Estate Flashcards
Non-Community Property Interest
- Income earned by spouses prior to marriage
- Property received as a gift by one spouse
- Property inherited by one spouse
- Interest earned on separate assets held by one spouse as a sole owner
Joint Tenancy with Rights of Survivorship (JTWROS)
- Property can be held by husband and wife, parent and child or children, siblings, and business partners
- Control, ownership, and enjoyment shared equally by all joint tenants
- Upon death of each tenant, property immediately passes to surviving joint tenants in equal shares.
- Property NOT controlled by terms of the will
- NOT subject to probate
Tenancy by the Entirety
- Ownership can only be held by a husband and wife
- Transfer of property can only occur with the mutual consent of both parties
- In most states, property is protected from the claims of each spouse’s separate creditors, but NOT protected from the claims of both spouse’s joint creditors
- NOT protected from claims of both spouses creditors
Tenancy in Common
- Two or more owners each own an undivided interest in the property
- Any Income is distributed according to each owner’s respective share in the property
- Owners are free to transfer their respective share of the property to other individuals
- Ownership stake goes through probate upon death
Assets NOT Subject to Probate
- Property conveyed by Deeds of Title (IRA)
- Property held by Joint Tenancy with Rights of Survivorship
- Government Savings Bond - co-ownership
- Revocable Living Trusts
- Payable on Death Accounts (PODs)
- Totten Trust
- -This is a revocable trust in a bank account in which the depositor is named as trustee for another’s benefit. The depositor retains the right of withdrawal until death.
Assets Subject to Probate
COMESTIC
- ”Singly” owned assets
- Property held by Tenancy in Common
- Assets where the beneficiary is the “Estate of the Insured”
- Community Property (CP)
Assets Included in the Gross Estate
- everything in probate COMESTIC PLUS
- Singly Owned Assets
- Tenancy in Common
- Beneficiary is the Estate
- Community Property
- JTWROS/Entirety
- Life Insurance
- General Powers
- 3-year gross-up on gift taxes paid (but NOT GST taxes paid)
- Retained life estate
Life Insurance Added to the Estate
- Proceeds are paid to the Executor of the Decedent’s Estate
- Decedent at Death possesses an Incident of Ownership in the policy
- Decedent transferred a policy with an Incident of Ownership within 3 years of death
Valuation of a Gift
The value of a gift for gift tax purposes is its fair market value (FMV) at the date of gift.
Basis of a Gift
- If FMV on the date of gift is greater than the donor’s Adjusted Basis, use the donor’s Adjusted Basis.
- If FMV of the gift is less than the donor’s basis, use the chart below:
Client’s Subtituted Basis/Dual/Double Basis
Above $2,015,000 Gain
Between $2,015,000 and $1,515,000 NO Gain or Loss
Below $1,515,000 Loss
Deductible Gifts (Not Taxable Gifts)
Also called Exempt Gifts or Qualified Transfer
- Gifts to a spouse, provided they are not a Terminal Interest
- Gifts to qualified charities
- Qualified payment in any amount made directly to an educational institution for tuition
- Qualified payment in any amount made directly to a medical care provider on behalf of any individual
- Gifts to American political parties
Summary of Rules Regarding Gifts and the Donor’s Estate
- Generally, gifts given are simply “Taxable Gifts” to the extent such gifts exceed the Annual Exclusion.
- Taxable Gifts are added to the Taxable Estate
- Gift Taxes paid (or payable) are generally allowed as credit against the Tentative Tax
- Gift Taxes paid on any gifts within three years of death are added to the Gross Estate
Powers of Attorney
- Traditional, Non-Durable Power of Attorney: Power ceases when the principal is no longer legally competent
- Durable Power of Attorney: Authority of agent continues when principal become incompetent
- Springing Durable Power of Attorney: Main strength is the agent has no authority over the principal’s assets until incompetency.
Power of Appointment (Trusts)
- Special Power: Exercisable only with the consent of the creator of the power or a person having a Substantial Adverse Interest
- Ascertainable Standard: Relating to health, education, maintenance, or support (HEMS)
- General Power: Holder may exercise the power in any manner he/she wishes
Gift and Estate Tax Implications (General Power)
-
Gift Tax Implications (General Power)
- Exercised, Released, or Lapsed → Taxed
- Lapsed with a “5 or 5” power →Not Taxed
-
Estate Tax Implications (General Power)
- Exercised, Released, or lapsed →Taxed
- Exercised, Released, or Lapsed with a “5 or 5” power → Greater of the “5 or 5” is taxed
“5 or 5” Power
Property subject to a General Power will be included in a donee decedent’s Estate (or considered a “Taxable Gift”) only to the extent that the property exceeds the GREATER of:
- $5,000, or
- 5% of the total value of the fund subject to the power as measured at the Time of Lapse
Grantor Trust Rules (Tainted / Defective Trusts)
Income Tax & Estate
- Trust may be Defective / Tainted for Income Tax and Estate Tax purposes if the Grantor retains:
- A Right to Income or the Right to Use/Enjoy Trust property (Beneficial Enjoyment)
- A Reversionary Interest exceeding 5% (Retained Interest)
Elements of a Trust
- In order for a Trust to exist, there must be Property (also known as Principal, RE, or Corpus)
- There must be a Grantor. This is any person who transfers Property to and dictates the terms of a Trust.
- There must be a Trustee who received legal title to the Property placed in the Trust, and who generally manages and distributes income according to the terms of a formal written agreement (Trust Instrument).
- There must be a Beneficiary who has Equitable Title to the property.
- The Grantor and Trustee must be legally competent.
Simple
vs.
Complex Trusts
Simple Trusts (2503(b), Marital, QTIP) are considered merely a “conduit” for forwarding income to the Beneficiaries (Pass-Through)
Complex Trusts (2503(c)), are separate Tax Entities and taxed as such if it meets two requirements:
- It is irrevocable, and the Grantor has not retained any control
- Income is accumulated
Crummey Trust
- Irrevocable Trust with Demand Rights
- Demand Right given to a minor through his/her guardian
- Beneficiary has Temporary Right to Demand a withdrawal from the Trust that is the lesser of the amount of the Annual Gift Exclusion or the value of the gift transferred
!! LESSER of $15,000 OR value of the current year contribution.
Non-Marital “B” Trust
(Family, Bypass, Credit Shelter, Unified Credit Shelter)
- Property transferred to the Trust at the time of the decedent’s death
- Can be structured to provide a Stream of Income to surviving spouse or other individual
- Decedent has post-mortem control
QTIP “C” Trust (Current Income Trust)
- Provides surviving spouse with a Stream of Income for life, but decedent has post-mortem control of Trust property
- Property qualifies for Marital Deduction
- Mainly used for second marriages
Keyword for QTIP - L.A.M.E.:
- Lifetime income for the spouse
- Annual payments to spouse
- Mandatory payments to spouse
- Exclusively for spouse
Qualified Domestic Trust (QDT / QDOT)
- No Unlimited Marital Deduction
- However, no Estate Tax due
- Jointly held property between spouses is not considered one-half owned
- Limited gift between spouses of only $100K (Indexed) per year
Present Interest Gift Vehicles
- UGMA
- UTMA
- 2503(c) Trust
- Section 529 College Savings Plan
- Gift to a 2503(b)
- Trust is a gift of a future Interest
