Estate Flashcards

Question

Charitable Contributions/Transfers

Answer 1

**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

Answer 2

**Remember:** PIGS Need Income Private Annuity Installment Sale Grantor Annuity Trusts (GRAT/GRUT) Self Canceling Installment Note (SCIN)

Answer 3

* Partnership / S-Corp * Family Limited Partnership (FLP) * Gift Leaseback * Qualified Personal Residence Trust (QPRT)

Answer 4

* 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

Answer 5

**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

Answer 6

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.

Answer 7

* Orderly distribution * Court supervised * Public for creditors * Publication of the Last Will and testament

Answer 8

TESTATOR: person making the will WILL: Creates testamentary Transfers PROBATE: process by wich transfer is completed *Testamentary TRUST does not go through Probate*

Answer 9

Court Supervised/Administration Inventory/Valuation (Marshalling of Assets) Bill Payment/Resolution of Credit Oversite of Distribution as directed by will OR Intestate Law

Answer 10

Loss of PRIVACY Will may be contested Court Costs/Delays Ancillary Probate

Answer 11

Singly Owned/Fee Simple TIC Community Property (50%) Estate is Beneficiary

Answer 12

REAL ESTATE in another state other than decdent's state of Domicile Competely separate proceeding

Answer 13

Revocable or Intervivos Strusts Operation of Law (often account titling): TOD, POD, JTWROS, TBE, Trust Strategies

Answer 14

Beneficiaries of insurance, retirement accounts etc. Property conveyed by “Deed of Title” Government Savings bonds (Co-ownership)

Answer 15

For Spouse who has NOT inherited a minimum amount (per state law). ⅓ or ½ possible of estate of decedent.

Answer 16

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.

Answer 17

Revocable trust in a bank Account Depositor is Trustee

Answer 18

If depositor becomes legally incapacitated you need a court order or Durable PoA to make withdrawals

Answer 19

NV, CA, AZ,NM, TX, WA, ID, WI, LA

Answer 20

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

Answer 21

Gifts from a spouse Inheritance Income PRIOR to marriage Interest on Separate assets

Answer 22

Yes, if we don't know if upon transfer if it was paid up or not

Answer 23

Revocable Living Trust (spousal remainder trust not effective)

Answer 24

Assets acquired while living in a Non-Community property state when couple moved to a community property state.

Answer 25

SUBJECT to PROBATE CAN be Disclaimed

Answer 26

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

Answer 27

FULL VALUE included in first to die UNLESS survivor can establish OWNERSHIP/Consideration BEFORE JT was created

Answer 28

First to die: 50% of property FMV included in Gross Estate

Answer 29

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

Answer 30

Subject to Probate CAN be Disclaimed NO Survivorshiprights Several Owners Free transferability of Shares

Answer 31

Trustee Holds Title NOT Subject to probate

Answer 32

Handwritten and signed

Answer 33

Oral Will (as in combat; must have witnesses

Answer 34

Generally must be in Writing Must be Witnessed Attestation clause (required in some states: “will was validly executed” by state and witnessed.)

Answer 35

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)

Answer 36

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

Answer 37

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.

Answer 38

Created by will Effective when will is submitted to Probate Testamentary trust does NOT go through probate

Answer 39

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

Answer 40

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)

Answer 41

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.)

Answer 42

MOST included in Gross Estate. IF survivor has rights to Lump Sum = FULL VALUE IF annuity =PV of Future Payments

Answer 43

Retained rights of enjoyment (income, use, or ownership – joint or sole) Included in Gross Estate (529 exception to the rule)

Answer 44

Life Insurance owned by OTHERS COMPLETED Gifts Life Estate (not retained) for decedent's own life policy

Answer 45

= Gross Estate - (admin & funeral expenses, debt, losses, taxes)

Answer 46

Surviving spouse (no disclaimer)

Answer 47

Outright transfer to QUALIFIED Charities are 100% deductible for BOTH Estate and Gift Tax purposes

Answer 48

State level death or inheritance taxes may be deducted from Adjusted Gross Estate

Answer 49

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.

Answer 50

= Adjusted Taxable Estate + Gifts

Answer 51

= Tax Base - $12,060,000 exemption

Answer 52

= Tentative Tax - (Tentative Tax \* 40%)

Answer 53

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)*

Answer 54

Through life, death, and skips. Three Separate Taxes (four with income Tax)

Answer 55

For property passing between TWO taxable estates within 10 years. Credit for inheritance and avoiding double taxation the same money

Answer 56

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.

Answer 57

CV is retained by the carrier *unless policy is UL or VUL*

Answer 58

General … and Limited Powers ⇒ Special ⇒ Five or Five ⇒ Ascertainable Standard

Answer 59

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

Answer 60

Transfer limited to ⇒ designated individuals ⇒ Specific Circumstances ⇒ With consent of another holder (to act in concert)

Answer 61

**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.)

Answer 62

Lapse: if not used for a time Released when a holder relinquishes all control (to determine who beneficiaries will be)

Answer 63

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”

Answer 64

In the GROSS Estate … because they can make taxable decisions

Answer 65

Transfers while alive. Gift tax applies to an exchange without full consideration (payment)

Answer 66

* 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

Answer 67

Forgiveness of Debt Below market rate loans Assignment of Life insurance benefits Transfer of Property to a trust

Answer 68

**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)

Answer 69

Reduce Value of Donor's Estate: FLP LLC Preferred Stock Recapitalization Gifting Closely Held Stock Gift Leaseback

Answer 70

Preferred Stock Recapitalization Gifting Closely held Stock Why? could impact 35% or 50% percentage requirements

Answer 71

FULLY Depreciated Property Lease payments by biz tax deductible and income to family member who received the gift.

Answer 72

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

Answer 73

Later enjoyment by a Donee Does NOT Qualify for Annual Exclusion

Answer 74

Appreciated Gifts = Donor's Basis Depreciated Gifts = 1. If Donee sells for \< FM then 1. Basis = FMV on Date of Gift 2. If Donee sells for \> FMV then 1. Basis = Donor's basis (carry over) 3. If Donee sells for \> Basis \< FMV 1. No gain or loss is recognized

Answer 75

How? 1. MUST be appreciated property 1. Gift tax is PAID by the DONOR

Answer 76

Value of gift is the NET = FMV - Debt

Answer 77

* 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

Answer 78

File When Gift is: * \>$16,000 (to nonspouse) * of FUTURE interest (any amount) * SPLIT with Spouse (split gift election)

Answer 79

* 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

Answer 80

* 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

Answer 81

When $12,060,000 is used up, the DONOR is subject to immediate Gift Tax

Answer 82

When $12,060,000 is used up, the DONOR is subject to immediate Gift Tax

Answer 83

When $12,060,000 is used up, the DONOR is subject to immediate Gift Tax

Answer 84

Possibly. Could be deemed a taxable gift

Answer 85

* the LESSER of * the CASH VALUE of the policy OR * the BASIS.

Answer 86

* 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

Answer 87

Lack of physical or cognitive or legal qualifications Unable to function at capacity

Answer 88

Springing power for medical. Can name surrogate or attorney in fact

Answer 89

* execute or revoke a will * execute a living will

Answer 90

Not in effect/No authority until incompetency

Answer 91

* ≤ $2,000 in countable assets * 5 year lookback * Home Equity can make an individual ineligible * Annuities: MUST name STATE as remainder beneficiary

Answer 92

* 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)

Answer 93

Exception to 5 year (60 month) lookback Person may transfer asset to the trust and the STATE will be the remainderman

Answer 94

* Trust Property / Corpus * Trust instrument / agreement * Competency of Grantor and Trustee * Grantor / Trustor / Settlor * Trustee has legal title * Beneficiaries have equitable title

Answer 95

IRREVOCABLE (generally) Taxed as a separate entity Income is Accumulated (Trustee has discretion or required)

Answer 96

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

Answer 97

* 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

Answer 98

* 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

Answer 99

Created during life RARELY included in Grantor's taxable estate (unless tainted or defective) CANNOT be changed without COURT approval Grantor cannot reclaim property

Answer 100

* 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*

Answer 101

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

Answer 102

**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

Answer 103

Does NOT result in immediate Estate or Income tax savings but ultimately might Spendthrift provisions: prohibits transfer of beneficiary interest AND claims of creditors.

Answer 104

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.

Answer 105

an EXECUTOR may NOT create a bypass trust BUT can TRANSFER any unused portion of the exemption to the trust.

Answer 106

* 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

Answer 107

* 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

Answer 108

a MARITAL TRUST that does NOT provide the surviving spouse with an INCOME stream Holds non-income producing assets

Answer 109

Why? To catch assets that are not controlled by the revocable trust Best Practice: 1. Set up revocable trust first THEN 2. Set up pour over will/trust

Answer 110

Cash type assets only. Can be in a custodian's estate Distrubute at 18 y.o. Cannot be testamentary

Answer 111

Any asset (including real estate) Distribute at 21 y.o. Can be in custodians estate CAN be testamentary

Answer 112

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

Answer 113

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: 1. Income Interest (gift of present interest and qualifies for annual exclusion) 2. Remainder or REVERSIONARY interest (gift of a FUTURE interest - no annual exclusion) ONLY INCOME NEEDS TO BE DISTRIBUTED

Answer 114

Present Interest Gift qualifies for annual gift exclusion IF 1. Trust MUST provide that property and income MAY be expended for the benefit of the minor/donee before age 21. 2. Any property NOT expended will pass to donee by age 21 3. If donee dies before 21, it goes to the donee estate OR to whom has general appointment over the property.

Answer 115

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.)

Answer 116

$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

Answer 117

Power to distributed INCOME but at the DISCRETION of the TRUSTEE

Answer 118

In Trust Document At the discretion of the trustee to distribute Income or Principal

Answer 119

Trust that distributes ONLY income AND principal for Support OR Education of beneficiary

Answer 120

Remainder interest =\> FUTURE INTEREST Typically corpus to a designated beneficiary (could be different from the income beneficiary) after income is terminated.

Answer 121

Maximum 21 years 9 months (youngst life in dynasty) for the vesting of a Dynasty trust

Answer 122

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

Answer 123

* 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.

Answer 124

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%

Answer 125

* 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.)

Answer 126

CRUT Alternative Non Chartiable Beneficiary will receive the LESSER of 1. Trust Value OR 2. 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.

Answer 127

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.

Answer 128

Simultaneous annuity purchase and contribution Cash for commitment of a stream of income FOR LIFE Like a CRAT BUT: 1. Property is transferred to a CHARITY NOT a trust 2. Charity gets money NOW 3. Value of Proerty transferred \> Annuity Value Guaranteed 1. NO 5% rule (Excess is the contribution to charity)

Answer 129

Not a TRUST. Commingled with other donors Controlled by SINGLE PUBLIC CHARITY Income distributions terminate at DEATH OF DONOR 1. PUBLIC Charity is Remainderman 2. No 5% rule Like a CRUT BUT: 1. It commingles assets with other donors 2. Managed by the TARGET CHARITY 3. Shares prorated for income 1. MUST distribute ANNUALLY 2. Income rises with inflation 4. Upon death of life income beneficiary, Remainder Interest VESTS with Charity and becomes part of the general assets 5. Donor receives income tax deduction: 1. PV of remainder interest * Donor CANNOT be a trustee of the funds * No Limited Terms ONLY LIFE Expectancy Income.

Answer 130

Face Amount can be ≤ value of the Property transferred to charity Why use? 1. Concerns about leaving enough to heirs 2. Concerns about estate liquidity Often used in conjunction with another CRT.

Answer 131

Not held to same standards as public charities or supporting organizations. Separate Legal entity 1. holds and invests assets 2. Distributes ≥ 5% of assets annually (income and/or principal) Established as a TRUST OR NonProfit Org according to state law 1. All State and Fed Requirements incorporated into org's docs 2. If they fail to comply they will not be granted or LOSE their charitable statis and their tax deductible contributions. **ADVANTAGES** 1. Donor has complete control over donations 2. ONLY requirement is 5%distributions 3. Control over FOUDATION may remain with individual or with the FAMIY of GENERATIONS 4. Can distribute to NONCHARITABLE BENEFICARIES or ONE individual for: 1. Study, Travel or similar 2. scholarship, fellowship, prizes **DISADVANTAGES** 1. Subject to excise taxes 1. 2% of NET investment income 2. 15% penalty if they fail to distribute 5% 2. Improve/enhance an individual's pursuits 1. literature, art, music, science, teaching or other skill/talent

Answer 132

Similar to a Private Foundation BUT 1. Created to benefit ONE PUBLIC CHARITY 2. Good for Donor who wants to: 1. Support over time OR 2. Support a special program across multiple organizations 3. Or MUST BE: 1. Operated, supervised, or controlled by the CHARITY, not the donor 4. Complicated Rules 1. Generally managed by creating a BOARD OF DIRECTORS 1. The Board holds 50% or MORE of the OTING power 2. Donors ma SERVE on the board with NO VETO POWER **ADVANTAGES** 1. No2% Excise tax 2. No Minimum distribution requirements **DISADVANTAGES** 1. No Donor Control or Family Control.

Answer 133

Defined by PPA (Pension Provision Act 2006 HR4 1. Owned and controlled by sponsoring organization 2. Donor/Donor Rep has privilege of providing investment advice 3. 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.

Answer 134

May want to create tax exempt income with CRAT/CRUT. May produce capital gains and could be attributable to donor.

Answer 135

Donation of Closely Held Stock (usually) 1. Charity takes it and sells later for ash back to the company. 2. Saves on income tax “bailing out” corporate earnings and profits without incurring dividend income 1. Younger family shareholders can concentrate ownership 2. Get a charitable deduction 3. To Qualify: 1. Stockholder and Charity CANNOT agree to the time or CERTAINTY of redemption (no time and price) 2. Charity MUST redeem through the corp 1. If they don't, it will create negative dividend treatment

Answer 136

Can be made to CHARITY OR NonCharity (typically family) Property sold for LESS THAN FMV. 1. Basis gets adjusted by % for Charity. 2. Family gets flat donation of the difference.)

Answer 137

**Rights to:** 1. Assign 2. terminate 3. Borrow 4. name beneficiaries 5. Change beneficiaries Values on proceeds become INCLUDABLE in GROSS estate of insured. *premium paying is not ownership*

Answer 138

Usually Insured is Owner and spouse/trust/family is beneficiary. Better alternatives: 1. Spouse is OWNER AND beneficiary 2. Mature Child is OWNER AND beneficaiary 3. BEST SOLUTION: 1. Irrevocable Trust is OWNER and Beneficiary

Answer 139

Why? To create Owner Beneficiary outside of estate. aka WEALTH Replacement TRUST Purpose: replace wealth to younger family members along side CRTs.

Answer 140

What can cause it? 1. Proceeds paid to ETATE or EXECUTOR fees, funeral, etc. 2. Decedent has incident of ownership in the policy 1. Decedent GIFTED policy within 3 years AND was the INSURED

Answer 141

* Incident of Ownership * Gifted within three years * NO TAX if sold (e.g. viatical settlement)

Answer 142

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)

Answer 143

Prior year Value + Premium Paid after date of death + Gain until Date of death

Answer 144

* **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.

Answer 145

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

Answer 146

1. Minority Discount 2. Marketability Discount 3. Blockage Discount 4. Key Person Discount 5. Lack of Control Discount (FLPs)

Answer 147

Unlimited marital deduction qualifies IF: 1. Property included in decedents GROSS estate 2. It Actually passes TO SURVIVING spouse 3. Interest is NOT a terminal interest (not a QTIP) 4. Spouse is a U.S. Citizen ALSO IF: 1. Property transfers are: 1. Outright 2. to a marital trust (power of appt) 3. to an estate trust (no income) 4. to a QTIP (Terminal interest)

Answer 148

Exceptions: 1. Surviving spouse receives a life estate income (annual or better) PLUS a General Power of appointment (or some other right) 2. Executor elects QTIP 3. Eecutor elects a QDOT (Qualified Domestic Trust) 1. spouse is NOT a U.S. Citizen

Answer 149

1. Non citizen spouse 2. NO unlimited marital deduction 3. Joint property NOT considered 50% (must provide consideration) 4. NO Unlimited tax free gifts (annual exclusion max $164,000)

Answer 150

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.

Answer 151

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.

Answer 152

Annual Exclusion Split Gifts Net Gift Technique Reverse Gift Technique Intrafamily business Transfers

Answer 153

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. 1. Donee's paid tax ≤ 3 yrs is ALSO included in the GROSS ESTATE. Gross up Rule. 2. 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: 1. Mom Gift: $1,500,000 2. Gift tax 40%: $600,000 3. Gift Tax 40% is discounted for son to pay: $600,000÷1.4 = $428,571.43. 4. Net Gift = $1,500,000 - $428,571.43 = $1,071,428.57

Answer 154

Disgusting. When one spouse is wealthy with low basis assets. 1. Wealth spouse donates the low basis assets to the dying spouse to get the step up. 2. Dying spouse must live for ≥ 1 year for this to work. 3. Otherwise it passes back to the original spouse at the same basis. 4. 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

Answer 155

It is a PREMIUM Bond with a HIGH coupon.

Answer 156

Property owner wants to : **CREATE INCOME FOR OWNER:** 1. Installment Sale 2. Self Cancelling Note (SCIN) 3. Private Annuity 4. Grantor Trust (GRIT/GRAT/GRUT) **GIFT ASSETS to get out of the estate AND/OR CREATE INCOME** 1. Gift Shares of Partnership/S Corp 2. FLP 3. Gift Leaseback 4. QPRT

Answer 157

See Roadmap Page 8-1 Estate

Answer 158

DO NOT USE ON DEPRECIATED PROPERTY 1. Spreads out taxable gain 2. Can remove appreciating property from estate and substitute installment payments 3. If seller DIES during period 1. PV of remaining payments included in estate 2. If Installment is forgiven in will (debt forgiveness) Estate must report all remaining gain ISSUES FOR FAMILY MEMBERS 1. If cancelled or forgiven, seller must recognize gain (Capital Gain: FMV-Seller basis) 2. If sold ≤ 2yrs seller is deemed to have been paid in full and all tax is due. Installment sale collapses 1. If Sale triggers depreciation recapture, ALL gain must be recognized in year of sale. 3. Even if annual payments are forgiven, it is perceived as a gift.

Answer 159

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

Answer 160

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 1. Value of property = discounted value of promised annuity 2. Proposed Taxation: ALL gain which WOULD have happened over term is TAXED in the YEAR of SALE (annuity established date.

Answer 161

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

Answer 162

MUST have real business purpose to be taxed as a partnership Technique to shift INCOME from parents to children REQUIREMENTS 1. Income tax and Income distributed by % unit shares 2. GP paid a salary (personal service to FLP) 3. CAPITAL must be the “material income-producing factor” 4. Avoids Ancillary Probate 5. No step up in basis when transferred 6. Discounting in valuation of gifts (50%) 1. Lack of Control 1. DONOR retains CONTROL over partnership over income and distributions OR investments. Can hold as little as 1% of equity 2. Lack of Marketability 50% Discount example 10 gifts, 32,000 gift from couple = 10 x $32,000 x 2 = $640,000

Answer 163

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

Answer 164

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 1. Legitimate biz purpose 2. charge reasonable rate of repayment 3. have enforceable WRITTEN lease 4. If in TRUST 1. Trustee must be independent Third Party

Answer 165

Can be a family member or charity as Buyer Buyer pays \< FMV FMV - SALE $ = Gift (Family – take annual exclusion) Adjusted Basis for Charities

Answer 166

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)

Answer 167

FIXED % of FMV of trust assets Reviewed Annually/revalued annually Best assets are subject to appreciation (not necessarily income assets)

Answer 168

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

Answer 169

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 1. Residence is valued at ≥ $1,000,000 2. Life expectance is reasonable ≥ 10 yrs 3. Donor continues to reside there 4. Estate is VERY large ≥ $12,060,000 5. 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 6. Notes about QPRT 1. Trust can receive additions of cash to pay down mortgage (up to 6 mths, more will make IRS taxable gift) 2. Residence CAN be sold 1. MUST replace ≤ 2 yrs with another property else trust corpus is paid out to the grantor (or meet terms of a GRAT)

Answer 170

Look for ways to get it OUT of the estate with NO strings (CRAT over GRAT)

Answer 171

Relative 2 generation younger or 37.5 years younger Deceased Parent Rule: if lineal descendent dies, everyone moves up a generation

Answer 172

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)

Answer 173

1. Direct Skips: Transferor liable for taxes 2. Taxable Terminations: End of NON-skip persons interest resulting only in Skip Persons as beneficiaries 1. Trustee pays Taxes 3. Taxable Distributions OUT of a trust to SKIP Person 1. Gift of a Future Interest No Ann Exclusion 2. Skip Person pays GSTT tax if any

Answer 174

$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

Answer 175

Trustee, legal title Court appointed: 1. Guardian for children 2. Conservator for disabled persons 3. Executor (Will) 4. Administrator (no will) 5. Personal Representative (manages Probate)

Answer 176

Beneficiaries can sue in civil court or take criminal action

Answer 177

Examples: 1. Insurance renewal commissions 2. Bonuses 3. monthly qualified plan payments (RMDs to employee or Widow) 4. Partnership Income of deceased 5. Gains to be recognized (installment sale) 6. S Corporation Income

Answer 178

1. Compute Fed Estate Tax WITH NET IRD 2. Compute Fed Estate Tax WITHOUT NET IRD 3. DIFFERENCE = NET IRD Income Tax Deduction * Tax Deduction is permitted for GST and Estate Taxes paid on the Income* * Examples:* 1. $10,000 fee increases Estate Taxes by $4,000; estate gets the “income tax deduction” 1. Estate is the beneficiary of an IRA $2,000,000 x 40% = $800,000. Estate can reduce tax by he income tax

Answer 179

1. AVD 2. Disclaimers 3. Disclaimer Trusts 4. Elections for Liquidity 1. Section 303 stock redemption 2. Section 6166 Installment Payment of estate taxes 5. Elections for Estate Tax REDUCTION 1. Special Use Valuation 2032A

Answer 180

$Can be taken up to 6 mths after Date of Death Requirements to use: 1. MUST reduce the total value of the GROSS ESTATE 2. MUST reduce Federal Tax Liability 3. MUST Be applied to ALL the properties included in the GROSS estate 1. Exceptions 1. Wasting Assets 2. Assets that pass to: 1. Spouse 2. Qualified Charities 3. Children ≤ $12,060,000

Answer 181

AS OF DATE OF DISTRIBUTION

Answer 182

Yes. Extensions to file, but no extensions to pay taxes

Answer 183

Value is reduced by the mere passage of time. e.g., Annuity payouts, retirement plans in payout status, mortgage payouts, or notes receivable

Answer 184

ALWAYS entitled to LTCG treatment before OR after death Basis on inheritance = FMV on the Date of Death or AVD

Answer 185

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.

Answer 186

1. It is IRREVOCABLE 2. MUST be in WRITING 3. MUST be received by executor within 9mths of 1. Date of Death 2. Disclaimant's 21st birthday 4. Beneficiary/donee can NOT have accepted ANY interest in the benefits 5. No rights to direction of where the property should go \**every $disclaimed over the $12,060,000 saves 40% on taxes*

Answer 187

1. Provides Income Stream to spouse 2. Usually a CLAUSE in the will 3. TRUST is IRREVOCABLE and income paid 4. Property is transferred to the trust 1. May have income for life (Life Estate) 2. Generally no right to corpus except for ACERTAINABLE STANDARD if in will

Answer 188

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

Answer 189

Distribution of Decedent Stock not taxed as dividends 1. closely held biz (a corporation) 2. Redemption must occur within 4 yrs of death 3. MAX Redemption = 1. Taxes + Admin + Funeral expenses (no losses) 4. Redemption treated as LTCG with step up 5. MUST be a corporation 6. Decedent Stock MUST be valued \>35% of ADJUSTED GROSS ESTATE 7. Amount of stock redeemed CANNOT exceed MAX Redemption

Answer 190

Used to Pay ESTATE TAXES as follows: 1. 10 equal installments 2. beginning 4 years after death date 3. Max Tax Deferral 1. 2% rule ≤ $1000,000 indexed for inlation at $1,640,000 2. 45% rule ≥ $1,640,000 3. Deferrable taxes are ONLY those attributable to the Biz 4. Those NOT deferred must be paid by the regular payment date REQUIREMENTS 1. MUST BE active trade or business 2. decedent must be a U.S. Citizen 3. ADJUSTED GROSS ESTATE includes \>35% of CLOSELY HELD Biz interest 4. Decedent MUST have owned ≥ 20% of EACH biz in aggregate if more than one

Answer 191

* Sole Proprietorship * Partnership * Corporation * Active AND require a MANAGEMENT Function

Answer 192

Requirements: 1. 5 of 8 years prior to death used by decedent or family for qualified use and actively managed 2. 25% of GROSS Estate = Value of Real Estate Property 3. 50% of GROSS ESTATE REal and/or Personal Property 4. 10 yrs after Date of Death Heirs use it as a Qualified Property Max Real Estate Reduction $1,230,000 (indexed from $750,000)

Answer 193

* 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

Answer 194

* Children from prior relationships * unmarried domestic partners * adoptions

Answer 195

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

Answer 196

REVOCABLE TRUST or TIC (possibly) GRIT can be an effective strategy (discounting for retained interest is allowed. BAD STRATEGIES 1. Will – can be contested 2. NO will – court will decide disposition 3. JTWROS – too much exposure 1. May be spent down or closed out by disgruntled partner 2. ONE person can sever JT 3. NON CONTRIBUTING partner can make withdrawals 1. W/D may be a taxable gif 2. Can be attached by creditors of bot/either parter