Estate Flashcards
XYZ Corporation is a closely held corporation. Martin McFly, along with the three other owners, set up a stock redemption agreement requiring the corporation to buy all shares of a deceased or disabled shareholder. The plan is funded by entity life insurance policies on each shareholder. Premiums are paid by the corporation. The agreement states that the share price will be established by an independent, competent third party appraiser. What are the tax implications of this plan?
i. A deceased shareholder’s gross estate will be increased by the amount of the life insurance.
ii. There is no step-up in basis for decedent’s family on the shares of stock covered by the plan.
iii. The corporation will owe income tax on the difference between the cash value of the policy and the death benefit amount.
I, II and III only.
I and III only.
II only.
None of the above.
Solution: The correct answer is D.
The deceased shareholder’s estate will not increase due to the life insurance, as the deceased shareholder does not own the policy and already has the value of his interest in his gross estate. There is a step-up in basis because the decendant died and the shares are “purchased” by the corporation. The corporation is “owed” the premiums by the individual at death and does not pay tax.
Income Tax - distributed vs accumulate
distributed - taxed to beneficiaries
accumulated - taxed at trust rates
pourover trust
receives assets from another source
grantor trust
intervivos trust for the grantor
grantor pays all income tax
standby trust
minimal funded
waiting for triggering event - usually incapacity
Inter Vivos Revocable Trust
important in states with high probate costs
privacy is maintained
will contests are discouraged
NOT effective for reducing estate taxes
probate estate
process in changing title
revocable trust can help with title but not with tax purposes
gross estate
tax purposes
inter vivos Irrevocable
completed gift
use annual exclusion - needs present interest
- distributions of income are considered a present interest
- crummey provision + 5 by 5 power (if you let beneficiary more than the greater of 5,000 or 5% of the trust assets and there is a lapse then there is a gift) -> can solve by having 1 beneficiary or limit to the annual exclusion
ILIT
need present interest
holds life insurance
common: make annual contributions to pay for the premiums
Bypass (Credit Shelter or B Trust)
spouse can still get the income HEMS, 5 and 5
usually testamentary, but can be inter vivos and exclude future appreciate
A Trust
Gross Estate
Provisions?
who decides where assets go?
POA - general power of appointment
qualify for UMD
assets will be included in 2nd spouse gross estate
appoint, appoint assets to yourself, creditors, estate or estate’s creditors
Gross Estate: 1st spouse dies - included 1st spouse GE -L UMD … 2nd spouse will also be in GE
Provisions: HEMS and 5x5 *this is good provisions for appoint to estate do not need for appoint to themselves
income to spouse
1st spouse recommends, 2nd spouse that actually decides where the assets are going
B Trust
GE?
provisions?
income?
who decides where the assets are going?
Bypass credit shelter
usually leave to nonspouse beneficiary (usually kids)
to take advantage of credit
1st spouse include GE + use applicable credit
2nd spouse - not included in GE b/c already taxed in the 1st spouse
yes- HEMS and 5x5 *spouse or kids
yes - can provide income to spouse or kids
first person decides where the assets are going
*take advantage applicable credit
C Trust
GE?
provisions?
income?
who decides where the assets are going?
QTIP
UMD
decides where the assets go
1st spouse dies - GE - QMD
2nd spouse dies - GE
HEMs and 5x5 ONLY to spouse *no one else
income *REQUIRED to spouse - spouse can allow trust to purchase income producing assets
first person decides where the assets are going
*take advantage applicable credit
