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
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
Assets Subject to Probate
- “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
- 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)
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
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.
Transfers through the Probate process are
- Orderly distribution
- Court supervised
- Public for creditors
- Publication of the Last Will and testament
Transfers through Testamentary Distribution
TESTATOR: person making the will
WILL: Creates testamentary Transfers
PROBATE: process by wich transfer is completed
Testamentary TRUST does not go through Probate
Intestate Succession
NO WILL
Advantages of Probate
Court Supervised/Administration
Inventory/Valuation (Marshalling of Assets)
Bill Payment/Resolution of Credit
Oversite of Distribution as directed by will OR Intestate Law
Disadvantages of Probate
Loss of PRIVACY
Will may be contested
Court Costs/Delays
Ancillary Probate
Assets in PROBATE Estate
Singly Owned/Fee Simple
TIC
Community Property (50%)
Estate is Beneficiary
Ancillary Probate Administration
REAL ESTATE in another state other than decdent’s state of Domicile
Competely separate proceeding
Probate Avoidance Strategies
Revocable or Intervivos Strusts
Operation of Law (often account titling): TOD, POD, JTWROS, TBE, Trust Strategies
Transfers by Contract (also avoid probate)
Beneficiaries of insurance, retirement accounts etc.
Property conveyed by “Deed of Title”
Government Savings bonds (Co-ownership)
Election against Will (elective share)
For Spouse who has NOT inherited a minimum amount (per state law). ⅓ or ½ possible of estate of decedent.
USDA Uniform Simultaneous Death Act
5 Days / 120 hours
Couple who dies within 120 hours are considered to predecease each other.
Keeps property from passing through 2 estates before going to contingent beneficiaries.
Totten Trust
Revocable trust in a bank Account
Depositor is Trustee
POD/TOD Disadvantage
If depositor becomes legally incapacitated you need a court order or Durable PoA to make withdrawals
Community Property States
NV, CA, AZ,NM, TX, WA, ID, WI, LA
Community Property Definition and Features
100% Step Up (LTCG, not ord. income property)
Separate, UNDIVIDED equal interest (50/50)
ALL property and income acquired during marriage
ALL interest accumulated during marriage (on non-community properties)
NO SURVIVORSHIP RIGHTS
Will is Needed
Commingled assets with NO paper trail
Pension/Retirement Plans (HR-10) are 50% owned by spouse
NON Community Property
Gifts from a spouse
Inheritance
Income PRIOR to marriage
Interest on Separate assets
Can Life Insurance Death Benefit be a “Step-Up”?
Yes, if we don’t know if upon transfer if it was paid up or not
Are assets with no beneficiaries a probate asset?
YES.
What is the best trust for community property?
Revocable Living Trust
(spousal remainder trust not effective)
Quasi Community Property
Assets acquired while living in a Non-Community property state when couple moved to a community property state.
Probate and Disclaimability
Sole Ownership/Outright Ownership/Fee Simple
SUBJECT to PROBATE
CAN be Disclaimed
JTWROS
NOT subject to probate
CAN be disclaimed
Not Controlled by WILL
Tenants must be adults, shared equally (income and principle)
Immediately passes to survivors
RIGHTS OF SURVIVORSHIP
JTWROS - ESTATE TAx for NON Spouse
FULL VALUE included in first to die UNLESS survivor can establish OWNERSHIP/Consideration BEFORE JT was created
JTWROS Spouse
First to die: 50% of property FMV included in Gross Estate
TBE
NOT Subject to probate
CANNOT be disclaimed
Protected from claims of each spouses separate creditors (but not both if joint claims)
Dissolution by death, divorce, mutual consent
TIC
Subject to Probate
CAN be Disclaimed
NO Survivorshiprights
Several Owners
Free transferability of Shares
Trustee Ownership
Trustee Holds Title
NOT Subject to probate
Holographic Will
Handwritten and signed
Nuncupative Will
Oral Will (as in combat; must have witnesses
Legal Requirements of a Will
Generally must be in Writing
Must be Witnessed
Attestation clause (required in some states: “will was validly executed” by state and witnessed.)
Modifying or Revoking a will
Wills are Ambulatory: can be changed
CODICIL for minor changes
If revoking, new will must state as such
May be revoked if INTENTIONALLY destroyed by shredding/tearing
Divorce may revoke certain portions of a will (state specific)
Avoiding Will Contests
MUST be presented in Probate Courte
Some attorneys video a will execution for evidence (testator has questionable capacity or an unusual disposition of property.)
NO CONTEST CLAUSE: not recognized in all states
Powers of Attorney vs Revocable Trust
Durable: ends at death
NonDurable: ends at incapacity
PoA may not be recognized in all states
Trustee powers cross state lines and continues past death.
Testamentary Trust
Created by will
Effective when will is submitted to Probate
Testamentary trust does NOT go through probate
Estate tax filing requirements and calculation
Federal estate tax Form 706 must be filed for citizens or residents with a total gross estate plus adjustable taxable gifts equaling or exceeding the amount of the exemption for the year of death. $12,060,000
The executor is responsible for paying the tax
Probate and NonProbate
Estate Calculation Road Map
Key Elements of Form 706
What is in the GROSS Estate
All Probate and NON probate assets
FMV of Property on Date of Death
JT w/Spouse (50%)
JT w/non Spouse (100%, subject to consideration)
Community Property (50%)
NOTE: Life insurance can be included if decedent was insured or owner or both (Cash Value or Face Value – good for estate liquidity)
THREE YEAR RULE for including in Gross Estate
Transfers of Life Insurance within 3 yrs of death
Gift TAX paid out of pocket
Gifts of real estate property or cash are NOT subject to 3 yr rule –only gift tax paid.)
Survivorship Annuities
MOST included in Gross Estate.
IF survivor has rights to Lump Sum = FULL VALUE
IF annuity =PV of Future Payments
Transfers with Retained Life Estate
Retained rights of enjoyment (income, use, or ownership – joint or sole)
Included in Gross Estate
(529 exception to the rule)
Exclusions from Gross Estate
Life Insurance owned by OTHERS
COMPLETED Gifts
Life Estate (not retained) for decedent’s own life policy
Adjusted Gross Estate
= Gross Estate - (admin & funeral expenses, debt, losses, taxes)
TBE can only pass to…
Surviving spouse (no disclaimer)
What is considered a Charitable Deduction?
Outright transfer to QUALIFIED Charities are 100% deductible for BOTH Estate and Gift Tax purposes
What do you do with STATE taxes in terms of and estate?
State level death or inheritance taxes may be deducted from Adjusted Gross Estate
What to do with ADJUSTED TAXABLE GIFTS
Taxable gifts made post-1976
NOT included in GROSS Estate.
TAXABLE GIFTS are ADDED BACK to the TAXABLE ESTATE to get to the Tentative Tax.
TAX BASE is…
= Adjusted Taxable Estate + Gifts
TENTATIVE TAX is …
= Tax Base - $12,060,000 exemption
NET ESTATE TAX is …
= Tentative Tax - (Tentative Tax * 40%)
Lifetime Gifts and Testamentary Transfers
Same Tax Rate 40%
Same Exemption $12,060,000
Unlimited Marital Deduction
Unlimited Charitable deduction
- Gifts: May be used in full WHILE LIVING*
- AND again at Death BUT*
- TAXABLE GIFTS ARE ADDED BACK TO THE TAXABLE ESTATE (no gift tax paid)*
Transfer Tax is… CUMULATIVE
Through life, death, and skips. Three Separate Taxes (four with income Tax)
What is PRIOR TRANSFER CREDIT
For property passing between TWO taxable estates within 10 years.
Credit for inheritance and avoiding double taxation the same money
Sources of Estate Liquidity
Sale of Assets
⇒ If marketable, get step up.
⇒ Annuities (have tax liability above basis)
⇒ Buy/Sell Agreements (Closely Held Biz)
Life Insurance (ILIT or Direct Ownership or through Buy/Sell)
⇒ If Insured OWNS a policy on his OWN life, full proceeds will be included in the GROSS ESTATE.
What happens to the CASH value of life insurance benefit at death?
CV is retained by the carrier
unless policy is UL or VUL
Powers of Appointment
General
… and Limited Powers
⇒ Special
⇒ Five or Five
⇒ Ascertainable Standard
General Power (considered OUTRIGHT OWNERSHIP)
Transfer of property to anyone
Power to invade corpus
Power to affect “beneficial enjoyment”
⇒ by altering, amending, revoking or terminating trust
Trustee holds legal title
Special (Limited) Power
Transfer limited to
⇒ designated individuals
⇒ Specific Circumstances
⇒ With consent of another holder (to act in concert)
Five or Five Power
Flexible planning technique with minimum tax consequences.
Property subject to GENERAL POWER only if it exceeds the GREATER of
⇒ $5,000 or 5% of total value
Power is granted to Beneficiary.
⇒ 5/5 is INCLUDED in GROSS estate if on exercised (or spent down if exercised.)
General Power: Lapse, Exercise, or Release of Power
Lapse: if not used for a time
Released when a holder relinquishes all control (to determine who beneficiaries will be)
Ascertainable Standard (a limiting power)
HEMS
Maintenance and Support definition is broad (not limited to the necessities of life.
Grantor can specify “reasonable comfort”, “accustomed manner of living”, “health and reasonable comfort”
Tax implications for Powers of Appointment
SPECIAL Powers (Lapse, Release)
Tax implications for Powers of Appointment
GENERAL Powers (Lapse, Release)
General Power IS included
In the GROSS Estate
… because they can make taxable decisions
Inter-vivos Gifting
Transfers while alive.
Gift tax applies to an exchange without full consideration (payment)
Requirements for a valid gift (by law)
- Donor MUST BE Capable of transfer
- DONEE must be capable of receipt and possession
- There must be delivery and acceptance
- There is ordinarily “donative” intent
Gift Giving Techniques
Forgiveness of Debt
Below market rate loans
Assignment of Life insurance benefits
Transfer of Property to a trust
Appropriate Gifting of Property
Appropriate Gifting Summary
Highly appreciated: Low Tax Bracket, charity, death for step up
Likely to appreciate: Remove from estate
Income property: Low tax bracket
Loss Property: Sell and gift Cash
Subject to depreciation: Keep until fully depreciated
Out of State Property: GIFT to avoid ancillary probate (to a person or trust)
Life Insurance: : EXCELLENT to gift; tax is based on REPLACEMENT value and Benefit is based on FACE value (death benefit)
CLOSELY Held Business Gifting Strategies
Reduce Value of Donor’s Estate:
FLP
LLC
Preferred Stock Recapitalization
Gifting Closely Held Stock
Gift Leaseback
Which closely held biz gifting strategies may disqualify estate from Section 303 or 6166?
Preferred Stock Recapitalization
Gifting Closely held Stock
Why? could impact 35% or 50% percentage requirements
Gift Leaseback
FULLY Depreciated Property
Lease payments by biz tax deductible and income to family member who received the gift.
Gifts of Present Interest
Donee has immediate enjoyment
Qualifies for Annual Gift Exclusion
Exceptions (that seem like a future interest):
- 529 Plans
- 2503© trusts
- Gifts in trust of future interests on behalf of minors
- Crummey Trusts
Gifts of a Future Interest
Later enjoyment by a Donee
Does NOT Qualify for Annual Exclusion
Basis of Gifts
Appreciated Gifts = Donor’s Basis
Depreciated Gifts =
- If Donee sells for < FM then
- Basis = FMV on Date of Gift
- If Donee sells for > FMV then
- Basis = Donor’s basis (carry over)
- If Donee sells for > Basis < FMV
- No gain or loss is recognized
Increasing the Basis on an Appreciated Gift
How?
- MUST be appreciated property
- Gift tax is PAID by the DONOR
What happens if a gift is subject to debt?
Value of gift is the NET = FMV - Debt
Taxable Gifts and Estate Tax General Rules
- Present Interest Gifts get Annual Exclusion ($16,000)
- Adjusted TAXABLE gits added to Taxable Estate
- Paid Gift Taxes are a CREDIT agains the TENTATIVE Estate Tax
- Paid Gift Taxes within3 yrs are ADDED to the GROSS estate
- Gift Tax Exemption = $12,060,000
Gift Tax Filing Requirements
Form 709
File When Gift is:
- >$16,000 (to nonspouse)
- of FUTURE interest (any amount)
- SPLIT with Spouse (split gift election)
Gift splitting only allowed with spouse
How to do Gift Splitting
50/50 with Spouse (required consent)
- IF Gift > Annual Exclusion ($32,000)
- TWO gift returns (one for each spouse)
- If Gift < Annual Exclusion ($32,000)
- Spouse must sign donor’s form to consent
- Community Property or JTWROS should do TWO returns since both own the property
Gifts of JT/Community Property
- Nature of Property
- Transferred when documents show transfer of title are executed
- JT Bank
- Gift with a Withdrawal (not creation) by donee
- JT US Govt Bonds (EE)
- Gift complete when bond is REDEEMED
When are Gifts taxed immediately?
When $12,060,000 is used up, the DONOR is subject to immediate Gift Tax
When are Gifts taxed immediately?
When $12,060,000 is used up, the DONOR is subject to immediate Gift Tax
When are Gifts taxed immediately?
When $12,060,000 is used up, the DONOR is subject to immediate Gift Tax
Is Non Court Ordered Child Support considered a gift?
Possibly. Could be deemed a taxable gift
Life Insurance Gift is equl to …
- the LESSER of
- the CASH VALUE of the policy OR
- the BASIS.
Exempt Gifts
- Direct to Educational Institution for TUITION
- Direct Medical
- Gifts to spouse (not a terminable interest)
- Qualified Charity
- Political Organization forits use
- The President of the United States
Incapacity Planning
When is an individual considered incompetent?
Lack of physical or cognitive or legal qualifications
Unable to function at capacity
Durable PoA for Healthcare
Springing power for medical. Can name surrogate or attorney in fact
What can a DPoA NOT do?
- execute or revoke a will
- execute a living will
Springing Powers
Not in effect/No authority until incompetency
Medicaid Planning
- ≤ $2,000 in countable assets
- 5 year lookback
- Home Equity can make an individual ineligible
- Annuities: MUST name STATE as remainder beneficiary
SNT
Special Needs Trust
- Can pay ONLY for supplemental needs not covered by programs (vacation, private duty nursing, furniture)
- Used for ANY disability
- Money from settlement can fund SNT
- Recipient must be younger than 65 years old.
- SNT assets usually come from parent.
- May establish a different beneficiary outside state (Payback trust cannot)
OBRA
Omnibus Budget Reconciliation Act
PAYBACK TRUST
Exception to 5 year (60 month) lookback
Person may transfer asset to the trust and the STATE will be the remainderman
Elements of a Trust
- Trust Property / Corpus
- Trust instrument / agreement
- Competency of Grantor and Trustee
- Grantor / Trustor / Settlor
- Trustee has legal title
- Beneficiaries have equitable title
Complex trusts
IRREVOCABLE (generally)
Taxed as a separate entity
Income is Accumulated (Trustee has discretion or required)
Simple Trusts
Conduit for forwarding income
Passes income and deductions to beneficiaries
Beneficiaries report income with the “same character” as in the trust
Beneficiary pays taxes at their marginal tax bracket
DNI
Distributed Net Income Purpose
- Provide the trust with a deduction for distribution
- Limit the portion of the distribution that is taxable to beneficiaries
- Ensure the character remains the same (prevents double taxation)
- Deduction = LESSER of
- the Actual Distribution
- or DNI
Revocable Trust AKA Grantor Trust
- Created during life
- grantor has powers to alter or reclaim (often maker and trustee)
- Often becomes IRREVOCABLE at death if inter-vivos
- Grantor Trust is included in GROSS estate
Irrevocable Trust
Created during life
RARELY included in Grantor’s taxable estate (unless tainted or defective)
CANNOT be changed without COURT approval
Grantor cannot reclaim property
what gives a the crummy annual exclusion or less?
Crummey Trust
- Crummey is a PROVISION in an IRREVOCABLE trust that creates DEMAND rights.
- Can be used for a minor beneficiary (if structured properly)
- Most used in ILITs
- Demand right of withdrawal = the LESSER of
- The annual exclusion OR
- the current year contribution
- If not exercised it remains in the trust (temporary right of withdrawal 30 days.)
- DONEE has a demand right in this provision, but should waive the right because the income is needed for premiums
Revocable Living Trusts (intervivos)
Becomes Irrevocable at death
Terminates with corpus depletion
Usually has no income tax to trust during lifetime (not a complete gift)
GRANTOR TRUST RULES = all income earned to trust taxable to grantor
Advantages/Disadvantages of Inter vivos trusts
Advantages
- Organization
- Lower cost than and avoidance of probate
- Alternative to Guardianship/Conservatorship
- Privacy
- Speedy disposal
Disadvantages
- Longer creditor period (not protected bc grantor has rights to corpus)
- Legal Fees
- Funding burdens
Postmortem control
Testamentary trusts and spendthrift provisions
Does NOT result in immediate Estate or Income tax savings but ultimately might
Spendthrift provisions: prohibits transfer of beneficiary interest AND claims of creditors.
Postmortem control
BYPASS Trust
(B Trust)
Non-Marital
FIRST to DIE controls the trust
- aka NonMarital trust, B trust,
Nonmarital B Trust,
Family Trust, Dynasty Trust,
Applicable credit trust, credit shelter trust
Property MUST equal Fed Estate Tax Exemption ($12,060,000)
- Can be structured for income stream to
- surviving spouse ONLY OR
- Split among other individuals
Spouse may have limited rights of invasion (5x5, HEMS)
BYPASS assets pass from Surviving spouse to beneficiaries TAX FREE.
Portability of Unused exemption
an EXECUTOR may NOT create a bypass trust BUT can TRANSFER any unused portion of the exemption to the trust.
Marital Trust
A Trust (mAritAl)
- SECOND TO DIE controls the trust property and has post mortem control
- Passes tax free to spouse via unlimited marital deduction
- Living spouse has either a lifetime or testamentary general power of appointment
- Right to income AND corpus invasion
- Right to CHOOSE beneficiary
- Included in GROSS estate but NOT subject to estate tax
- Must be included in the Second to Die estate
QTIP trust
Qualified Terminal Interest Property
C Trust/Current Income Trust
- FIRST TO DIE controls the trust
- Lifetime, Mandatory, Annual Payments, to Spouse only
- Why? When decadent wants to provide an income stream for spouse for life AND wants the MARITAL DEDUCTION.
- Executor MUST make the election on the Federal Tax Return
- MUST be included in the surviving spouse GROSS estate
- May have limited power of invasion over corpus
- QTIP must pay its share of estate tax in the surviving spouse’s estate
BeCAuse trust summary names
Trust Roadmap
ESTATE trust
a MARITAL TRUST that does NOT provide the surviving spouse with an INCOME stream
Holds non-income producing assets
Pour Over Trust (with a pour over will)
Why? To catch assets that are not controlled by the revocable trust
Best Practice:
- Set up revocable trust first THEN
- Set up pour over will/trust
Gifts to Minors Chart
UGMA – Unified GIFT to Minors Account
Cash type assets only.
Can be in a custodian’s estate
Distrubute at 18 y.o.
Cannot be testamentary
UTMA – Unified TRUST to minors account
Any asset (including real estate)
Distribute at 21 y.o.
Can be in custodians estate
CAN be testamentary
Why UTMA and UGMA?
Gift to one person
Ok to distribute income and principal at any time
Not a separate legal entity (simple) but does incur kiddie tax.
If DONOR is CUSTODIAN and dies before age of Majority it is part of donor estate
DONEE MUST receive property at age of majority
Cannot be used for Child spport
If child dies before age of majority, goes to child’s estate
Section 2503(b) Bad boy trust
Simple trust
Gift of Present AND future interest
Can be used for minors (kiddie tax may be an issue)
Mostly used for ADULT Children
Provides INCOME STREAM
Two Part Gift:
- Income Interest (gift of present interest and qualifies for annual exclusion)
- Remainder or REVERSIONARY interest (gift of a FUTURE interest - no annual exclusion)
ONLY INCOME NEEDS TO BE DISTRIBUTED
Section 2503(c) Current/Present Interest COMPLEX trust
Minor’s Trust
Present Interest Gift
qualifies for annual gift exclusion IF
- Trust MUST provide that property and income MAY be expended for the benefit of the minor/donee before age 21.
- Any property NOT expended will pass to donee by age 21
- If donee dies before 21, it goes to the donee estate OR to whom has general appointment over the property.
Why a 2503c trust?
Ability to make gifts over time.
Cant be spent until 21 yrs
Does not have to terminate as long as it is allowed to be distributed by 21
May have initial AND successor trustees (will revert to donor’s estate if donor dies.)
2503c vs 2503b
Kiddie Tax Review
Section 529
$16,000 Annual Exclusion ($80,000 5 yr lump sum)
IfDonordiesbefore 5 yrs, the gift remaining is INCLUDED in the donor’s estate
Donor can takemoney back any time.
Any trust could also be used for education
Sprinkling Provisions (or SPRAY provisions) in estate or trust
Power to distributed INCOME but at the DISCRETION of the TRUSTEE
Discretionary Provision
In Trust Document
At the discretion of the trustee to distribute Income or Principal
Support Trust
Trust that distributes ONLY income AND principal for Support OR Education of beneficiary
Income and REMAINDER beneficiaries
Remainder interest => FUTURE INTEREST
Typically corpus to a designated beneficiary (could be different from the income beneficiary) after income is terminated.
RAP
Rule Against Perpetuities
Maximum 21 years 9 months (youngst life in dynasty) for the vesting of a Dynasty trust
DYNASTY Trust
could violate Rule against Perpetuities (RAP)
(B Trust for multiple future generations)
Trusts can only be free of estate, gift, and GSTT for 21 years and 9 months OR
as long as local law allows
Beneficiary interest limited to LIFE ESTATES
Charitable Transfers Roadmap
CRAT
- Good for NON charity bene (donor, spouse, etc)
- Income for life or stated term (not to exceed 20 yrs.)
- Donor gets tax deduction of
- PV of Remainder Interest
- At Term end, passes to qualified charity
- Can remain in trust OR pass outright
- Remainder interest MUST BE ≥ 10% of INITIAL value
- Initial Value = ONE DoNATIoN ONLY no additions
- FIXED PAYMENTS and income ≥ 5% of corpus (Sum Certain). Can be more.
CRUT
Same as CRUT except has INFLATION protection
MORE THAN ONE DONATION is allowed
FIXED Payments of a percentage of the corpus value (may vary) of ≥ 5%
CRT (Charitable Remainder Trust in general)
- Trustee CAN change charitable purpose
- Must have a definite class of beneficiaries
- IRREVOCABLE REMINDER MUST BE Paid or held for charity
- Trust can have an indefinite life
- Terms ENFORCED by Trusty
- Corpus MUST produce Income (no raw land for example.)
NIMCRUT
Net Income with Make-Up Unitrust
CRUT Alternative
Non Chartiable Beneficiary will receive the LESSER of
- Trust Value OR
- NET INCOME earned by the trust that year
IF the Net Income $ is < Stated % THEN any Excess is forfeited and NIMCRUT accrues in those years.
Good for highly appreciated assets.
Good for accruing income tax deferred in a trust. A way to provide income for yourself.
Charitable Lead Trust
Grantor Lead Trust
Upfront Tax deduction for the
- PV of the payment Stream to Charities
FUTURE income and gains in the trust are TAXABLE TO GRANTOR
GRANTOR NOT entitled to additional charitable deduction on those annual distributions
BEST FOR WEALTHY; those that benefit MOST from avoiding Federal Estate Tax.
Charitable Gift Annuity
Simultaneous annuity purchase and contribution
Cash for commitment of a stream of income FOR LIFE
Like a CRAT BUT:
- Property is transferred to a CHARITY NOT a trust
- Charity gets money NOW
- Value of Proerty transferred > Annuity Value Guaranteed
- NO 5% rule (Excess is the contribution to charity)
Pooled Income Fund (No Muni’s in the Pool)
Not a TRUST.
Commingled with other donors
Controlled by SINGLE PUBLIC CHARITY
Income distributions terminate at DEATH OF DONOR
- PUBLIC Charity is Remainderman
- No 5% rule
Like a CRUT BUT:
- It commingles assets with other donors
- Managed by the TARGET CHARITY
- Shares prorated for income
- MUST distribute ANNUALLY
- Income rises with inflation
- Upon death of life income beneficiary, Remainder Interest VESTS with Charity and becomes part of the general assets
- Donor receives income tax deduction:
- PV of remainder interest
- Donor CANNOT be a trustee of the funds
- No Limited Terms
ONLY LIFE Expectancy Income.
Wealth Replacement Trust (ILIT)
Face Amount can be ≤ value of the Property transferred to charity
Why use?
- Concerns about leaving enough to heirs
- Concerns about estate liquidity
Often used in conjunction with another CRT.
Private Foundations/Family Foundations
Not held to same standards as public charities or supporting organizations.
Separate Legal entity
- holds and invests assets
- Distributes ≥ 5% of assets annually (income and/or principal)
Established as a TRUST OR NonProfit Org according to state law
- All State and Fed Requirements incorporated into org’s docs
- If they fail to comply they will not be granted or LOSE their charitable statis and their tax deductible contributions.
ADVANTAGES
- Donor has complete control over donations
- ONLY requirement is 5%distributions
- Control over FOUDATION may remain with individual or with the FAMIY of GENERATIONS
- Can distribute to NONCHARITABLE BENEFICARIES or ONE individual for:
- Study, Travel or similar
- scholarship, fellowship, prizes
DISADVANTAGES
- Subject to excise taxes
- 2% of NET investment income
- 15% penalty if they fail to distribute 5%
- Improve/enhance an individual’s pursuits
- literature, art, music, science, teaching or other skill/talent
Supporting Organizations
Similar to a Private Foundation BUT
- Created to benefit ONE PUBLIC CHARITY
- Good for Donor who wants to:
- Support over time OR
- Support a special program across multiple organizations
- Or MUST BE:
- Operated, supervised, or controlled by the CHARITY, not the donor
- Complicated Rules
- Generally managed by creating a BOARD OF DIRECTORS
- The Board holds 50% or MORE of the OTING power
- Donors ma SERVE on the board with NO VETO POWER
- Generally managed by creating a BOARD OF DIRECTORS
ADVANTAGES
- No2% Excise tax
- No Minimum distribution requirements
DISADVANTAGES
- No Donor Control or Family Control.
Donora Advised Funds (DAF)
Defined by PPA (Pension Provision Act 2006 HR4
- Owned and controlled by sponsoring organization
- Donor/Donor Rep has privilege of providing investment advice
- Separately identified with reference to contributions of a donor
- Fund is held by a “community foundation” OR public charity OR a Committee appointed by the donor.
- Community Foundation may recommend eligible charitable recipients
- Governing Body MUST be free to accept OR Reject recommendations
- Broker Dealer can serve as admins and have low minimum deposits.
Conversion of charitable donations into tax exempt securites – Risk
May want to create tax exempt income with CRAT/CRUT.
May produce capital gains and could be attributable to donor.
Charitable Stock Bailout
Donation of Closely Held Stock (usually)
- Charity takes it and sells later for ash back to the company.
- Saves on income tax “bailing out” corporate earnings and profits without incurring dividend income
- Younger family shareholders can concentrate ownership
- Get a charitable deduction
- To Qualify:
- Stockholder and Charity CANNOT agree to the time or CERTAINTY of redemption (no time and price)
- Charity MUST redeem through the corp
- If they don’t, it will create negative dividend treatment
Charitable Bargain Sales
Can be made to CHARITY OR NonCharity (typically family)
Property sold for LESS THAN FMV.
- Basis gets adjusted by % for Charity.
- Family gets flat donation of the difference.)
Review: Incidents of Ownership
Rights to:
- Assign
- terminate
- Borrow
- name beneficiaries
- Change beneficiaries
Values on proceeds become INCLUDABLE in GROSS estate of insured.
premium paying is not ownership
Best beneficiary Designation for Life Insurance
Usually Insured is Owner and spouse/trust/family is beneficiary.
Better alternatives:
- Spouse is OWNER AND beneficiary
- Mature Child is OWNER AND beneficaiary
- BEST SOLUTION:
- Irrevocable Trust is OWNER and Beneficiary
ILIT (Irrevocable Life Insurance Trust)
Why? To create Owner Beneficiary outside of estate.
aka WEALTH Replacement TRUST
Purpose: replace wealth to younger family members along side CRTs.
Life Insurance Causes of Estate and Gift Taxation
What can cause it?
- Proceeds paid to ETATE or EXECUTOR fees, funeral, etc.
- Decedent has incident of ownership in the policy
- Decedent GIFTED policy within 3 years AND was the INSURED
Life insurance inclusion in the decedent’s estate ROADMAP
Life Insurance Inclusion in Estate key Points
- Incident of Ownership
- Gifted within three years
- NO TAX if sold (e.g. viatical settlement)
What about Key Person life insurance policies?
No incident of ownership and won’t be included in decedent estate.
If a policy has to LEGALLY pay taxes of the estate it IS includable (payable to executor)
Interpolated Terminal Reserve
Prior year Value +
Premium Paid after date of death +
Gain until Date of death
Recapitalization Keys
Reissue Stock from Common to Preferred
- Value of Gifted Common Stock =*
- (Value of the Business) - (Retained Preferred Shares)*
- Preferred pay dividends to gifter (to increase retirement income)
- If Gifter dies, preferred value FREEZES (Estate Freeze)
- All Common Stock gifted appreciates to younger family members and is out of estate.
Transfers in Trust included in Estate IF
Transfers are a RETAINED LIFE ESTATE
(when a decedent has made a transfer by TRUST for LESS THAN FULL CONSIDERATION
AND
Has retained right to enjoyment
Valuation Discounts for Business Interests related to estate inheritance
- Minority Discount
- Marketability Discount
- Blockage Discount
- Key Person Discount
- Lack of Control Discount (FLPs)
Note about Marital Deductions
Unlimited marital deduction qualifies IF:
- Property included in decedents GROSS estate
- It Actually passes TO SURVIVING spouse
- Interest is NOT a terminal interest (not a QTIP)
- Spouse is a U.S. Citizen
ALSO IF:
- Property transfers are:
- Outright
- to a marital trust (power of appt)
- to an estate trust (no income)
- to a QTIP (Terminal interest)
Terminal Interest Rule
Exceptions:
- Surviving spouse receives a life estate income (annual or better) PLUS a General Power of appointment (or some other right)
- Executor elects QTIP
- Eecutor elects a QDOT (Qualified Domestic Trust)
- spouse is NOT a U.S. Citizen
QDOT
- Non citizen spouse
- NO unlimited marital deduction
- Joint property NOT considered 50% (must provide consideration)
- NO Unlimited tax free gifts (annual exclusion max $164,000)
More on Non Citizen Spouse
Annual gift exclusion ($164,000)
IMPORTANT: $12,060,000 Exemption is available for decedent estate EVEN if non-citizen spouse
To qualify for marital deduction for non citizen, estate must pass TO a QDOT.
Why? To keep the money in the U.S.
What is excluded from GROSS Estate
Solely owned property of surviving spouse
50% Community Property
Life Insurance Owned by OTHERS
A Life Estate where the owner had rights of enjoyment, income for life AND there is no remaining interest.
Lifetime Gifing Strategies
Annual Exclusion
Split Gifts
Net Gift Technique
Reverse Gift Technique
Intrafamily business Transfers
Net Gift Technique
Used when donor is short of cash to pay the tax and to get appreciating property out of the estate.
The donee pays the tax in the donee’s gift tax bracket.
- Donee’s paid tax ≤ 3 yrs is ALSO included in the GROSS ESTATE. Gross up Rule.
- It will be a gift tax CREDIT for the estate if paid by son (≥ 3 yrs.)
Can be used ONLY when the Gift Exclusion is EXHAUSTED ($12,060,000)
Only amount of NET GIFT is included on Form 706.
Net Gift Example:
- Mom Gift: $1,500,000
- Gift tax 40%: $600,000
- Gift Tax 40% is discounted for son to pay: $600,000÷1.4 = $428,571.43.
- Net Gift = $1,500,000 - $428,571.43 = $1,071,428.57
Reverse Gift Technique
Disgusting.
When one spouse is wealthy with low basis assets.
- Wealth spouse donates the low basis assets to the dying spouse to get the step up.
- Dying spouse must live for ≥ 1 year for this to work.
- Otherwise it passes back to the original spouse at the same basis.
- It CAN get a step up in ≤ 1 year if it passes to someone else, other than the original donor.
Be aware of Property Type and Grantor (spouse or child), Beneficiary (same as grantor or not.
Why? Gifting a JTWROS home only gets 50% step up
Side Note: If a Bond is worth more than the Basis
It is a PREMIUM Bond with a HIGH coupon.
Lifetime Intra family and Business Transfers
Property owner wants to :
CREATE INCOME FOR OWNER:
- Installment Sale
- Self Cancelling Note (SCIN)
- Private Annuity
- Grantor Trust (GRIT/GRAT/GRUT)
GIFT ASSETS to get out of the estate AND/OR CREATE INCOME
- Gift Shares of Partnership/S Corp
- FLP
- Gift Leaseback
- QPRT
Intra-Family and Business Lifetime Transfers Road Map
See Roadmap Page 8-1 Estate
Installment Sale for Income
DO NOT USE ON DEPRECIATED PROPERTY
- Spreads out taxable gain
- Can remove appreciating property from estate and substitute installment payments
- If seller DIES during period
- PV of remaining payments included in estate
- If Installment is forgiven in will (debt forgiveness) Estate must report all remaining gain
ISSUES FOR FAMILY MEMBERS
- If cancelled or forgiven, seller must recognize gain (Capital Gain: FMV-Seller basis)
- If sold ≤ 2yrs seller is deemed to have been paid in full and all tax is due. Installment sale collapses
- If Sale triggers depreciation recapture, ALL gain must be recognized in year of sale.
- Even if annual payments are forgiven, it is perceived as a gift.
Self Cancelling Note (SCIN) for Income
Provision to cancel note at death.
Why? Seller needs a payment streamwhich will NOT continue past death.
Allows BUYER to depreciate assets based on purchase price (private annuity does not)
AND
to deduct the portion of payments attributed to the interest expense
- Unpaid principal excluded from estate at death
- Advantage when unpaid principal EXCEEDS income tax cost from buyer paying premium for cancellation feature.
GOAL
High Premium offsets income tax from Estate tax
Term is typically shorter than life expectancy for a fixed period of years
Cancellation of payments at death trigger recognizing enter remaining gain on the decedent’s estate INCOME TAX return. Only effect CAP Gain.
Good for Wealthy Clients facing 40% Estate Tax vs. 20% Cap Gains
Private Annuity for Income
Best when transferor has little gainto be recognized OR losses to offset gain
Generally between family members
Unsecured promise of a life annuity in exchange for sale of an asset
Excludes property from sellers GROSS estate
No taxable Gift as long as
- Value of property = discounted value of promised annuity
- Proposed Taxation: ALL gain which WOULD have happened over term is TAXED in the YEAR of SALE (annuity established date.
S Corporate Gifting
Closely held family business
Shares can be gifted year over year at annual exclusion (might create kiddie tax.
MUST BE A CAPITAL SENSITIVE BUSINESS (service related biz would shift income like assignment of income)
Only Trusts which can own S Corp Stocks:
Grantor, Testamentary, Voting Trusts, QSBT (Wualified Subchapter S) and ESBT (Elective Small Business Trusts
FLP Gifting
MUST have real business purpose to be taxed as a partnership
Technique to shift INCOME from parents to children
REQUIREMENTS
- Income tax and Income distributed by % unit shares
- GP paid a salary (personal service to FLP)
- CAPITAL must be the “material income-producing factor”
- Avoids Ancillary Probate
- No step up in basis when transferred
- Discounting in valuation of gifts (50%)
- Lack of Control
- DONOR retains CONTROL over partnership over income and distributions OR investments. Can hold as little as 1% of equity
- Lack of Marketability
- Lack of Control
50% Discount example
10 gifts, 32,000 gift from couple =
10 x $32,000 x 2 = $640,000
FLP Contribution of Property and Asset Protection
Gifts from parents have carry over basis
Interests retain parent’s income tax basis
Gain/Loss on disposition of property by the PARTNERSHIP is determined at the partnership Level
LIMITED Asset protection for GP/Parent for personal debts.
GP/Parent is ONLY partly liable to creditors of FLP
Gift Leaseback
Why? Parent wants to gift but lacks money/personal assets
Gift FULLY DEPRECIATED biz assets outright or to trust to LOWER BRACKET family members (beware of kiddie tax)
Can claim a deduction IF
- Legitimate biz purpose
- charge reasonable rate of repayment
- have enforceable WRITTEN lease
- If in TRUST
- Trustee must be independent Third Party
Bargain Sale
Can be a family member or charity as Buyer
Buyer pays < FMV
FMV - SALE $ = Gift (Family – take annual exclusion)
Adjusted Basis for Charities
GRAT
Irrevocable Trust with a String
No Annual Exclusion (Gift in Trust is gift of FUTURE INTEREST)
has Discounting
Grantor transfers property and gets a FIXED annuity PAYMENT for a period of time (based on initial value)
Trust ends and remainder is transferred tax free to named beneficiariy
IF Grantor DIES before term end, WHOLE VALUE of property is brought back into the estate at Date of Death value (with “certain adjustments)
GRUT
Irrevocable
Has discounting
FIXED % of FMV of trust assets
Reviewed Annually/revalued annually
Best assets are subject to appreciation (not necessarily income assets)
GRIT - Grantor Retained Income Trust
Irrevocable
NO discounting like a GRAT (there is an IRS 7520 discount – not discussed)
Retains a right to INCOME for a term
No guaranteed distributions
Initial value of transferred property reduced by remained interest
GRIT Transfers trigger gifts
Successful if the appreciation/RoR/Income is greater than what the IRS assumed (7520) (kind of a tax loophole.)
May work for unrelated parties (as does QPRT) in commonlaw relationships
QPRT Irrevocable
has a string
For Personal Residence
Home is valued at Date of Trust
Grantor resides there for a period of years (retained interest)
Passes at the end of the term outright or in trust
May hold ≤ 2 residences (one primary)
When to use
- Residence is valued at ≥ $1,000,000
- Life expectance is reasonable ≥ 10 yrs
- Donor continues to reside there
- Estate is VERY large ≥ $12,060,000
- IF Donor DIES before term, hoe is valued at date of death, and is INCLUDED in the estate as if there was NEVER a trust.
Taxable gift is voided
- Notes about QPRT
- Trust can receive additions of cash to pay down mortgage (up to 6 mths, more will make IRS taxable gift)
- Residence CAN be sold
- MUST replace ≤ 2 yrs with another property else trust corpus is paid out to the grantor (or meet terms of a GRAT)
IF Concerned about Estate Taxes what do you do?
Look for ways to get it OUT of the estate with NO strings (CRAT over GRAT)
Skip Person
Relative 2 generation younger or
37.5 years younger
Deceased Parent Rule: if lineal descendent dies, everyone moves up a generation
Skips, Taxes, and Exemptions for GSTT
All skip Persons (Direct only transfers) get Annual Exclusion
Indirect Skip– to a trust with mix of beneficiaries (if for Skip person only it’s DIRECT)
GSTT Rate 40% (GSTT taxes not brought back nor are they credited to the estate)
Types of GSTT Skip Transfers
- Direct Skips: Transferor liable for taxes
- Taxable Terminations: End of NON-skip persons interest resulting only in Skip Persons as beneficiaries
- Trustee pays Taxes
- Taxable Distributions OUT of a trust to SKIP Person
- Gift of a Future Interest No Ann Exclusion
- Skip Person pays GSTT tax if any
GSTT Tax Calc
$5,016,000 Gift - $16,000 Annual Exclusion
$5,000,000 x 40% = $2,000,000 Estate
$5,000,000 - $2,000,000 = $3,000,000
$3,000,000 x 40% = $1,200,000
$2,000,000 + $1,200,000 = $3,200,000 Estate Tax + GSTT Tax => total taxes due
Fiduciaries
Duty of Loyalty,
No self-dealing,
Preserve property and make it productive,
Impartiality to all beneficiaries
Trustee, legal title
Court appointed:
- Guardian for children
- Conservator for disabled persons
- Executor (Will)
- Administrator (no will)
- Personal Representative (manages Probate)
Breach of Duty
Beneficiaries can sue in civil court or take criminal action
Income in Respect of Decedent
NET income
Examples:
- Insurance renewal commissions
- Bonuses
- monthly qualified plan payments (RMDs to employee or Widow)
- Partnership Income of deceased
- Gains to be recognized (installment sale)
- S Corporation Income
Calculation of IRD to include in GROSS INCOME
- Compute Fed Estate Tax WITH NET IRD
- Compute Fed Estate Tax WITHOUT NET IRD
- DIFFERENCE = NET IRD Income Tax Deduction
- Tax Deduction is permitted for GST and Estate Taxes paid on the Income*
- Examples:*
- $10,000 fee increases Estate Taxes by $4,000; estate gets the “income tax deduction”
- Estate is the beneficiary of an IRA $2,000,000 x 40% = $800,000. Estate can reduce tax by he income tax
Post Mortem Estate Planning Techniques
- AVD
- Disclaimers
- Disclaimer Trusts
- Elections for Liquidity
- Section 303 stock redemption
- Section 6166 Installment Payment of estate taxes
- Elections for Estate Tax REDUCTION
- Special Use Valuation 2032A
AVD = Alternate Valuation Date
$Can be taken up to 6 mths after Date of Death
Requirements to use:
- MUST reduce the total value of the GROSS ESTATE
- MUST reduce Federal Tax Liability
- MUST Be applied to ALL the properties included in the GROSS estate
- Exceptions
- Wasting Assets
- Assets that pass to:
- Spouse
- Qualified Charities
- Children ≤ $12,060,000
- Exceptions
AVD Distributions before 6 months are valued …
AS OF DATE OF DISTRIBUTION
Are there extensions to file form 706?
Yes. Extensions to file, but no extensions to pay taxes
Wasting Assets
Value is reduced by the mere passage of time.
e.g., Annuity payouts, retirement plans in payout status, mortgage payouts, or notes receivable
Capital Gains on Inherited Property
ALWAYS entitled to LTCG treatment before OR after death
Basis on inheritance = FMV on the Date of Death or AVD
Disclaimer
Refusal to accept inheritance transfer of property
Most often refused by Primary beneficiary to go to secondary
For Fed Tax Purposes if the disclaimer is “Qualified” then thedisclaimant has never received it. No Fed Estate or GST.
What Makes a Disclaimer Qualified?
- It is IRREVOCABLE
- MUST be in WRITING
- MUST be received by executor within 9mths of
- Date of Death
- Disclaimant’s 21st birthday
- Beneficiary/donee can NOT have accepted ANY interest in the benefits
- No rights to direction of where the property should go
*every $disclaimed over the $12,060,000 saves 40% on taxes
Disclaimer TRUST
for Spouse ONLY
usually TESTAMENTARY
- Provides Income Stream to spouse
- Usually a CLAUSE in the will
- TRUST is IRREVOCABLE and income paid
- Property is transferred to the trust
- May have income for life (Life Estate)
- Generally no right to corpus except for ACERTAINABLE STANDARD if in will
What can and cannot be disclaimed or sent to a disclaimer trust?
TBE No disclaimer allowed
Life Ins, IRA, and other beneficiary assets –can be disclaimed but can’t go to trust (it will go to contingent beneficiary)
JTWROS CAN be disclaimed and 50% can be moved to a trust
Post Mortem Election Roadmap
Section 303 Stock Redemption
Distribution of Decedent Stock not taxed as dividends
- closely held biz (a corporation)
- Redemption must occur within 4 yrs of death
- MAX Redemption =
- Taxes + Admin + Funeral expenses (no losses)
- Redemption treated as LTCG with step up
- MUST be a corporation
- Decedent Stock MUST be valued >35% of ADJUSTED GROSS ESTATE
- Amount of stock redeemed CANNOT exceed MAX Redemption
Section 6166 Installment Method
Used to Pay ESTATE TAXES as follows:
- 10 equal installments
- beginning 4 years after death date
- Max Tax Deferral
- 2% rule ≤ $1000,000 indexed for inlation at $1,640,000
- 45% rule ≥ $1,640,000
- Deferrable taxes are ONLY those attributable to the Biz
- Those NOT deferred must be paid by the regular payment date
REQUIREMENTS
- MUST BE active trade or business
- decedent must be a U.S. Citizen
- ADJUSTED GROSS ESTATE includes >35% of CLOSELY HELD Biz interest
- Decedent MUST have owned ≥ 20% of EACH biz in aggregate if more than one
Review: What is considered a Closely Held Business?
- Sole Proprietorship
- Partnership
- Corporation
- Active AND require a MANAGEMENT Function
Special Use Valuation Section 2032A
MAX Reduction $1,230,000
Requirements:
- 5 of 8 years prior to death used by decedent or family for qualified use and actively managed
- 25% of GROSS Estate = Value of Real Estate Property
- 50% of GROSS ESTATE REal and/or Personal Property
- 10 yrs after Date of Death Heirs use it as a Qualified Property
Max Real Estate Reduction $1,230,000 (indexed from $750,000)
Coordination of 2032A, 6166, and 303
- Whenever 2032A is available, 6166 is also available for the state
- 303 is for Corporations only
- When NO Debt or expenses are shown assume ADJUSTED GROSS ESTATE = GROSS ESTATE
Estate Planning or Special Circumstances such as…
- Children from prior relationships
- unmarried domestic partners
- adoptions
Tips for special circumstances
Consider independent planners for each partner to reduce
- conflict of interest
- exposure to E&O Claims
Planning consideration
- unmarried partners lose
- elective share
- unlimited marital deduction
- Guardianship for partner’s children
BEST Transfer Strategy for Unmarried partners
REVOCABLE TRUST or TIC (possibly)
GRIT can be an effective strategy (discounting for retained interest is allowed.
BAD STRATEGIES
- Will – can be contested
- NO will – court will decide disposition
- JTWROS – too much exposure
- May be spent down or closed out by disgruntled partner
- ONE person can sever JT
- NON CONTRIBUTING partner can make withdrawals
- W/D may be a taxable gif
- Can be attached by creditors of bot/either parter
