CFP - Estate Flashcards
Roadmap - Post mortem planning
A family run farm/business could possibly use all three
Roadmap - Intrafamily transfers
Roadmap - Charitable transfers
Roadmap - 2503(b)/(c)
Taxation of income distributed from 2503(b)/(c)
Since if the grantor passes before the dollars are distributed, the assets interest will be included in the grantor’s estate = grandparents should not be the grantor of 2503C trust
- Income distributions from 2503c trust taxed under Kiddie Tax rules
- Income distributions from 2503b trust taxed at benes rates.
Roadmap - Gift to minors
Roadmap - A/B/C Trust
B/Non-marital/Bypass = First to die controls
-Income can be to spouse or anyone
-Generally fund up to estate exemption $13,610,000, no marital deduction
-SUPER powerful; growth excluded from estate tax again
A/Martial = Second spouse to die controls
QTIP = First to die controls
-Income has to go to spouse
-Trust included in the second to die’s estate
Roadmap - Irrevocable grantor trusts (incl. ILIT + defective trust)
REMEMBER - Tainting can be desirable for income tax purposes, but client doesn’t want irrevocable trust to be tainted for estate tax purposes
Double tax (grantor pays) = Income tax + Estate tax
-this is case for 1. (revisionary interest) & 2. (Beneficial enjoyment)
Roadmap - 706
Roadmap - Life issuance inclusion on decedent’s estate
Gifting appreciated property + affecting basis
Ex. Client buy stock for $1,018,00. The client gifted the stock when the fair market value was $1,118,000. The client paid gift tax of $400,000. What is the recipient basis?
When gifting assets/appreciated property, the tax gift paid attributable to the appreciation is added to the basis.
Ex. $1,118,000 - $18,000 (annual exclusion) = $1,100,000 X 40% (tax rate) = $440,000 tax paid. The $40,000 attributed to growth is added to the basis. The recipient’s basis is $1,058,000.
Mini roadmap -
Completed and not completed gifts
REMEMBER - Gifts of future interest, no $18,000 annual exclusion
Distributable net income (DNI)
Income available for distribution from a decedent’s estate or trust. Goal = Income taxed at bene rates, not higher trust rates
Crummy trust provision (timeline and features)
If bene doesn’t take the lesser of annual exclusion or the value of the gift transferred in 30 days, the annual right to withdrawal expires and dollars stay in the trust.
Crummy (irrevocable) trust doesn’t have to determine money at age 21unlike the 2503c trust
5 or 5 concepts
Ex. If client had a five for five right and didn’t exercise it and dies how does this affect what’s included in her estate?
Ex. If she didn’t exercise the five for five before dying, the greater of $5,000 or 5% will be included in her estate
5 or 5 gives general power of appointment
Trust provisions (question would have to tell you it’s a part of the trust - don’t assume!)
Income, ascertainable standards (HEMS), 5 or 5, crummy
Who is QTIP v reverse QTIP beneficiaries?
QTIP = Kids
Reverse QTIP = grandkids (skip people)
Dynasty Trust
Generational bypass trust – B trust that benefits multiple future generations and can last for the beneficiaries lives plus 21 years, and nine months
Wealth replacement trust
Alleviates concerns for charitable donors that are worried their remaining assets may be insufficient to satisfy financial needs of their heirs or provide estate liquidity
-In practice this looks like forming a CRUT with a wealth replacement trust (ILIT)
Generation skipping tax
- Who’s a skip person?
- What are the kinds of skips?
- Summary of liability for payment of GST
- Grandkids for related people, someone 37.5 yrs younger that’s not related BUT remember if child dies, their children move up and aren’t skip person’s anymore
- Three kinds
- Direct skip - Grandparent gifts to grandkid
- Taxable termination - Gift into a trust to benefit the child, but remainder interest goes to grandkids once the kid dies (no annual exclusion - not a direct lifetime gift) - REMEMBER - Taxable termination = Someone terminates for the skip to happen
- Taxable distribution - Goes to a child and grandchild (non-skip and skip person)
- Who pays the GST?
-if the transfer is a direct, skip, the transferor pays the GST
-if the transfer is taxable termination, the GST is paid by the trustee
-if the transfer is a taxable distribution, the GST is paid by the transferee
Alternative valuation date (when can you use it + what are exceptions?)
Only if estate tax is due! The AVD is elected to pay less estate taxes so no estate tax = can’t use AVD
When can’t you use it? Wasting assets (assets that reduce based on time passing like annuity)
Disclaiming assets - Which to choose?
If the goal is to use up exemption and the will has a disclaimer trust/provision, choose property that, if disclaimed, goes back into the trust
Interpolated terminal reserve
When gifting life insurance, the replacement value/interpolated terminal reserve + unearned premium = the gifted amount
Gifting life insurance w/ premiums payable – Value of gift determined by adding the interpolated terminal reserve (reserve adjusted to the date of gift) + value of unearned portion of last premium
In practice, add the unused premium, and the prorated increase policy reserve to the policy reserve = the value of the policy that’s included in gross estate
See question 43 in estate live review book
Clients are considering a FLP. The gifts can qualify for various valuation discounts a gift of $18,000 can be discounted by 50%. How long will it take to split gift $4,320,000 to 10 family members?
Six years – discounted by 50% means they can gift $72,000 per year per family member instead of the $36,000 split gift
Income in respect to the decedent provisions
Ex. Which of the following is not an example of IRD?
-insurance renewal commissions, taxable distributions from a qualified plan, partnership income of deceased partner, depletion
IRD - Income a decendent was entited to recieve but was not property includable in the decendent’s final tax return.
Income and respect of a decedent (IRD) - If the income is included in the gross estate, the estate tax attributed to that income item is generally deductible by the recipient of the income
IRD includes amounts that the decedent was entitled to but were not included in their final income tax return because the payment had not yet been made.
Ex. Depletion – depletion is an expense, not income and respect of a decedent (IRD)
-Common IRD items: annuities, IRAs, salaries, bonus, lottery winnings
Mac Blair decided to make a gift of Blair, Inc. common stock to his son Blake. Mac seeks that any future appreciation of the stock not be included in his estate for federal estate tax purposes. He is going to retire soon and will need income during his post-retirement years. Mac has converted the majority of his common stock to preferred stock and gifted the remaining common stock to his son. What is the result?
The preferred share value will be determined based on the stated dividends. The common stock value would then be the difference between the FMV of the corporation and the aggregate value of the preferred shares.
Both of Rusty Whitman’s parents recently died in an auto accident. Rusty is 12 years old. Before their death, the Whitmans had established various trusts including revocable living trusts (each parent), an irrevocable life insurance trust, and a 2503(c) minor’s trust. While Rusty is younger than age 21, the trust earnings will support his normal living needs. Into which of the following trusts will Rusty’s parents’ assets ultimately pass?
A. A revocable living trust
B. A 2503(c) trust
C. A Crummey trust
D. A standby trust
E. A family trust
E. A family trust
The revocable trust will become irrevocable and will turn operate as a family trust for Rusty’s benefit thereafter. It is rare that a revocable trust would name its beneficary as a 2503(c) children’s trust. 2503(c) trusts generally terminate when the minor beneficiary turns age 21.
Mrs. Lucy, age 80, is in reasonable health. Five years ago, her husband died leaving her $3 million and placing $3.5 million in a bypass trust for her benefit. In addition, their home was in JTWROS. The home, FMV value $500,000 and the $4 million of investments has a high basis of $3.5 million. Mrs. Lucy has two married children and 5 grandchildren to keep her estate under $5 million. What type of asset do you recommend she give and to whom?
A. Low basis, high dividend paying investments to both children and grandchildren.
B. High basis, high dividend paying investments to both children and grandchildren.
C. Low basis, growth investments to children and high basis, growth investments to grandchildren.
D. High basis, growth investments to children and low basis, growth investments to grandchildren.
Think ages. The grandchildren have to be age 30 maybe age 40. With high basis, they can sell the investment with little or no tax or keep it and get big dividends. They could be taxed a 0% or at most 15%. Low basis investments would be subject to capital gains. If she keeps the low basis stocks until death, her estate will get a full step-up in basis. She does not have an estate tax situation.
Suzanna York, age 5, was injured on a playground. The playground equipment was found to be defective, and her parents sued the manufacturer on Suzanna’s behalf. Suzanna was awarded a $1,000,000 compensatory structured settlement to be paid out over 40 years. Unfortunately, Suzanna died during the early stages of the settlement process. What would generally happen in regard to the structured settlement?
The present value of the remaining periodic payments would be included in Suzanna’s gross estate for federal estate tax purposes.
Although Suzanna’s applicable credit would probably exceed any tentative tax, the present value of the yet unsatisfied payments would be included in her gross estate for federal estate tax purposes. Nothing indicates the settlement ceases at death
