Chapter 12 - Special Elections & Post Mortem Planning Flashcards
Define Alternative Valuation Date
An alternate date, other than the date of death, to value a decedent’s gross estate. The AVD is either 6 months from the date of death, or if the asset is disposed of within 6 months of the date of death, the asset’s disposition date.
Define Disclaimer
An heir or legatee’s refusal to accept a gift or bequest. The disclaimer allows assets to pass to other heirs or legatees without additional transfer tax.
Define ILIT
An irrevocable trust that owns and holds life insurance on its grantors life.
Define Split-Dollar Life Insruance
A single life insurance policy in which two parties have an ownership interest. Usually one party has an interest in the death benefit and the other in the cash value up to the amount of the premiums paid.
What are the most common costs that increase the need for liquidity in an estate?5
- Last Medical Costs
- Funeral Costs
- Transition or Adjustment Period Costs
- Administration Costs
- Taxes
What are the three most common administration costs?
- Executor’s and Attorney’s Fees
- Preparation for Estate and Inheritance Returns
- Appraisal Fees
When is an estate tax return due?
Within 9 months of date of death.
When is income tax on any income received during estate administration due?
Annually (April 15th or the 15th day of the 4th month of the end of the fiscal year for the estate).
If the decedent generates any gift taxes before death, when are they due?
April 15th
What are some sources of liquidity for an estate?
- Life Insurance
- Sale of Assets
- Tax Advantage Accounts
- Corporate Redemption of Closely Held Business
- Loans
- Asset Distribution
What are the requirements that state a life insurance policy will be included in a decedent’s gross estate under section 2042? 3
- The decedent owned the policy at the time of his death;
- The death benefits are made available to the executor or the estate; or,
- The decedent had any incident of ownership in the policy at the time of his/her death.
What are two ways to address the section 2042 issue?
- Instead of making the proceeds available to the estate, the ILIT could give the trustee the discretion to make loans to the decedent’s estate.
- The decedent can have language in his/her will allowing the estate to sell assets to any party, including the ILIT. As long as an arm’s-length transaction is entered into to provide liquidity for the estate, the proceeds of the life insurance policy are not deemed to be made available to the estate, thereby escaping inclusion in the gross estate.
What happens with setup basis for IRDs?
If income is deferred during lifetime, the value of the deferral at death will not qualify for a step-up in basis.
How is income tax treated with an IRD?
Whoever receives the decedent’s deferred income will have to pay income tax.
What happens if an IRD distribution causes an estate to be subject to estate tax?
If the IRD causes the estate to be subject to estate tax, the beneficiary of the tax-advantaged account will be eligible for a deduction in the form of a misc. itemized deduction not subject to the 2% AGI floor.
