CFP - 6.1 Estate Planning Flashcards
What is it called to die without a will?
Intestate
What is intestate?
Dying without a will
What happens to property if the decendent does not have a will?
Property goes through probate and is distributed according to the state’s intestacy laws
What are the 4 qualifications to making a will?
- Will maker (testator) has to be 18 years old or an emancipated minor
- Has to be of sound mind (testamentary capacity)
- Absence of undue influence
- Absence of fraud
What is a holographic will?
A handwritten will
Are holographic wills universally accepted?
No, not accepted in all states
What is a nuncupative will?
An oral will - dying declaration before sufficient witnesses
Are nuncupative wills universally accepted?
No, not accepted in all states. Can only be used for personal property, not real property
What is a statutory will?
A formal will drafted by an attorney
Do statutory wills require witnesses?
Yes, non-beneficiaries, and usually 2
What is a codicil?
An amendment to a will
What is a residuary clause?
Clause to address the transfer of the balance of any assets not otherwise provided for in the will. Estate taxes are usually paid for by the residuary estate.
What is a survivorship clause?
Clause that requires a beneficiary to survive beyond a specified period to receive the bequest
Can a will require survivorship clause for a spouse and still qualify for the estate tax marital deduction?
No, the will cannot require the spouse to survive for more than 6 months to receive the bequest
What does a survivorship clause prevent?
Prevents property from being included in two estates in rapid succession
What is an in terrorem clause?
No contest clause - discourages heirs from contesting the will by substantially decreasing or eliminating their bequest if they file a will contest
What does per stirpes mean?
“by the roots”
Members of a designated class inherit property as members of the class
Steve had 3 kids. Jay, Dee, and Laura. Dee is deceased and survived by two children, Damien and Paul. Laura and Jay are alive and have no children. Steve’s will left $300,000 to his living descendants on a per stirpes basis. Who gets what?
Jay: $100,000
Dee: $0
Damien: $50,000
Paul: $50,000
Laura: $100,000
What does per capita mean?
“by the head”
Members share in the inheritance as equals.
My children per capita disinherits grandchildren.
My descendants per capita means children and grandchildren get equal share.
Steve had 3 kids. Jay, Dee, and Laura. Dee is deceased and survived by two children, Damien and Paul. Laura and Jay are alive and have no children. Steve’s will left $300,000 to his living descendants on a per capita basis. Who gets what?
Jay: $75,000
Damien: $75,000
Paul: $75,000
Laura: $75,000
Steve had 3 kids. Jay, Dee, and Laura. Dee is deceased and survived by two children, Damien and Paul. Laura and Jay are alive and have no children. Steve’s will left $300,000 to his children on a per capita basis. Who gets what?
Jay: $150,000
Laura: $150,000
What is a side letter?
States the writer’s wishes for tangible possessions of nominal value. Avoids will clutter. Not legally binding.
What establishes the medical situations in which the maker no longer wants life-sustaining treatment?
Living will
What is another name for a living will?
Advance medical directive
Does a living will appoint a surrogate decision maker?
No, it informs physicians of decisions the patient has already made regarding life-sustaining treatments if in a terminal situation
What do the concepts of durable and non-durable apply to?
Powers of attorney, NOT LIVING WILLS
What is a durable power of attorney for healthcare?
A person appointed to make health care decisions for the principal.
What is a springing power of attorney?
Becomes effective on incapacity
Can power of attorney be used to end life-sustaining treatment?
Only in some states
What does durable mean with a power of attorney?
Mean the power remains effective even if the principal becomes incapacitated.
Does durable power of attorney stay in effect after the principal passes away?
No
What are the two qualifications for a power of attorney?
18 or older and competent
What is a POA?
Power of APPOINTMENT, not attorney! Power of attorney is DPOA
What is the difference between a POA and a DPOA?
Power of appointment gives the holder the right to name the new owner of property.
Durable power of attorney gives the agent the right to act in the principal’s place.
Is DPOA revocable?
Yes, any power is revocable by the principal
Is DPOA more or less expensive to set up and administer than a living trust or conservatorship?
Less
Is a stock certificate tangible or intangible property?
Intangible
What are the 3 types of present interests?
- Fee simple
- Life estate
- Interest for term
What is fee simple interest?
Complete ownership with all rights. This property will pass through probate.
What is life estate interest?
Holder of the life estate has an exclusive right to the use and enjoyment of the property for the remainder of life or the life of another person.
What is the right to ownership or enjoyment of property at some point in the future or upon occurrence of a specified event?
Future interest
What are the two types of future interests?
Remainder and reversion
Future interests in the property that go to a person after termination of life estate or interest for term. If the property goes to the grantor it is a…
Reversion
Future interests in the property that go to a person after termination of life estate or interest for term. If the property goes to someone other than the grantor it is a…
Remainder
What happens to a tenants share (tenancy in common) when they pass?
Does not automatically go to surviving tenants. Usually passes through probate.
Do JTWROS tenants need the consent of the other tenant to sever the interest in property?
No
Bob and Sally own assets JTWROS. Bob passes away. Do the assets go through probate?
No, passes to Sally outside of probate by operation of law
What are the gift tax ramifications of non-spousal JTWROS assets?
There are none if each individual contributed the same amount toward the purchase price.
If not, the tenant contributing the greater percentage has made a gift to the tenant, equal to the difference between an equal contribution and the actual amount contributed by the lesser contributor.
Joint tenants must be equal owners. T or F
True
Steve and Sandy are siblings. They buy a $100,000 vacation home in Florida, JTWROS. Steve kicks in $80,000 and Sandy kicks in $20,000. What are the gift tax implications?
Steve has made a gift of $30,000 - eligible for the annual exclusion of $15,000. The taxable gift is:
$50,000 equal - $20,000 Sandy’s share =
$30,000
-$15,000 annual exclusion = $15,000 taxable gift
JTWROS (non-spouse):
The portion of the property in the decedent’s gross estate equals what?
Their contribution toward the purchase price of the property - must be proven or it will be assumed that they contributed the entire purchase price
JTWROS (non-spouse)
Who does the burden of proof rest with for proving contributions?
The decedent’s estate
Do tenancy by entirety tenants need the consent of the other tenant to sever the interest in property?
YES
Tenancy by entirety can exist between whom?
Spouses only
What is community property?
Married individuals own an equal, undivided interest in all property accumulated during the marriage
What happens to community property when one spouse dies?
No automatic right of survivorship, one half of the value of all community property is included in the gross estate and goes through probate
What is the step up for community property when one spouse dies?
The entire value receive a step-up to FMV on the DOD
Is community property subject to probate?
Yes
What forms of property interest have rights of survivorship?
JTWROS and Tenancy by entirety
What forms of property interest are subject to probate?
Fee simple, tenants in common (% ownership), and community property (50%)
What are the 5 exceptions to community property?
- Property acquired before marriage
- Property acquired by gift by one spouse and held separately
- Property inherited by one spouse and held separately
- Property acquired by court award compensating for physical injury and HS
- One spouse donates full interest to the other spouse (partition of community property)
What happens when a couple moves from a community property state to a common law state?
The property remains community property, but can be divided upon arrival
Is joint property subject to double taxation?
Yes, taxed in both gross estates
Is property in a will passed through probate?
Yes
What are the 4 ways of passing property?
- By will (testate)
- By law of intestacy
- By contract
- By operation of law
What two ways of passing property avoids probate?
Contract and operation of law
What is the applicable exclusion for gift tax, estate tax, and generation skipping transfer tax?
11,180,000
Is there a portability of applicable exclusion for spouses?
Yes, surviving spouse may use any unused portion of the deceased spouse’s exclusion - up to a total of $22,360,000
If a surviving spouse has more than one predeceased spouse, how much applicable exclusion can they use?
Only the unused exemption amount of the last predeceased spouse
Are gifts from an individual included in gross income?
No
Are gifts from a business to an employee included in gross income?
Usually as compensation
What are the four conditions to make a gift complete?
- Competent donor
- Intent to donate
- Constructive delivery of property to donee or donee’s representative
- Valid acceptance of the gift by donee
Can a person refuse a bequest?
Yes
Can a donee refuse a gift?
Yes
Are contingent gifts or incomplete gifts subject to gift tax?
Not until they are complete
Does federal gift tax apply to nonresident aliens ?
Yes, if they are transferring real or tangible personal property in the US
What gifts are eligible for annual exclusion?
Only present interest gifts
Are gifts of a future interest eligible for annual exclusion?
No
When does property given to a trust become a gift?
When the trust becomes irrevocable
Does a spouse need to consent to gift splitting?
Yes
What is gift splitting?
Doubling the annual exclusion by electing with a spouse
Does a gift of community property require splitting?
No
Does gift splitting require filing a gift tax return?
Yes
Can you gift split with someone besides a spouse?
No
Can you specify only 1 gift to be split in a year?
No, the splitting applies to all gifts made during that year by either spouse
Mona buys a condo for $200k and takes the title in her name and the names of her 3 daughters as JTWROS. What is the gift tax consequence?
Mona has made $50k gifts to each daughter. Each is eligible for the annual exclusion.
When is a gift made with a joint bank account?
Only when the donee withdraws funds
When is a gift made with a joint savings bond?
Only when the donee redeems the bond
What are the two types of qualified transfers that are not subject to gift tax
Medical and tuition, PAID DIRECTLY TO THE PROVIDER
Do qualified transfers for medical and tuition need to be made by relatives?
No
Is there a limit on qualified transfers for medical and tuition?
No
Are property settlements between divorcing spouses subject to gift tax?
No, transfers up to three years after divorce are not subject to gift tax
Interest on gift loans is not subject to gift tax if the loan is below…
$10,000
Interest on gift loans is not subject to gift tax if the loan is below _______ and the donee’s net investment income is below _______.
$100,000
$1,000
What is the gift amount on a below-market loan?
The difference between the federal rate and the interest charged, capped by the donee’s net investment income
What is the gift amount for an employer-employee below-market loan?
Not a gift, imputed interest is deemed compensation
What is the gift amount for a corporation-shareholder below-market loan?
Not a gift, imputed interest is deemed a dividend
Are political donations subject to gift tax?
No
Are obligation of support payments subject to gift tax?
No
What is a qualified disclaimer?
Refusal to accept transferred property, instead passing the property to someone else
What are the requirements of a disclaimer?
- In writing
- Irrevocable
- Made within 9 months of the interest coming into being (or 9 months after the receiver reached age 21)
- Must pass interest without the direction of the disclaimant
When are disclaimers usually used?
When property is left to a spouse and would like to pass some onto a contingent beneficiary (usually a child)
Are gifts to charity subject to gift tax?
Gifts to qualified charities are deductible from gross gifts
Are gifts to spouses subject to gift tax?
No, marital deduction for all gifts and transfers between spouses
For gifts to a non-citizen spouse, only the first _______ per year are not subject to gift tax.
$152,000
What is the value of a gift for gift tax purposes?
The FMV on the date of the gift
What is the value of gifted securities?
The average of the high and low prices on the date of gift or DOD
Lisa gifted her sister Michelle one share of XYZ on July 11th (Friday). The stock did not trade on the 11th. It traded on the 14th and 8th. What is the amount of the gift?
7/8 High: $60, Low: $56
7/12 High: $62, Low: $58
Average on the 8th: $58
Times TRADING days between gift date and the 12th:
$58 x 1 = $58
Plus, Average on the 12th: $60
Times TRADING days between gift date and the 8th:
$60 x 3 = $180
$58 + $180 = $238 divided by total number of days used (4) = $59.50
What is the gift tax value of a remainder?
Present value of the future interest on the date of the gift
Who is liable for gift tax due?
The donor
Can the donee become liable for gift tax if the donor fails to pay?
Yes
What is a net gift?
Transaction where donee pays gift tax
How are net gifts considered?
Part sale part gift
What does the donor realize in a net gift?
Taxable income to the extent that the gift tax paid exceeds the donor’s adjusted basis
What is the taxable gift amount on a net gift?
FMV of the gift - annual exclusion
What are the 3 instances in which a gift tax return (Form 709) must be filed?
- Gifts to one donee for the year exceed the annual exclusion amount.
- Gift of future interest has been given.
- Gift splitting between spouses has been elected.
What amount is deductible for a charitable donation?
The basis of the property
Mike donates a stock with a FMV of $40,000 to the University of Georgia. His basis is $10,000. What is the taxable gift amount?
$40,000
-10,000 deduction for basis
= $30,000
Gift taxes paid are not included in gross estate, except when gifts are made within ____ years before death.
3
What is the cap for gifts from non-citizen spouses to citizen spouses?
None
Can 529 plans be used for qualified K-12 expenses?
Yes
What are the 2 differences between UGMA and UTMA?
UGMA is adopted in all states, UTMA in some states
UGMA cannot include gifts of real estate, UTMA can
Do UGMA and UTMA accounts require bonding and accounting?
No
Do guardianships require bonding and accounting?
Yes
UGMA and guardianship property must be received by the minor at age _____.
18
What are the 3 types of irrevocable minor trusts?
- Section 2503(b) - Mandatory income trust
- Section 2503(c) - Discretionary complex trust
- Crummey Minor’s Trust
What happens to income in a mandatory income trust?
Must be distributed annually to the minor either directly or to a custodial account for their benefit
Do mandatory income trusts (2503b) have to end at age 21?
No
A gift of $12,000 to a Section 2503(b) plan. The present value of the interest income is $1,123 and the remainder interest is determined to be $10,877. What are the tax consequences?
$1,123 present interest qualifies for the annual exclusion
$10,877 future interest component does not qualify for the annual exclusion
What is the income distribution for a 2503(c) plan?
Discretionary (complex trust)
What happens to a 2503(c) plan’s principal?
Principal distribution is discretionary until age 21, then is mandatory at 21
Are Section 2503(c) gifts considered present or future interest?
Present
What happens if the donee of a 2503(c) plan dies before 21?
The property must go do the donee’s estate or the donee must hold a general POA
What is a Crummey Trust?
Allows a right (Crummey Power) to withdraw for a brief period (usually 30 days), creating a present interest that qualifies for the annual exclusion.
What is the donee’s basis when gifted appreciated property?
The donor’s basis
What is the donee’s holding period when gifted appreciated property?
The donor’s holding period
What is the formula for the donee’s basis if the donor paid gift tax at the time the gift was made?
Donor’s adjusted basis +
(unrealized appreciation / FMV less annual exclusion) x gift tax paid
Edmund gave Seamus a stock with FMV of $60,000 and paid gift tax of $15,000. Edmund acquired the stock two years ago for $20,000. This is the only gift Edmund has made to Seamus this year. What is Seamus’s basis?
20,000 + [ 40,000/(60,000 - 15,000) x 15,000 ]
= 33,333
What is the donee’s basis when gifted loss property?
Cannot be determined until it is disposed of.
What is the donee’s basis and holding period when gifted loss property, if sold at a gain?
The donor’s basis and holding period.
What is the donee’s basis and holding period when gifted loss property, if sold at a loss?
The FMV at the time of the gift and the holding period begins on the day of the gift. The gift tax is not allocated to the donee’s basis.
What happens if the donee sells gifted property between the donor’s adjusted basis and the FMV at the date of the gift?
No loss or gain recognized
Are straight life annuities included in gross estate?
No, because the annuitant’s interest in the contract terminates at death
Are survivorship annuities included in the gross estate?
Yes, equal to the value of a comparable policy on the second annuitant. (half if the other annuitant paid half of the premium)
Are life insurance proceeds included in the gross estate?
Yes, if receivable by the estate, decedent’s executor, or if there where incidents of ownership
What proceeds of a split-dollar arrangement are included in the gross estate?
Entire amount, even though part of the proceeds are payable to a third party. The right to name a beneficiary is an incident of ownership.
What is included in the gross estate if the decedent had a life insurance policy on someone else’s life?
The terminal value (cash surrender value)
Are assets under a general power of appointment held by the decedent at the time of death included in the gross estate?
Yes, even if they are not exercised. ONLY FOR GENERAL, not limited or special!!
Are assets under a limited power of appointment held by the decedent at the time of death included in the gross estate?
No! Only general
Are assets under a special power of appointment held by the decedent at the time of death included in the gross estate?
No! Only general
At death, how are assets valued if the alternate valuation date (AVD) is used?
The FMV as of six months after the DOD
If AVD is selected, what assets are valued as of the AVD?
ALL except:
- Assets disposed between DOD and ADV are valued at net proceeds
- Wasting assets (depreciating assets) are valued at DOD (annuitized annuities, copyrights, installment notes…etc.)
Can funeral expenses be deducted from the gross estate?
Yes
What admin expenses can be deducted from the gross estate?
Executor commissions Attorney fees Accountant fees Court costs Selling expenses for asset dispositions Appraisal fees
Can an unpaid mortgage be deducted from the gross estate?
yes, all claims, debts, and unpaid taxes can be deducted
What two unlimited deductions exist for the gross estate?
Marital and charitable
What is the holding period for property acquired from a decedent?
Long term
What is the basis for a deathbed gift?
Decedent’s basis with no step-up
Ted and Alice (married) own a property with a $200k basis and a FMV of $1mm. Ted dies. What is Alice’s basis if they are in a community property state, and what is her basis if they are in a common law state?
Community property: $1mm
Common law: $600k
What is the benefit of using an Irrevocable Life Insurance Trust (ILIT) ?
The proceeds are not included in the gross estate if the ILIT originally purchased the policy or the policy was transferred in more than 3 years before death.
The ILIT can loan death benefits to the estate without inclusion of benefits in gross estate.
What are the three parties in a POA?
- Donor - grants power
- Holder - receives power
- Appointee - appointed by the holder to own or enjoy the property
What is a POA?
Power of Appointment - the power to name who will enjoy or own property
What is the difference between a general power of appointment and a limited/special power?
General - the holder can appoint anyone
Limited is any power that is not a general power
What are the 4 restricted parties for a POA?
Holder
Holder’s estate
Holder’s creditors
Holder’s estate’s creditors
Can a holder with a general power appoint the 4 restricted parties?
Yes
What is the 5/5 lapse rule?
If two beneficiaries have Crummey powers, and their allowable withdrawal is greater than $5,000 or 5%, AND they let their powers lapse, they have gifted the amount of the withdrawal to each other as a future interest that is not eligible for the annual exclusion.
Mary Sue is the beneficiary of a trust established by her deceased spouse. The trust includes a 5-and-5 power. Before exercising the power, Mary Sue passed away. The trust balance at the DOD is $500,000. What is included in her gross estate?
5% of $500,000 = $25,000 because it had not lapsed and she did not exercise
The lapse of a power that exceeds the 5-and-5 power will be included in the decedent’s gross estate for _____ years.
3
Are assets in a limited or special POA included in gross estate?
No
What is the marital deduction?
Allows the decedent’s estate to deduct an unlimited amount for qualifying bequests or transfers of property to a surviving spouse.
Can terminable interest property qualify for the marital deduction?
No
What is a straight bequest?
Everything left to spouse, the decedent’s estate gets a 100% marital deduction.
What is the disadvantage of a straight bequest?
Overqualified estate, and total estate tax between 2 spouses may be higher if all property goes to one spouse
What is a QTIP?
Qualified Terminable Interest Property Trust
What is the point of a QTIP?
Allows a terminable interest to be passed to a surviving spouse and the property will still qualify for the marital deduction.
What are the income requirements for a QTIP?
Income from the trust must be payable to the surviving spouse at least annually for life
Jeff dies and his wife Suzy has a QTIP. What happens when she dies from a gross estate perspective?
All assets in the QTIP are included in her gross estate valued on her DOD
How are QTIPs used for people in second marriages?
The second spouse gets the income to live off of. When the second spouse dies, the children from the first marriage receive the principal.
How much in assets should you have before contemplating a QTIP?
More than the lifetime estate tax exemption amount ($11,800,000)
Which requires an election to be made on form 706?
QTIP
POA Trust
Only QTIP
What is the difference between a POA trust and a QTIP?
QTIP, first to die picks ultimate beneficiary.
POA trust, surviving spouse gets general POA to determine what happens to the property. Still receives life income.
Does a bypass trust qualify for the marital deduction?
No
What gross estates are bypass trusts included in?
The first spouse’s. Not included in the second spouse to die’s.
What is over qualifying the estate?
Using too much marital deduction and not using any applicable exclusion amount.
What is under qualifying the estate?
Not using enough marital deduction and using up too much of the applicable exclusion amount.
What are the 3 parties of a trust?
Grantor
Trustee
Beneficiary
What is a grantor trust?
When the grantor is also trustee and beneficiary
What are the 3 types of trust interest?
- Income Interest
- Remainder Interest
- Reversion Interest
What is income interest in a trust?
The beneficiary receives the income earned from trust assets
What is remainder interest in a trust?
The beneficiary receives the trust principal upon termination of the trust
What is a vested remainder?
One that is nonforfeitable
What is a contingent remainder?
The interest depends on whether or not a certain future event happens
What is a reversion interest in a trust?
The grantor retains the right to receive the principal upon termination of the trust
What is the rule against perpetuities?
Some states have this -
Prevents trusts from having an infinite life
What is the general max duration for trusts?
21 years after the death of the youngest person named in the instrument creating the interest, alive on the date the interest was created.
What trust is exempt from the rule against perpetuities?
Charitable trusts
When is the interest created for a trust?
When the trust is created if irrevocable, or when a revocable trust becomes irrevocable
What are the 5 main reasons to create a trust?
- Avoid probate
- Reduce taxes
- Asset management in case of incapacitation of grantor
- Asset management for beneficiaries
- For charitable contributions while retaining some interest in the gifted property
What is a testamentary trust?
Created by will, becomes effective at death
When to testamentary trusts become irrevocable?
At testator’s death
Are testamentary trusts subject to gift tax?
No
Are inter vivos trust assets subject to gift tax?
Yes, if they are irrevocable and transferred during the grantor’s life
Are testamentary trust assets subject to probate?
Yes, pass through probate then into trust
What are the 3 aspects of a simple trust?
- Income must be paid to beneficiaries annually
- No amounts can go to charitable beneficiaries
- Corpus may not be distributed
When does a simple trust become a complex trust?
In the final year because the corpus is distributed
What is a dynasty trust?
Passes life insurance policy to grandchildren and avoids GSTT
What are the exemption amounts for distributions from simple and complex trusts?
$300 simple
$100 complex
