EP- Life insurance/valuation/Strategies

Question 1

ILIT

Answer 1

• trust established to remove the face value of the grantor’s life insurance from the gross estate for tax purposes
• may be unfunded (the life insurance policy in corpus only)
• or funded (with other income-producing assets)
• proceeds payable from an ILIT train their character as nontaxable for income tax purposes
• may provide liquidity for paying taxes or other settlement costs for the estate
• grantor can’t retain any incidents of ownership!

1. avoidance of probate
2. flexibility in distribution of the assets to the trust beneficiaries
3. management expertise of the independent trustee
4. removal of life insurance proceeds from the decedent-insured’s gross estate

Question 2

unfunded ILIT

Answer 2

• trust where the grantor gifts cash to the trust each year to pay the premiums of the policy
• would have to include a Crummey power on the beneficiary to obtain the gift tax exclusion
• most ILITs are unfunded

Question 3

funded ILIT

Answer 3

-type of trust that holds not only title to the life insurance policy, but also has income-producing assets

-results in an income tax problem for the grantor
trust treated as a grantor trust

-often funded with muni bonds

Question 4

When is Life insurance included in decedents gross estate?

Answer 4

INSURED IS YOU!

1. Proceeds paid to executor of decedents estate(death benefit Included, included in probate estate)
2. Decedent possessed incidents of ownership at death (death benefit included)
3. Decedent gifted policy within 3 years of death(even to spouse, Death benefit included)

*if you “SELL” policy to someone else, nothing included, no 3 year rule.

INSURED IS SOMEONE ELSE!
1. You own the policy on wife
Replacement cost included in your gross estate NO 3 year rule. Value included in probate estate.
-term -unused premium
-WL interpolated terminal reserve plus unearned premium

2. You gifted spouses policy to your daughter
   
   • No 3 year rule…NOTHING included in your estate

Question 5

Taxable gift of Life Insurance

Answer 5

1. Gift during lifetime - taxable gift is = to interpolated terminal reserve plus unearned premium (replacement value) of the policy. (don’t forget to subtract annual exclusion)
2. Wife owns policy on husband and names son as bene. He dies wife made gift to son. (She should have gifted son the policy before husbands death or put it in trust)

Question 6

Corporate and Partnership Recaplitaizations

Answer 6

• controlling persons common stock reissued as preferred stock
• gift = common stock value -preferred stock
• Preferred stock pays owner dividends in retirement
• At death estate is frozen and Preferred stock valued at FMV-gift
• All appreciation on stock in grantees name

Question 7

estate freezes

Answer 7

1. corporate recapitalizations
2. partnership capital freezes
3. grantor retained trusts
4. buy-sell agreements
   involved the transfer of property or business where the transferor retains some sort of interest, such as an income stream, for a specified term after which the transferee owns the property outright

the value of the transferor’s interest is “frozen” at its value on the date of transfer for estate tax purposes

Question 8

valuation discounts

Answer 8

• discounts for the lack of marketability (15-35%) or ownership of a minority interest (usually combined with lack of marketability for a total discount of up to 50%)

Question 9

key person discount

Answer 9

the stock or value of a closely held business will fall with the death or disability of a key person

Question 10

fractional interest discount

Answer 10

may be available for an undivided interest in real property (such as TIC)
discounted because it is harder to find a buyer since they have to share the interest with another(others)

Question 11

blockage discount

Answer 11

attributable to the value of large blocks of corporate stock that are listed on a public exchange - they can’t be liquidated at one time without causing a depression in the current price of the listed stock

Question 12

Minority Discount

Answer 12

inability of small shareholder to influence corporate policy makes shares worth less

Question 13

Marketability Discount

Answer 13

Closely held business interests are more difficult to sell. 15-50% discount

Question 14

Three requirements for the unlimited marital deduction

Answer 14

1. property left to the surviving spouse must be included in the decedent’s gross estate
2. property must pass to the decedent’s surviving spouse
3. interest passing to the surviving spouse must not be a terminable interest

Question 15

Terminable interest

Answer 15

an interest that ends on an event or contingency
ie a spouse that receives a life estate in the property of the first spouse to die possesses an interest that terminates when the surviving spouse dies - life estate = classic terminable interest

Question 16

Exceptions to the terminable interest rule

Answer 16

1. when the only condition of a bequest is that the surviving spouse lives for a period not exceeding six months
2. when a surviving spouse receives a life estate coupled with a general power of appointment
3. when the property left to the surviving spouse is a QTIP
4. when there is a bequest to the spouse of income from a CRT and the spouse is the only non charitable beneficiary

Question 17

QDOT

Answer 17

When spouse is not a US citizen

• no unlimited marital deduction
• $5450000 no avail
• jt property not considered 1/2 owned
• Limited gift of $148000 per year

Must pass through a QDOT to qualify for marital deduction

Question 18

Reverse Gift

Answer 18

when appreciated property is transferred to a donee who is expected to die shortly and the same property is then transferred back to the donor via the will

THUS - the boomerang provision of Section 1014(e) prohibits a step-up in basis if the donor-decedent dies within one year of receiving the gift - the original donor takes his own, unchanged basis in that property

MUST live more than 1yr or no step up unless passes to someone other than donor