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
Charitable Contributions/Transfers
Income to donor until donor’s death:
- Charitable Remainder Annuity Trust (CRAT) - 5%
- Charitable Remainder UniTrust (CRUT) - 5%
- Pooled Income Fund - no 5% required
- Charitable Gift Annuity - no 5% required
Income to the charity:
- Charitable Lead Trust (CLAT/CLUT) - no 5% required
- Private Foundation - 5% - can give money to individuals
Intrafamily Transfers
(Property owner needs income)
Remember: PIGS Need Income
Private Annuity
Installment Sale
Grantor Annuity Trusts (GRAT/GRUT)
Self Canceling Installment Note (SCIN)
Intrafamily Transfers
(Property owner wants to gift assets and/or income to family members)
- Partnership / S-Corp
- Family Limited Partnership (FLP)
- Gift Leaseback
- Qualified Personal Residence Trust (QPRT)
Disclaimer
- In order to Disclaim Property, the following requirements must be met:
- Disclaimer must be an Irrevocable Refusal to accept the interest
- Refusal must be in writing
- Refusal must be received within 9 months
- Intended donee cannot have accepted any interest in the benefits
- As a result of refusal, the interest will pass, without the disclaiming person’s direction, to someone else
Post-mortem Planning Techniques
(Estate Liquidity)
Stock Redemption (Section 303):
- Business must be Incorporated (Closely Held)
- Value of business must exceed 35% of the decedent’s Adjusted Gross Estate
- Redemption cannot exceed the sum of the estate taxes plus administrative expenses
Installment Payment of Estate Taxes (Section 6166):
- Value of business must exceed 35% of decedent’s adjusted gross estate
- During the first 4 years (of 14 years) can pay interest only on taxes due
Port-mortem Planning Techniques
(Estate Tax Reduction)
Special Use Valuation (Section 2032A):
- 25% of the Gross Estate consists of real property
- Must be in Qualified Use: 5-out-of-8 year rule before death and 10 years after death.
Exclusions fro Gross Estate
Life insurance owned by others ( even when the decedent is the insured)
completed gifts (donor parted with dominion and control)
life estate ( decedents life only)
Adjusted Gross Estate
The Gross Estate minus
- funeral expenses
- administrative expenses
- debts
- taxes
- casualty losses
Prior transfor credit
Credit for having paid estate taxes with 10 years
10% per year
test question concept only - Credit for double taxation
Special Power of appointment
Exercisable only with consent of creator of power or person having substantial adverse interest
no gift tax
no estate tax
Assertsinable standard
HEMS
HEALTH
EDUCATION
MAINTENANCE
SUPPORT
no gift tax
no estate tax
General power
Allows holder to exercise power in any manner he wishes
virtually the same as outright ownership
if power is exercised, released or lapsed - both gift tax and estate tax apply
ifa 5 or 5 is used - no gift tax and 5,000 or 5% whichever is greater estate tax
Non citizen spouse annual gift exclusion 2022
$164,000
Form 709
Form that you file for spousal consent when gifting more than $32,000 to a single individual
How to avoid ancillary probate
Real property owned JTROWS
real property owned by revocable living trust
real property owned as a TBE tenancy by entirety
Probate estate includes
COMESTIC
community property (1/2 @ 1st death)
titled to estate
singly owned
tenants in common
2022 gift tax exemption vs. exclusion
Gift tax exemption $12,060,000
amount that can be given to one donee in 2022 with no federal gift tax
exclusion $16,000
Skip Person
UNRELATED PERSON 37.5 years younger
RELATED Person- 2 generations younger
Gift Tax
Estate Tax
GSTT - Generation Skipping Transfer Tax
calcuation for transfer tax
amount of transfer LESS annual exclusion (16,000)
difference * 40% = gift tax
total gift - (gift tax + annual exclusion) (40%) = GST due
ADD GST + Gift Tax for total transfer tax.
Taxable Termination
The GSTT is paid by Trustee at time of distribution
Noncommunity (Seperate Assets)
property received as a gift by one spouse
property inherited by one spouse
income earned by spouses prior to marriage
interest earned on seperate assets held by one spouse as sole owner.
3 year rule
Only gift tax paid within 3 years
NOT GSTT
NOT a gift of property or cash
Life insurance for probate/ gross in community property state
1/2 cash value included in probate
if there is a beneficiary not included in probate
gross estate
includes 1/2 of DB if a Bene was named
Holographic will
Handwritten, signed will
uniform probate code allows this
Nuncupative will
Oral wills
must be made in the presence of witnesses
generally during a final illness or combat
Increasing basis on appreciated gift
in certain situations donee would be allowed to increase the basis on a gift
Two conditions must be met
- Must be appreciated and
- gift tax must have been paid by the donor
FMV on date of gift - donors basis
multiply by 40%
add back donor basis
= donees NEW basis ( higher than donors basis)
Gifts subject to debt
Only NET value of gift is subject to gift tax ( the property less the debt obligation)
additionally if the debt is greater cost to donor, the donor will realize a taxable gain on excess of debt over basis
example on 3-6
Gifting life insurance to charity
Cash value or cost basis whichever is LESS
PIGS
Private annuity
installemnt sale
Grat/Grut
Self-cancelling installment note
GRAT
Best asset likely to appreciate
transferor receives payments over a period of time.
income reported as received
if transferor dies before the exp of the term the FULL value is included in estate of transferor
Installment Sale
Seller receives payments over a period of time.
income is reported as received
the present value of any remaining payments is included in the sellers gross estate at death
FLP
Income is shared by transferor and transferees.
estate taxed reduced
entity must be capital sensitive
Gift Leaseback
Income to a family member in a lower tax bracket
an income tax deduction is available for the donors business
SCIN
Higher payout the installment note and avoid estate taxes
303 stock redemption
Must be incorporated
value of stock must exceed 35% of AGE
amount of stock redeemed as cap gain can’t exceed sum of estate taxes paid plus admin
2032 A
Real estate / farming or closely held business
50% of gross estate must be real and personal property
25%must be real property
5/8 before
10 after
6166
Sole prop, partnership, corp
value of business must exceed 35%of AGE
first 4 years interest only ( total 14 years)
interest rate 2% on the first $1,000,000 indexed to $1,640,000 2022
45% of regular underpayment rates ( pertains to tax due above $1,640,000)
2% not deductible
