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ALU 202 > Ch 6 Financial Underwriting: Planning for Personal Needs > Flashcards

Ch 6 Financial Underwriting: Planning for Personal Needs Flashcards

1
Q

estate planning

A

lifelong process dealing w/ accumulation, conservation and distribution of an estate
-acquisition of wealth and estate maintenance, delivery of estate assets upon death to benes

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2
Q

advantages to well planned estate

A
  • maximized wealth
  • efficient use of estate capital
  • tax savings
  • appropriate asset ownership
  • assurance estate property will be distributed according to decedent’s wishes
  • adequate estate liquidity
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3
Q

estate tax exclusion amount

A

allows small estates below certain amount to be exempt from estate tax
2020 rate 40% exclusion $11.58M

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4
Q

arguments for estate tax

A
  1. assists in redistribution of wealth from rich to poor via govt programs, providing assistance and opportunities not normally available to economically deprived
  2. provides financial support for American democratic institutions of govt and national programs
  3. encourages support for charitable giving to reduce taxable estate
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5
Q

arguments against estate tax

A
  1. affects society’s most successful
  2. money and financial resources removed from general economy via estate tax cause job loss
  3. tax-supported govt institutions generally less effective at promoting economic prosperity than free-market economy
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6
Q

valuing taxable estate

A

-net worth used as basis to estimate if subject to estate tax
-computed on taxable estate, determined by subtracting certain allowable deductions from gross estate

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7
Q

gross estate

A

value of all property interests, real or personal, tangible or intangible, of an individual on the date of death to the extent of his interest in the property

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8
Q

exceptions when fair market value is not general rule for asset valuation

A
  1. real property, land and permanent attachments, may not always have ready market from which to estimate fair market value. can be valued at higher of highest price available or salvage value
  2. some real property subject to special use valuation. designed to value property according to its current use, not potential value if it were used for other purposes. ex. family farm fit property for mall
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9
Q

special valuation situations

A

-real property
-publicly traded stock, corporate bonds
-US govt bonds
-closely held corporation stock not subject to special use valued at adjusted book value method
-life insurance proceeds set aside for benefit of estate or proceeds from policies owned by decedent

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10
Q

fair market value

A

price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts
-general rule for asset valuation

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11
Q

allowable deductions from gross estate

A
  1. allowable debts - mortgage
  2. funeral expenses
  3. medical expenses
  4. administrative expenses
  5. losses during estate administration (decline in value of asset while estate was being settled)
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12
Q

marital deduction

A

-property passing to spouse of decedent can be deducted from estate. postpones estate tax till death of surviving spouse.
-survivor joint life insurance to offset impact of estate tax due at second death

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13
Q

pros/cons of marital deduction

A

-avoid estate tax by passing estate but no guarantee spouse will manage assets wisely
-spouse can remarry and exclude children of decedent
prudent use depends on:
1. value of property rights (power of appointment): right reserved by donor to control who receives property
2. partial interests in property: property owned or controlled by 2 or more people
3. charitable remainder trusts: bene receives income but charity gets property upon death of bene
4. guaranteed annuity interests: charity gets income for term, then property passes to bene
5. split gifts: partial to charity and remainder to bene

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14
Q

opponents to charitable

A

attempting to replace property in which no longer have interest
proper amount of insurance should reflect needs generated by reduced estate

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15
Q

proponents of charitable

A

public charity worthy of support by insurance industry
serves to benefit society at large
supplies valuable estate planning tool

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16
Q

estimating estate growth

A

time and interest
-interest rates fluctuate, base projections on:
1. reasonable rate of return commensurate with avg return on assets in estate
2. type of investments that make up estate
3. adjust to age of estate owner
4. assume some investment income will be consumed and not reinvested

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17
Q

Canadian Income Tax Act

A

deceased taxpayer is considered to have sold all capital property at fair market value immediately before death. any capital gains realized will be subject to tax on terminal income tax return of deceased

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18
Q

depreciable capital property

A

value declines over time.
buildings/furniture/machinery

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19
Q

non-depreciable capital property

A

land, stock, mutual funds

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20
Q

Canada estate taxation

A

-capital gains tax incurred where fair market value exceeds owner’s adjusted cost basis of property (original cost)
-50% of gain included on deceased’s estate terminal income tax return
-if property worth more than depreciated value, some or all depreciation can be added back to value of property through tax provision, recapture of capital cost allowance

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21
Q

recaptured depreciation

A

taxable as income on terminal return
ex. vacation home bought for $60K, depreciated value $30K, fair market value $70K. pay tax on $40K difference as if it were regular income

22
Q

Canadian martial deduction

A

property rolled over directly to spouse or through spousal trust does not incur capital gains tax until death of second spouse. property held jointly between spouses will pass to remaining survivor owner w/o taxes

23
Q

citizenship taxation

A

IRS states: tax is hereby imposed on the transfer of taxable estate of every decedent who is citizen or resident of US. taxed on estate assets worldwide regardless of where assets located

24
Q

citizen

A
  1. all native born, includes children born in US of non-US parents visiting or staying illegally
  2. naturalized citizens
  3. citizens living abroad - still liable for estate tax
  4. individuals w/ multiple citizenship status
  5. former citizens/expatriates - estate tax for 10 yrs after citizenship is renounced
25
Q

proof of residency or domicile

A
  1. physical presence
  2. intention to remain in country
26
Q

situs of estate assets

A

assets owned by foreign decedents are subject to estate tax even if never visited US and has no residence in US.
ex. land, homes, tangible property, corporate stock, bank accts

27
Q

Special tax treatment of foreigners

A
  1. estate tax exclusion amount for non-resident aliens $60K due when estate transfers US situs assets above $160K
  2. charitable deduction, US charities only
  3. no marital deduction for non US spouse
  4. foreign death tax credits can be applied
28
Q

income w/ respect of a decedent (IRD)

A

income earned but did not receive before death. double taxation: estate tax and income tax of decedent or bene
ex. uncollected salaries, wages, bonuses, commissions, vacation pay, sick pay, interest, dividends, uncollected lottery winnings, deferred compensation benefits, outstanding stock dividends, accounts receivable, rents, royalties, unreceived gain from sale of property
-IRD deduction allows bene to deduct that portion of federal estate tax paid on his income tax
-purchase life insurance to offset

29
Q

trusts

A

legal arrangement whereby property is held and managed for welfare of bene
-main advantage: competent asset management
-independent taxpayer
-reduces estate tax liabilities

30
Q

Revocable trust (intervivos) - US

A

living trust set up before death of grantor
no estate tax savings
grantor liable for income tax due on generated income
assets vulnerable to creditors
grantor in control

31
Q

Irrevocable trust - US

A

trust assets removed completely from grantor’s control
no ownership
assets removed from estate to reduce estate size and taxes
income generated taxed to trust
assets not vulnerable to creditors

32
Q

Irrevocable Life Insurance Trust - US

A

policy on grantor comprises trust asset
removed from estate of grantor and bene
bene/spouse receives death benefit during lifetime
can loan money to estate to pay estate taxes
at death of bene, assets pass to children w/o tax consequences.

33
Q

rules against perpetuities

A

private trusts can exist for period of time not to exceed 21 years after creation of trust

34
Q

charitable trust - US

A

irrevocable
assets managed on behalf of charity
policy on grantor can be asset of trust
not subject to rules against perpetuities

35
Q

charitable remainder trust

A

type of charitable trust
% of assets paid out annually to non-charitable bene
policy can be purchased on grantor w/ trust’s annual payment
when grantor dies, charity receives assets, policy proceeds given to non-charitable policy bene

36
Q

Generation skipping trusts - US

A

multi-generational planning allows for use of estate assets by grandchildren and further generations
-assets equal to GST exemption amount $15K/donee/yr
-assets can purchase policy on grantor
-policy proceeds fund trust at grantor death
-subject to rule against perpetuities

37
Q

Dynasty Trust - US

A

private trust not subject to rule against perpetuities
-funded like GST w/ exemption amount
-purchase and benefit from policy on grantor
-not available in all states

38
Q

Special Needs trust - US

A

irrevocable, supplemental needs trust
-funded by assets or income belonging to special needs person or someone other
-benefits received from trust do not replace bene’s govt benefits nor disqualify from qualifying for such benefits

39
Q

Spousal limited access trust - US

A

irrevocable
allows grantor control of assets for heirs/benes
provides access to policy’s CV for variety of supplemental needs
outside taxable estate

40
Q

Testamentary Trust - US

A

irrevocable contained in will
upon grantor’s death
can be more than 1 trust per will
requires probate

41
Q

Inter vivos trust - Canada

A

set up and funded during lifetime of grantor
trust pays taxes on retained earnings at highest rate
subject to 21 year rule, except when trust purchases life insurance

42
Q

Spousal trust - canada

A

inter vivos
ultimate benes often offspring of previous marriage
joint life insurance to offset taxes due upon death of second spouse

43
Q

alter-ego trust - canada

A

inter vivos
65 or older
1 grantor
income given to grantor until death, assets go to bene
life insurance may be needed by contig. bene to pay death taxes

44
Q

joint partner trust - canada

A

inter vivos, age 65 or older
1 grantor
used by spouses, common law, same sex couples
income given to grantor until death, assets inherited by contig bene
policy may be needed to pay death taxes

45
Q

testamentary trust - canada

A

used for minors or permanently disabled children
activated at time of grantor death
receives favorable tax treatment
wholly or partially funded w/ life insurance

46
Q

Family limited partnership - US

A

modified business partnerships comprised solely of family members
general partners - responsible for daily management of partnership, often elderly who contribute property
limited partners - play more passive role and have no daily management responsibilities, often children, younger members of family
-also used by same sex couples
-protection from creditors
separate from estate

47
Q

justifiable needs for elderly financial underwriting

A

estate transfer
continuing income
funds for final expenses
stock repurchase
management/protection of accumulated assets
changing investment from growth to quality
long term care needs

48
Q

concept of attainability

A

determine if desired objective can be accomplished in remaining normal life span of elderly PI

49
Q

estate creation

A

use of insurance as sole means of providing an inheritance received by heirs where none would otherwise exist or using insurance to allow heirs to inherit considerably more than would normally pass to them

50
Q

premium financing

A

obtaining loan to finance policy, useful for those w/ substantial assets but little liquid cash
STOLI or IOLI

51
Q

considerations for elderly financial UW

A

appropriateness of plan
PI’s health status
medical problems affecting financial objectives
medical expenses impacting ability to pay premiums

ALU 202 (15 decks)

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