the policy premiums.
Beneficiaries are NOT given Crummey powers.
21
Q
Family Limited Partnerships (FLPs)
A
is a pass-through entity established under state law, which works as a partnership consisting entirely of family members. The FLP allows senior family members to transfer property to junior family members at significantly reduced transfer costs, to lower the value of their estates and keep the property in the family.
22
Q
Advantage of FLP
A
Control: General partners (i.e., senior family members) retain control of property through the FLP.
Income tax reduction: Shares are shifted to junior family members at lower tax brackets, reducing current taxation. Earnings from the assets in the FLP are taxed at the recipient’s income tax bracket.
Protection from creditors.
Valuation discounts: These range from 30%-70% for a more efficient transfer of wealth.
Lack of Marketability Discount: A discount allowed by the IRS because investors are not interested in closely held stock or FLP shares, and the cost of taking this stock public or selling it on an exchange to potential investors is very expensive.
Minority Interest Discount: Applied when transferring business interests to minority shareholders because these shareholders have no influence or control over business operations or management policy.
Gifting: Ease of gifting assets that are difficult to distribute. Transfers qualify for the annual exclusion ($16,000 in 2022).
23
Q
Disadvantages of FLP
A
Income shifting to younger family members may be limited by “Kiddie Tax.”
Additional filing, fees, and informational tax returns are due when setting up and accounting for an FLP.
Gifts do not receive a step-up in basis.
Retained partnership interests continue to appreciate in senior family member’s estate.
24
Q
If the value of the assets that the client intends on transferring into a trust exceeds the GST exemption then the client may want to consider dividing the assets within the trust into exempt and non-exempt portions. The exempt portion would be funded with the GST exemption amount, and the non-exempt portion would be funded with the balance of the assets.
A
In a number of property transfer cases, the gift tax is not imposed since these transfers do not involve gifts in the tax sense.
These situations fall into three basic categories:
Where property or an interest in property has not been transferred,
Certain transfers in the ordinary course of business, and
Sham gifts.
A situation where interest in property has been transferred may be considered a gift and, as a result, would receive taxable treatment.
25
Tenants in common: two or more parties share ownership rights in a real estate property or parcel of land. Each independent owner may control an equal or different percentage of the total property, whether commercial or residential.
when inheriting property the person gets the step up in basis to the valuation at the time of death
26
In addition to an outright transfer of assets to an individual, gifts can take other forms.
These include:
The forgiveness of a debt
Foregone interest on an intra-family interest-free or below market loan
The assignment of the benefits of an insurance policy
The transfer of property to a trust.
Quasi-community property is 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; such as California, Arizona, Idaho, Washington, and Wisconsin.
27
A tenancy by the entirety is a specialized form of joint tenancy with right of survivorship existing between co-tenants who are husband and wife.
The estate is based on the common law concept of "spousal unity," that husband and wife are one person.
The spouses own the whole interest collectively, but no undivided individual share.
The basis in property held as tenancy in common is calculated based on each contributor's share of the property when acquired.
if someone contributed 60% of the original purchase.
Thus, 60% of the FMV on the date of death will be included in their gross estate.
28
lifetime gifts get the carryover basis and holding period of the person who made the gift.
if sale price is between donors basis and FMV at the time of gift then no gain or loss is recognized
eg. $40k in stock gifted when fmv is $36k and then is sold for $38k then no gain or loss is recognized
FMV on the date of the gift was below the donor's original basis, and the stock was sold below the FMV on the date of the gift, the new basis is the FMV at time of gift and new holding period starts from date of gift
The reverse gift transfer will work if
1. the decedent lives for more than one year after receiving the gift, or
2. if the gifted property is bequeathed to anyone other than the original donor or the donor's spouse.
In these two situations the transferred property would receive a stepped-up basis in the decedent spouse's estate for the property's fair market value.
29
Certain factors are examined by courts to determine if there was an intent to make a gift:
Was the donor legally competent to make a gift?
Was the donee legally competent to accept the gift?
Was there a clear and unmistakable intention on the part of the donor to absolutely, irrevocably and currently divest himself or herself of dominion and control over the gift property?
The annual $16000.00 gift tax exclusion does not apply to charitable gifts. Charitable gifts are unlimited, but the tax deduction a donor receives each year will depend on the taxpayer’s AGI, as well as the type of property gifted and the type of charity to which the gift is made.
30
Some gratuitous transfers are exempt from the gift tax.
Examples include:
*a contribution to a political organization
*tuition paid directly to an educational institution for the education or training of an individual
*payment(s) made directly to a medical provider, as long as such medical care is not covered by insurance.
The assignment of income doctrine states that income earned or belonging to one individual, cannot be assigned to another simply to gain tax-favored treatment.
By directing right’s to next year’s rent earned from the condominium to his daughter, the father has assigned income and, consequently, will be taxed.
31
The blockage rule 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.
In some cases an intended donee may decide that he or she does not want or does not need the gift.
A disclaimer is used to expressly refuse a gift.
To treat a disclaimer as qualified.
1.The refusal or rejection of the benefits must be in writing.
2.The writing must be received by the transferor, his legal representative or the holder of the legal title to the property no later than 9 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.
32
To be considered a completed gift for gift tax purposes, three requirements must be met:
1. The donor must intend to make the gift.
2. The gift must be delivered to the donee.
3. The gift must be accepted by the donee.
*Form 709 completion is not a requirement to be considered a completed gift.
Community property is a form of ownership held by a husband and wife in the nine community property states including: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
33
The gift tax is an excise tax, a tax levied on the right of an individual to transfer money or other property to another. The gift tax is based on the value of the property transferred.
While each state has local variations on the classification of assets, there are general presumptions on the classification of community property that apply in all nine of the community property states.
It is presumed that if the couple moves to a non-community property state, any asset acquired during marriage while living in a community property state retains its community status.
34
Only husband and wife may hold the property as tenants by the entirety.
Tenancy by the entirety offers limited protection from creditors as well. If one spouse defaults on debts and creditors are seeking compensation, the most the creditor can do is put a lien on the property.
Property held in tenancy by the entirety can only be severed with the consent of both spouses or by divorce.
Gifts are made while you are and are referred to as inter vivos gifts.
Transfers of property made at death, in comparison, are known as bequests.
35
An ordinary business transaction, defined as:
a sale,
exchange, or
other transfer of property
that is a transaction which is
bona fide,
at arms length, and
free from donative intent made in the ordinary course of business.
Property that is titled JTWROS may be owned by spouses or non-spouses. Regardless of whom the joint owners are, the decedent's interest will automatically transfer to the surviving owner.
*qualify for unlimited marital deduction.
*may incur gift taxes if the spouse is a non-U.S. citizen.
*automatically transfer decedent's interest to the surviving owner.
36
Gifting may be used if the donor owns an asset that has a substantial amount of appreciation potential.
If the asset is properly gifted during the donor's lifetime, all asset appreciation will avoid inclusion in the donor's gross estate. Therefore, gifting this type of asset allows the donor to control the amount of estate tax liability that may be due upon his or her death.
Tenancy in common is appropriate when a client wishes to:
Reduce potential estate tax liability
Reduce any income tax liability
Ensure that the property is transferred to a designated beneficiary
Tenancy in common will lead to increased administrative expenses and costs as property passes via a will through the probate process.
37
An individual on his or her deathbed will sometimes make a gift causa mortis (a gift in anticipation of his imminent death).
For non-spousal joint tenants, the joint tenancy status of the property does not automatically result in the inclusion of only one-half the amount of the joint tenancy property in the decedent's gross estate.
38
When a charitable remainder is given to a qualified charity, a gift tax deduction is allowable for the present value of that remainder interest only if certain conditions are satisfied.
Identify the correct condition(s) that would permit a gift tax deduction:
The transferred property was either a personal residence or a farm.
The transfer was made to a charitable remainder annuity trust (CRAT).
The transfer was made to a charitable remainder unitrust (CRUT).
The transfer was made to a pooled income fund (PIF).
If the individual owner of the asset is married, regardless of the provisions within the will, the surviving spouse may be entitled to a minimum share of the decedent's estate. This right is afforded to a spouse under the state's elective share statutes.
39
The tax-oriented benefits associated with lifetime gifts include:
potential federal estate tax savings
income tax shifting (i.e., gifting income-producing assets from a high income-tax-bracket taxpayer to a low income-tax-bracket taxpayer)
if stock was gifted by donor at a loss and donee ultimately sold the stock for a gain...then
As a result, donee receives the carryover basis of the donor, as well as donor's holding period.
40
life tenants.
1. Life tenants are responsible for for paying property taxes and homeowners insurance on the property.
2. If the property is sold before the death of the life tenant, a portion of the gain is taxed to the life tenant.
3. If the property is sold before the death of the life tenant, the life tenant's gain qualifies for the $250,000 capital gains exclusion.
4. With real property, a life tenant cannot be forced to move out of a property.
Tenancy in common can serve as a means of transferring the property to an intended beneficiary under the will. The property does not pass automatically to the surviving tenants in common.
Tenants in common can split income among themselves.
41
For community property interests, a decedent's gross estate would include each of the following
1. One-half of the value of retirement plan assets and IRAs
1. 1/2 of death benefit proceeds of a life insurance policy obtained on the life of one of the spouses (since the policy and premiums were paid with community property assets)
3. One-half of the value of a residence
4. One-half of community property that is titled in one spouse's name
Assets identified within a will go through the probate process.
Assets jointly-owned with rights of survivorship, assets transferring under a beneficiary designation, and assets owned within a trust prior to death, are probate substitutes.
42
A remainderman, or remainder beneficiary, will receive the entire property interest after the life tenant's death. Unlike a trust, the remainder beneficiary has an immediate vested interest in the property.
The severance of a joint tenancy does not require the consent of all joint tenants.
It is easy to terminate a property interest, which is owned as JTWROS.
The joint tenancy may be terminated unilaterally by any one of the joint tenants.
As a practical matter, it is always prudent to obtain the signature of the non-consenting joint tenant(s).
43
To gift-split the donor must be married and obtain consent of non-donor spouse.
Gift-splitting increases the maximum annual individual gifts to $32,000 for an unlimited number of recipients
Gift splitting only applies to lifetime transfers not to transfers at death and is available for present interest gifts.
If the spouses elect to split gifts, all gifts made by either spouse during that calendar year must be split.
Upon the death of the first owner, the property immediately passes to the surviving owner(s), in equal shares.
The survivorship feature of property causes full exclusion from the probate estate of the decedent.
Typical JTWROS assets have two owners, but there may be three or more.
With community property, not property titled JTWROS, each spouse has a separate interest acquired in the property during marriage.
44
gifts that may be subject to the gift tax:
A gift on which the identity of the donee is not known on the date of the transfer.
A gift, such as a municipal bond, that is exempt from federal income tax.
A gift transferring intangible property rights.
A gift on which the donee is a partnership, corporation, foundation, or trust.
A taxable gift may include direct, as well as indirect gifts, gifts made outright, and gifts in trust (of both real and personal property).
A gift tax is imposed on the shifting of property rights, regardless of whether the property is tangible or intangible.
45
In classification evidence, furnishing records, purchase receipts, deeds of title, and records of deposit or withdrawal provides the evidentiary proof needed to classify property as community or separately owned.
Community Property
Money earned by either spouse, post-marriage
Property purchased by either spouse, post-marriage
Commingled separately owned assets and community property assets
Separately Owned:
Gifts to an individual spouse while married.
Property acquired by either spouse prior to marriage
Inherited assets bequeathed to either spouse, individually, while married.
46
The maximum reduction of the decedent's gross estate under Section 2032(A) (special use valuation) in 2022 is $1,230,000.
This rule is especially useful where the price of farmland falls behind local prices for new homes or commercial property.
The federal estate tax is calculated in five steps:
1. Determining the value of the gross estate.
2. Arriving at the adjusted gross estate.
3. Determining the taxable estate.
4. Calculating the federal estate tax payable before credits.
5. Applying the allowable credits to arrive at the net federal estate tax.
47
A revocable transfer is a transfer of property in which the decedent retained the right to alter, amend, revoke, or terminate the gift.
According to Section 2034, the gross estate is not reduced by the value of any dower or curtesy interest.
The value of these assets will be included in the decedent's gross estate.
48
The tax in a direct skip is tax-exclusive. In other words, the tax is paid by the transferor or the estate and the taxable amount does not include the amount of generation-skipping tax.
Taxable distributions and taxable terminations are tax inclusive whereas direct skips are tax exclusive. Since the net amount for the recipient of direct skips is exclusive of the tax, then, an allocation to direct skips tends to be wasteful. Therefore, in order to maximize the use of one's GST tax exemption, it is preferable to allocate it whenever possible to what otherwise would be taxable distributions and taxable terminations.
49
To maximize the use of one's GST tax exemption, it is preferable to allocate it to which of the following?
Taxable distributions
Taxable terminations
When the owner of a life insurance policy dies and the insured on the policy is alive, the ‘interpolated terminal reserve’ is included in the deceased’s gross estate. This is not the full face value of the policy/death benefit, but an amount that’s based on premiums paid into the policy.
50
At the death of the first spouse, an election can be made to transfer any unused lifetime exclusion amount to the surviving spouse. This is known as a Deceased Spouse Unused Exclusion (DSUE) election. Unlike in the past, the unused portion of the lifetime exclusion is not forfeited if an unlimited marital deduction is used to the deceased's entire estate tax-free to a surviving spouse.
Terminable interests may qualify for the marital deduction by using these exceptions:
1. General Power of Appointment
2. QTIP election
51
The Executor will elect the alternate valuation date on the estate tax return Form 706 when a significant portion of the estate assets have decreased in value.
For an asset to be included in the gross estate under 2036, the right must have been retained by the decedent for:
1. Life
2. Period not ascertainable
without reference to death
3. Period that does not end
before the decedent's
death
52
Under IRC Section 2056, the decedent's estate will qualify for the federal marital deduction if assets transfer into a marital trust, referred to as a qualified domestic trust, or QDOT.
A QDOT ensures that the assets will not ultimately leave the US without being taxed.
A general power of appointment allows the decedent to transfer the property to himself, his estate, his creditors, or the creditors of his estate.
Such property will be includable in a decedent's gross estate regardless of whether the power could be exercised at death or only during lifetime.
53
Once all or a portion of a person's exemption is allocated to a GST, all future appreciation on the property is designated to be exempt.
When selecting assets that will be protected by the GST exemption, assets most likely to appreciate, such as equities, should be used.
Examples of property whose value will be included under IRC Section 2033 include:
1.Specific property (e.g., stocks, bonds)
2.Property in which the decedent held a sufficient interest
3.Property in which the decedent held a vested remainder interest
*Property in which the decedent held a contingent remainder interest is not considered includible in the decedent’s gross estate under IRC Section 2033.
54
The federal estate tax is a tax on the transfer of property when a person dies. It is measured by the value of the property rights that are shifted from the decedent to others.
It is a tax on the right to transfer property or an interest in property, rather than a tax on the right to receive property, which is the basic characteristic of an inheritance tax.
Corporate owned life insurance (COLI) is includable in a decedent's estate if he or she owned more than 50% of the corporation's stock at death and is the insured on the policy, but only to the extent that it is payable to a party other than the corporation or its creditors.
55
For GST purposes, all persons are assigned to a generation. In the case of related persons, this is done by reference to the ancestral chain relating back to grandparents of the transferor, except that spouses of the transferor or a descendant are always assigned to the same generation as the transferor or descendant.
Related skip persons are 2 or more generations below the transferor.
An unrelated skip person is at least 37½ years younger than the transferor.
If a farm or a closely held business qualified for the special valuation rules, then an additional estate tax will be imposed if within 10 years after the decedent's death a qualified heir disposes of the property or ceases to use that property in the manner in which it was used to qualify for this special tax treatment.
56
Under the common law system, a surviving spouse has dower or curtesy rights.
Dower is defined as the widow's property rights under state law.
Curtesy is defined as the widower's (man) property rights under state law.
Holding control over trust income and corpus for health, education, maintenance, and support (HEMS) is a special power of appointment.
If the trust document says that the holder can use trust property for health, education, and "comfort," or any wording other than HEMS, the power of appointment will be considered a general power instead of a special power.
57
In the absence of a market for such property, the greater of the following will control the valuation:
The highest price available, or
The salvage value.
An annuity is defined as payments, or the decedents right to receive payments, that do not terminate upon the decedent's death.
In other words, they include periodic payments over a specified period of time under an enforceable contract where the decedent had the right to the payment.
58
If the value of the assets that the client intends on transferring into a trust exceeds the GST exemption then the client may want to consider dividing the assets within the trust into exempt and non-exempt portions. The exempt portion would be funded with the GST exemption amount, and the non-exempt portion would be funded with the balance of the assets.
Valuation problems become essentially problems of evidentiary proof, and often of opinion, where:
There are different markets for the same property.
The appraisal of the worth must be made on the basis of comparison with somewhat similar property.
The property in question is unique, such as a patent or copyright.
59
Commercial annuities are usually funded with cash, the gross estate would include replacement value of the commercial annuity, and standard actuarial tables are used to determine their payout terms.
If the alternate valuation date is elected for a decedent and the property is distributed, sold, exchanged or otherwise disposed of within six months after the decedent's death, the asset disposed of will be valued as of the disposition date.
60
The percentage-of-contribution rule applies to the estate taxation of property held jointly with the right of survivorship where the joint owners are not spouses, or if one of the spouses is not a U.S. citizen.
The estate tax includability of jointly-held property with survivorship rights involving a father and son is the portion of the purchase price attributable to the decedent's contribution.
Since McCoy contributed 60% of the original purchase ($60,000 ÷ $100,000 = 0.60), 60% of the value at death will be included in McCoy’s estate ($120,000 × 0.60 = $72,000).
A taxable distribution is any distribution of income or corpus from a trust to a skip person that is not otherwise subject to estate or gift tax.
Since the trust was established by Milo, Seth’s grandfather, and Seth received a distribution of trust corpus, this transaction would be categorized as a taxable distribution.
61
The alternate valuation date (AVD) is six months after death.
The executor can elect the alternate valuation date only if the value of the decedent's gross estate has diminished in value in six months and the estate tax liability is also less.
The 50-50 rule provides that only 50% of certain property titled and held jointly by the decedent and spouse with rights of survivorship, or as tenants by the entirety, will be includable in the decedent's estate. This is regardless of the size of his or her contribution. This rule applies to property interests included in the decedent's estate.
62
qualification requirements for special use valuation under Section 2032(A):
1.The qualified property in the decedent's estate must equal at least 50% of the decedent's gross estate.
2. At least, 25% of the gross estate must be qualified farm or closely held business real property.
3. Property must pass to a qualified heir.
4. On the date of the decedent's death, the property must be involved in a qualified use.
Once the gross estate is calculated, certain deductions are allowed in arriving at the adjusted gross estate. These deductions fall into three categories:
Funeral and administrative expenses,
Debts including certain taxes, and
Casualty and theft losses.
A charitable deduction is a potential deduction from the adjusted gross estate to arrive at the taxable estate.
63
A qualified personal residence trust (QPRT) is an irrevocable trust that holds a person's residence, allowing couples or individuals to live in the house rent-free for a specified period of time.
At the end of the term, the home will pass gift-tax free to the trust beneficiaries.
the charity's receipt should include:
Name of the organization.
Amount of cash contribution.
Description of any non-cash contribution.
A statement that no goods or services were provided by the organization in return for the contribution, if applicable.
Description and good faith estimate of the value of goods or services. Deductions for clothing and household goods can only be taken if the items are in "good condition" or better. For a donated item that exceeds $5,000, a qualified appraisal must be included with the donor's income tax return.
64
Ancillary probate is a procedure that disposes of real estate of the decedent that is located in a state other than that of the decedent's residence.
A 2503(b) trust can provide a beneficiary with a stream of income during the time in which the beneficiary is a minor.
The trust must distribute the income to the minor on an annual or more frequent basis. All or portions of gifts to such trusts will qualify as gifts of present interest for the income beneficiaries, and thus are eligible for the annual gift tax exclusion.
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If the donor is making a gift of cash to a public charity, the maximum income tax deduction that may be taken is 60% of the donor's AGI.
Plenary guardianship manages both the ward's property and personal affairs.
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An estate may be closed after which of the following have occurred? (Select all that apply)
All claims and debts have been paid.
All taxes have been paid.
All property has been distributed.
A final accounting or report is filed with the court.
The most common reasons for gifting or bequeathing property to a qualified charity are:
1.Satisfaction of the donor,
2.Reduction of the size of the taxable estate,
3.Reduction of income tax liability, and
4.Reduction of gift tax liability.
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A testate estate is one where the separately-owned assets of the decedent's estate transfer under the provisions of the will.
The Executor(trix) typically has been named by the testator in the will. Once the letters testamentary have been issued, administration of the probate estate begins.
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Letters testamentary are letters of authority given by the probate court to act on behalf of the estate as fiduciary.
Section 2056A allows a marital deduction for property placed into a special trust for the benefit of the non-citizen spouse called the Qualified Domestic Trust (QDOT).
This section also requires that there are safeguards to ensure that the trust property (if not used up by the alien survivor) is eventually subjected to the U.S. estate tax.
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Probate fees are any expenses incurred by the estate as a part of the probate process.
Probate fees include:
Appraisal fees for probate assets (e.g., real estate, business interests, etc.),
Court filing fees,
Attorney's fees, and
Other administrative expenses.
A holographic will is a will handwritten by the testator. A few states allow such documents to be admitted to probate, but most courts are very reluctant to accept them.
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A residuary clause directs the testator's property that was not disposed of through other will clauses, to pass outright to others or to an existing trust. Property acquired after the will was executed is subject to intestacy if not disposed of through a residuary clause.
Thus, the residuary clauses prevent partial intestacy of property after payment of debts, taxes, expenses, and specific bequests are addressed.
An individual who has died without a will has left an intestate estate.
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Spendthrift trusts also provide creditor protection if they are established solely for a beneficiary's supplemental support, not for their general support. This prevents the beneficiary from compelling distributions for support in favor of creditors.
Contributions to qualified charities through donor advised funds result in income tax deductions subject to adjusted gross income (AGI) limitations, and they reduce the size of the donor's gross estate.
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techniques known as will substitutes which bypasses probate administration:
Examples of a will substitute include:
property that passes by operation of law,
property that is contained within a trust, and,
property that is transferred to a named beneficiary.
Fractional interests held in Tenancy-in-Common property are considered probate assets.
The Qualified Terminable Interest Property (Q-TIP) trust is also referred to as the current income interest trust, is used when the decedent wishes to provide the surviving spouse with a stream of income for life, qualify for the marital deduction, yet ultimately control who will receive the trust property upon the death of the surviving spouse.
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Most standby trusts are revocable inter-vivos trusts, in which the grantor is also the trustee & the beneficiary.
The powers of attorney should be very SPECIFIC NOT GENERAL as to the aspects of the principal’s affairs that are covered.
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following elements should be included in the powers of attorney :
1.An outline of the specific aspects of the covered principal’s affairs.
2.A provision authorizing the agent to make elections with respect to retirement plan assets.
3.Verbiage dealing with gifting powers such as annual exclusions and/or lifetime gifts.
4.Authority to transfer assets into a trust created by the principal.
Advantages of a Codicil
Convenient
Simple
Inexpensive
For these reasons, codicils are frequently used to make minor changes to a will at a lower cost.
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A sprinkling trust can distribute income to beneficiaries and a spray trust can distribute both income and corpus.
Ordinary income property includes:
1.Capital assets held less than the requisite long-term period at the time contributed,
2. Section 306 stock (that is, stock acquired in a nontaxable corporate transaction that is treated as ordinary income if sold),
3. Works of art, books, letters, and musical compositions, but only if given by the person who created or prepared them or for whom they were prepared, and
4. A taxpayer’s stock in trade and inventory (which would result in ordinary income if sold).
***Long-term capital assets are not considered ordinary income property.
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The Deficit Reduction Act provides for a five-year "look-back" period to determine if any income and assets were transferred to individuals, charities, or trusts for less than fair market value
Transfers made to trusts within 60 months, which use at least some of the Medicaid applicant's funds, are considered available resources.
To qualify for the charitable income tax deduction, the donation must involve a present interest gift.
Future interest gifts of property to a charity ordinarily do not qualify for the charitable income tax deduction.
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If the donor makes a gift of property that is a long-term capital gain asset, the value of the gift to the charity is the FMV of the asset on the date of the gift. However, for income tax deduction purposes, the value of the charitable income tax deduction for a long-term capital asset is 30% of the donor's AGI.
Pooled income funds are trusts established by qualified charities to receive charitable donations from many donors, whose funds are commingled together.
The charity manages the fund's pool of investments, but they cannot invest in tax-exempt securities.
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Property that passes through a will or intestacy must always go through the probate process. Examples of property interests that are probate assets include:
Fractional interests held in Tenancy-in-Common property
Community property
Property passing from a will into a Testamentary Trust
Property transferred by a Pour-over will into a trust
Homestead and exempt property allowances
An annuity with a named beneficiary is considered a will substitute and will avoid the probate process
UTMAs are a flexible type of trust that can be used for the benefit of a minor.
They allow for testamentary transfers into the minor's account & terminate at age 21 or 25, depending on the state.
UTMAs permit the use of various investments, including transfers of real estate, partnership interests, and oil and gas interests.
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In the absence of a will, it is the laws of intestacy in the decedent's state of domicile that will determine how and to whom separately owned assets would transfer.
Real property is distributed according to the laws of the state where the land is located, which is known as its situs, and personal property is distributed according to the laws of the state of the decedent's domicile.
A 50% of AGI maximum deduction on LTCG property may be made if the donor is willing to reduce the value of the gift to their basis in the asset.
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A gift to a minor through a Section 2503(c) trust will be considered a gift of a present interest (so the gift will qualify for the annual gift tax exclusion) if the income and principal is available for distribution to or on behalf of the beneficiary at any time prior to the time the beneficiary reaches age 21.
Though the IRS Valuation Manual states that the fractional interest discount is generally based on the cost of dividing the land, such as survey costs, court costs, and legal fees, the following other factors must be considered:
Size of the fractional interest
Number of owners
Size of tract and likelihood of partition
Use of land
Access to financing
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Capital assets, such as mutual funds are not considered items of IRD.
EE bonds, insurance commissions, and deferred annuities are items of IRD.
Financial goals that involve tax planning include:
Minimizing gift and estate taxes when transferring property to others
Shifting income to family members in lower tax brackets
Obtaining a stepped-up basis in property to avoid future capital gains taxes
Non-tax personal estate planning goals often include:
Caring for spouses and children
Planning for incapacity
Reducing estate administration costs
Protecting property
Controlling the transfer of property interests to others
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Once the private annuity seller's basis in the property has been returned, all remaining payments are taxed as ordinary income.
Estate Planning Process:
1. Gather significant data
from the client.
2. Establish and prioritize
estate planning objectives.
3. Identify the factors that
limit or affect the selection
of estate planning
techniques.
4. Identify estate planning
weaknesses before
selecting a technique.
5. Select an appropriate
estate planning technique.
6. Implement the estate
planning technique.
7. Monitor the plan for
revisions and
modifications.
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An estate planning attorney can provide analysis and recommendations of the following:
Transfer costs
Special needs
Disposition of assets
Liquidity
Adequacy of capital and assets
Stability and maximization of value
Assets, which are income in respect of a decedent, such as the life insurance commissions or installment payments received after a decedent’s death, are taxed as income to the recipient of these assets.
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The value for purposes of federal estate tax of all stock of the corporation that is included in determining the value of the decedent's gross estate must be more than 35% of the excess of the value of the gross estate minus the sum allowable as a deduction under IRC Sec. 2053 that is estate expenses, indebtedness, and taxes, and Sec. 2054 that is losses.
In Diana’s situation, the stock value is calculated as follows:
0.35 x ($4,500,000gross estate - $350,000admin cost) = $1,452,500
Special use valuation is applied to the real property valuation of farms and closely-held businesses to reduce the value included in the owner's gross estate.
The maximum amount of the reduction in 2021 is $1,190,000.
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A family limited partnership (FLP) is a legal, tax-paying entity established under state law, which is a partnership consisting entirely of family members. The FLP allows senior family members to transfer property to junior family members at significantly reduced transfer costs, to reduce the value of their estates.
Capital assets, such as bank accounts, CDs, stocks, bonds, mutual funds, real estate, and business assets, are not items of IRD.
IRAs are considered items of IRD.
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Private annuity payments are unsecured promises to pay a monthly fixed payment to the seller for life and are received by the seller as a tax-free return of adjusted basis, capital gains, and interest taxed as ordinary income.
Question 36 of 40Tag to proceed
A self-canceling installment note (SCIN) is indicated when a business owner wishes to sell his business to family members and receive income from the sale for a period of time, or until his death. A SCIN is structured as an installment sale with a provision that the note will partially or fully cancel automatically before the note matures or at the business owner's death.
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By-pass (B) trusts funded with the exemption equivalent amount of $12,060,000 (2022) escape taxation in the decedent's estate and the assets and any subsequent appreciation are not included in the surviving spouse's estate at death.
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Deductible Traditional IRA contributions are recorded and claimed on Form 1040, Schedule 1. This IRS Schedule is used for items of additional income and adjustments to income (i.e., deductions for AGI). Schedule A documents below-the-line deductions (i.e., deductions from AGI). Schedule D tracks capital gains and losses. Schedule SE is used to compute self-employed income.
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If you are married and file a separate income tax return from your spouse, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
Individuals will owe the NII tax of 3.8% if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:
Note, municipal bond income is not included in NII.
Filing Status
Married filing jointly
$250,000
Married filing separately
$125,000
Single
$200,000
Head of household (with qualifying person)
$200,000
Qualifying widow(er) with dependent child
$250,000
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The Failure to File penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late up to a maximum of 25%.
The on-site daycare is an employee benefit that is excluded from taxation. A business can provide up to $5,000 in childcare assistance to each employee and exclude it from their taxable wages reported on Form W-2.
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The Series EE bond education tax exclusion permits qualified taxpayers to exclude from their gross income all or part of the interest paid upon the redemption of eligible savings bonds when the bond owner pays qualified higher education expenses at an eligible institution. Room and board are not considered qualified education expenses for this purpose.
Roth IRA conversion amounts are listed as distributions on Form 1099-R and contributions made to the Roth IRA(s) for the tax year are recorded on Form 5498
Form 8606 is used when Traditional IRA contributions are made when the taxpayer’s MAGI is above the phaseout thresholds. In this case, the funds are considered ‘non-deductible.’
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A taxpayer whose spouse itemizes deductions or losses must either itemize deductions or claim "0" as the standard deduction.
The Retirement Savings Contribution Credit (Saver’s Credit), is a non-refundable tax credit available to taxpayers making eligible contributions to their IRA, employer-sponsored retirement plan, or, in certain cases, an ABLE account.
A taxpayer is eligible for the credit if they are:
Age 18 or older,
Not claimed as a dependent on another person’s return, and
Not a student.
Depending on the AGI reported on their Form 1040 tax return, the amount of the credit is 50%, 20%, or 10% of:
contributions made to a traditional or Roth IRA,
elective salary deferral contributions to a 401(k), 403(b), governmental 457(b), SARSEP, or SIMPLE plan,
voluntary after-tax employee contributions made to a qualified retirement plan (including the federal Thrift Savings Plan) or 403(b) plan,
contributions to a 501(c)(18)(D) plan, or
contributions made to an ABLE account for which you are the designated beneficiary.
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Collectible items held for the long-term are taxed at a maximum rate of 28%.
Property that is NOT classified as a capital asset includes the following:
*Accounts or notes receivable acquired in the ordinary course of a trade or business for services
*Copyrights; a literary, musical, or artistic composition; a letter, memo, or similar property created by the taxpayer.
*Inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
*Depreciable property used in trade or business (e.g., Section 1231 assets).
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Adjusted gross income reduced by deductions from AGI equals taxable income. This is the amount of income that is taxed (i.e., this figure is used when determining taxes on the marginal tables for a given filing status).
Know that when the prior year AGI is over $150,000 ($75,000 for MFS), that either 110% of the prior year’s liability OR 90% of the current year’s liability are required to avoid any underpayment penalties.
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Mutual fund custodians prefer to report cost basis information using the average cost method.
On an asset-by-asset basis, once you commit to a particular method you must continue to use that method until the asset is completely sold.
Taxpayers may be eligible to deduct up to a $25,000 loss in a given year provided they “actively participate.” Active participation requires that the taxpayer owns at least 10% of the property and has substantial involvement in managing the property.
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If a business is carrying inventory and does not have a service portion of the business, the accrual method of accounting must be used. If there was a service portion, the hybrid method could be used and the cash method would apply exclusively to the service side.
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Final Tax Due minus prepayments (i.e., withholdings and estimated payments) equals Net Tax Payable or Refund Due.
The law limits deductions for charitable contributions to private foundations to 30% of the taxpayer's adjusted gross income for cash and 20% for other
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Negligence: Deficiency of tax liability if there was no intent to defraud. A 20% penalty will apply to the amount of the deficiency.
The default IRS method is First-in, First-out (FIFO).
On an asset-by-asset basis, once you commit to a particular method you must continue to use that method until the asset is completely sold.
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A tax credit creates a reduction of the tax due and decreases the liability on a dollar-to-dollar basis.
Gross Tax minus tax credits equal the Final Tax Due. The Final Tax Due is further reduced by prepayments (i.e., withholdings and estimated payments) to arrive at the net tax payable or refund due.
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2022 Capital Gains Rates
0% = Up to $83,350
15% = $83,350 to $517,200
20% = Over $517,200
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Estimated tax payments due date:
Payment Period Due Date
January 1 – March 31 April 15
April 1 – May 31 June 15
June 1 – August 31 September 15
September 1 – December 31 January 15 of the following year
Rental real estate active participant rule:
MAGI of $175,000 falls outside the phaseout range of $100,000 to $150,000. As a result, $0 of the $25,000 in losses can be claimed in the current year
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Losses are deductible for members of a partnership to the extent of their tax basis in the partnership
Each of the following statements about AMT Credit creation, usage, and limitations are correct EXCEPT:
* AMT credit is created when a taxpayer has AMT exposure that resulted from a deferral item (timing difference)
* Credit can be used to the extent that regular tax liability is greater than the AMT liability
* Credit is limited and cannot be used in years when the AMT liability exceeds the regular liability
* AMT can be carried over until final tax return
