Dalton Review Flashcards
Qualifying for Installment Payments of Estate tax
closely held business - sole proprietor or small partnership or corporation with 20%+ interest included in gross estate and
Special Use Valuation characteristics
FMV is for property at highest / best use
can be reduced up to $1.1M if not used as such, and continue
US citizen at death,
Farming or business operated by decedent for 5+ of 8 previous years
value (real and personal) is 50%+ of decedent’s estate
real prop value >25% of estate
heirs must continue to use for at least 10 years directly thereafter
corp stock redemption characteristics
IRC #303
stock redeemed for estate costs (funeral, taxes, admin…) withOUT being treated as a dividend.
business MUST be a Corporation and value in corp 35%+ in estate
characteristics of probate
retitle assets at death
- get clear title & orderly process, BUT
costly, time consuming, public
SO, Avoid probate
Estate elections
choose tax yr (non-calendar?), which form, if executor will waive fees, bonds (dist to beneficiaries or cash first), and tax reporting status (MFJ, S, WW…)between
706 estate return (take what you can here)
1040 tax return (typically
stock valuation if not traded daily
avg of hi/ low on days traded and multiplied by other’s days to trade -
M 1/2 hi 25 low 21,
SCIN characteristics
OWNER holds a Secured Interest
requires actuarial life expectancy term
installment sale with pmts of P&I for term
note cancels at seller death
no gift if PV= value
interest is deductible (by buyer)
used when seller in poor health and may die before full term
Private Annuity Characteristics
no Gift tax or Estate tax UNsecured purchase uses IRS life expectancy/ pmts transaction between 2 private parties seller canNOT be terminally ill risk is that seller lives longer (buyer keeps paying for life)
characteristics of imputed interest
taxable gift from donOR to donEE
taxable income on donOR’s tax return
may be deductible interest on donEE’s return (home)
Maximum gift not triggering gift tax in 2015
$5458k (5430k + individual 14k gift)
gift valuation characteristics
FMV (even if lower, as the double basis adjustment will come at sale)
how are taxable gifts computed when opting for gift splitting
first add up FMV of gifts (by recipient)
next SPLIT the sum of each recipient’s gifts in half
finally, reduce by annual exclusion to get tax by recipient
sum total gifts to see what the donor’s taxable gifts are
requirements to exclude trust from taxable gift status
Must be a present interest in a completed gift -
if in a trust, must have a CRUMMEY provision & 5x5 power
valuation of a GRAT or CRAT for taxable gift value
amount transferred LESS retained value
Where is a revocable trust included in estates?
included in gross estate, NOT in probate estate (as passe by trust doctrine)
What does an income beneficiary earn?
dividend income and other income, but, not capital gains or corpus which goes to the remainder beneficiary
Characteristics of a Power of Appointment Trust
- Qualifies for unlimited marital deduction if spouse is given general POA over assets, BUT not if POA is limited
- POA trusts are irrevocable, but, can be created during lifetime or at death
- a General POA trust qualifies the grantor’s contributions for the gift tax annual exclusion if the beneficiary is allowed to take withdrawals at their discretion
differences between 2503 b and c
2503b (bad boy) requires trustee to offer distribution at age 21 or terminate the trust
2503c (choir boy) may hold property throughout the child’s life - allows trustee to accumulate income
characteristics of bargain selling
when selling for significantly below FMV, the discount rate is also applied to the adjusted basis offsetting the proceeds. If sold for 10% of FMV, then, gain/loss is determined based on 10% of basis
e.g. - sell an asset with FMV $100k for $10k (10%)
must reduce basis to 10% of basis to calc gain -
if basis was $30k, new basis is $3k, and
gain is based on both adjusted = $10k - $3k = $7k
Estate property exclusions
Life Estate in Home with NO QTIP election
suggests that the home is only theirs during life, not at death or in estate value!
bypass trust and marital deduction impact on estate taxes
gift bequests are removed from estate credit available ($5.430M - bypass bequests) to determine amount for bypass trust. Use marital deduction to park remaining assets - EXAMPLE…
$8M estate with gift bequests of $2.1M total ($600k, 700k & 800k), leaves $7M in estate. $2.1M gifts reduce exclusion from $5430 to $3330K)…
$8M estate less $3.330M = $4,670,000 remaining to gift as marital deduction
impact of life insurance transferred for valuable consideration
death benefit in excess of basis of consideration provided will be subject to ordinary income tax.
EXAMPLE - client cannot pay a debt and transfers a policy with a cash basis to cover debt. When insured dies, beneficiary’s benefits are taxable for all dollars beyond original basis. Client transfers $50k cash value policy to new beneficiary. when insured dies, all proceeds in excess of $50k are taxed as income. If the face amount is $250k, then $200k is income.
Death benefits are taxable when
- policy is transferred for value / consideration
- policy sold to an individual rather than company for cross-sell arrangement (thereby removing the possible exception of insurance for value for partnerships and corporations…)
characteristics of an ILIT
- if executor can demand a distribution from the ILIT for estate taxes, the ILIT value is included in gross income
- Executor can sell assets to the ILIT without causing ILIT to be included in estate value
- if owner releases rights to revoke ILIT, the ILIT would be included in the gross estate
- Cash contributions to an ILIT (e.g. paying for insurance premiums) do NOT cause the ILIT to be included in the estate
- gift taxes paid on contributions to the ILIT will be added back to the estate
