Estate Flashcards
deductions FOR gross estate
ABCDE
Administrative
Burial/funeral
Casualty losses during admin
Debts of decedent
Expenses for medical
deductions FROM gross estate
- charity
- marital
- state tax paid for estate, inheritance, legacy, succession
what does prior transfer credit apply to?
credit for estate taxes paid within the last 10 years
<2 years = 100%
2 years = 80%
3 years = 70%
purpose is to help avoid double taxation when couple dies at close time
estate credits
-estate tax credit
-prior transfer credit
-foreign death taxes credit (property outside US)
what basis and holding period do heirs get? exception
-step to FMV (not necessarily up; could be a step down)
-holding period is always LT
-no step to for IRD
how are publicly traded securities valued for gift purposes?
- average of high and low trading price for the day (including accrued dividends/interest)
- if death occurs on a weekend, based on averages for trading day before and after
if rarely traded security, there is a different formula
Crummey provision
allows trust beneficiary to withdraw some or all of a contribution to a trust for a limited period of time (e.g., 30 days) to create a present interest
5/5 lapse rule:taxable gift occurs when power to withdraw >$5K or 5% of assets lapses (if >1 beneficiary)
note: 5 days is NOT enough for Crummy
heir vs legatee
legatee inherits under the will
heir inherits under state law
abatement
reduction of a bequest
e.g., will said $100K but you only have $80K at death
ademption
extinguishment of a right when we no longer have the asset we gave in a will
e.g., it names a specific house but decedent doesn’t live there anymore
durable and general vs limited power of attorney/appointment
general means right to manage asset broadly
limited can be narrow (pay my bills) or braod (anything I can do except); limited appointment often limited to HEMS
durable means it survives incapacity
holographic will
handwriten; must be signed and dated
noncupative will
oral, dying wishes
only applies to personalty
not valid in most states
must have witnesses
statutory will
drawn by attorney and complies with domicile state law
survivorship clause
requies beneficiary to survive decedent by certain period of time
for spouse, must be <6 months to get marital deduction
disclaimer clause
outlines who gets the property if a named legatee disclaims (doesn’t want) it
cannot be used to avoid GSTT
power of attorney vs power of appointment
general and limited
attorney is the right to manage; cannot survive past death
appointment is the power to appoint
- general can appoint assets to yourself
- limited can only appoint assets to others
tenants in common
owners, estate inclusion, survivorship feature, partioning
owners: 2+
estate: include based on % owned
survivorship feature: none
partitioning: CAN be partitioned without consent of all
JTWROS
owners, estate inclusion, survivorship feature, partioning, probate
owners: 2+
survivorship feature: yes
estate: % contributed unless spouse (50/50)
survivorship feature: yes
partition involuntarily: yes
probabte: no
tenancy by entirety
owners, estate inclusion, survivorship feature, partioning, probate
owners: 2 only
estate inclusion: 50%
survivorship feature: yes; automatically goes to surviving owner, even if will says otherwise
probabte: none
partitioning: cannot be partitioned involuntarily
community property
owners, estate inclusion, survivorship feature, partioning, probate
owners: 2
estate: 50% inclusion
survivorship feature: no
probate: yes
partitioning: no
surviving owners also gets a step to FMV
what is required to elect gift splitting?
filing a 709 for each person that has a taxable gift (i.e., gifts >$16K each and has used credit)
what is the annual exclusion for non-citizen spouses?
$164K
intestate
- to die without a valid will
- includes dying with a will that only covers some assets (or without a risiduary clause)
attestation clause
aka witness clause
signed by at least two qualified witnesses (3 in some states)
self-proving clause
notary signing a declaration
requirments to disclaim a bequest
- cannot benefit from property (some exceptions for surviving spouse)
- cannot direct future interest
- must disclaim within 9 months
- must be in writing
per capita vs per stirpes
stirpes: grandchildren stand in for decased parent and split
per capita: equal shares among living beneficiaries
codicil
a suplement to a will used to modify, amend, or explain
what are the community property states?
AZ, CA, ID, NV, NM, TX, WA
LA, WI
which ownership types go through probate?
sole ownership
tenants in common
community property
duties specific to administrator and executor
administrator: petition court for appointment, pay security bond
executor: locate will, submit will to court
what letter does the court use to name administrator and executor?
administrator: letter of administration
executor: letters of testamentary
when is imputed interest required?
loan > $100K
Loan $10-100K AND borrower has inestment income $1K+
note: If $10-100K, imputed interest is limited to net investment income
what is a qualified transfer?
what does it include?
payment made directly to:
- education facility for tuition (NOT books/supplies/room & board)
- medical care provider
are gifts to a political organization exempt from gift tax?
yes
when is a Form 709 required?
- when any gift is made unless it is < annual exclusion, not subject to gift tax (qualified transfer, spouse, charity)
- when gift splitting is elected
what is the statute of liminations on gift tax?
3 years unless gift was not disclosed
how do gifts made within 3 years of death impact the gross estate?
- any gift tax paid on them is included in gross estate
- if any retained interest, value is included in gross estate
- proceeds from any life insurance policy gifted within 3 years is included
are annuities included in the gross estate?
- no if a straight single life annuity beause it terminates at death
- yes if survivorship annuity; in that case, it’s included in the estate for the first to die
is life insurance on the decedent’s life included in the gross estate?
proceeds are included if proceeds were receivable by estate or decedent had any incident of ownership
what are minority discounts, lack of marketability discounts, and blockage discounts, and how much are they typically?
- minority: has a minority interest in closely held business; 15-50%
- marketability: closely held buisness that is hard to market; 15-50%
- blockage: block of corporate stock so large it would have a material impact on stock price
there is also a key person discount
how are rarely traded securities valued for estate tax inclusion purposes?
[(price after death x business days until death) + (price before death x business days since death)] / (business days until death + business days since death)
basically a weighted average
what is the alternate valuation date and what is required to use it?
assets valued at date 6 months after death
requirements:
- value must be lower than valuation on date of death
- estate tax must be lower than date of death
- if asset is sold between death and 6 months, include value of sale
- wasting assets (annuities, patents, lease income) must be valued as of date of death still
when is Form 706 required?
- required if gross estate + adjusted taxable gifts is > estate tax credit
- time: must be filed and estate tax must be paid 9 months after death
- extension: executor can request up to 12 month extension by filing form 4768
penalties for not filing Form 706
- same as income tax
failure to file: 5%/mo up to 25%
failure to pay: 0.5%/mo up to 25% - if fraud, 15%/mo up to 75%
reverse gift
if heir receives property that was given by the heir to the decedent within 1 year of death, no step to basis
what is the estate tax rate?
varies by estate tax base
remember that if taxable gift >$1M: $345,800 + 40% of amount that exceeds $1M
what is the deadline for filing a 709 and who is liable for the tax?
- tax due date + extensions
- donor is primarily liable but may go after donee if donor doesn’t pay
what type of gifts are best to gift to charity from a strategic perspective?
those that have appreciated the most
is general power of appointment included in gross estate?
follow up - how to avoid inclusion
- yes because you have the right to appoint to yourself, your creditors, etc
- avoid by creating an ascertainable standard (HEMS) or Crummey provision
how is life insurance valued for gross estate?
- paid up: include replacement value
- premium pay status (i.e., still making payments: include interpolated terminal reserve + unearned premium
when are 1041’s due when someone dies?
they continue to be filed annually until the estate is closed out
which expenses can you choose whether to take on 1041 or 706?
AMC
- admin
- medical
- casualty losses
high-leve estate formula
Gross Estate
(-) ABCDE
= Adjusted Gross Estate
(-) marital and charity
= Taxable Estate
(+) post ‘76 gifts
= Tentative tax base
requirements for marital deduction
- married at death
- citizen
- item must be included in gross estate
- later must be included in spouse’s gross estate
how are things valued for marital deduction?
the NET value of what the spouse is receiving (i.e., FMV - mortgage)
reasons that would prohibit spouse from using marital deduction for an item
items with a terminable interest
- >6 month survival contingeny
- terminable interest where spouse has general power of appointment (A Trust)
- QTIP (ultimately goes to kids)
- CRT where spouse is only noncharitable beneficiary
ways non-citizen spouse can get full marital deduction
- become US citizen before due date of return
- utilize QDOT with at least one US trustee who withholds sufficient assets for taxes
Note: Non-citizen spouse can transfer any unlimited amount to US spouse
portability
what is it, when and how to file, who can use
- port over deceased spouse’s unused estate tax credit
- file timely 706
- based on the last deceased spouse only. I.e., if you have two husbands die, can only use your second husband’s
what are IRD assets?
- qualified retirement accounts like IRAs, 401(k)s EXCEPT for Roths
- income not yet received like dividends, commissions
- passive income not yet reeived like rents, royalties, S corp income, annuities
- Unpaid debt on installment
transfers not subject to gift tax
- legal support (buying car for kid)
- qualified transfers (medical, education)
- below-market rate loans
- transfer to citizen spouse
SCIN
payment term, interest deductibility, basis, collateral interest
installment sale for FMV between private (usually related) parties over a term
- term: determined by seller
- deduct interest: depends on property (e.g. mortgage interest can be)
- buyer basis: price of property, regardless of # payments made
- collateral interest: yes
- gross estate: no inclusion if payments are consumed
Note: if seller dies before term, no further obligation to pay
private annuity
payment term, interest deductibility, basis, collateral interest
transaction between private but usually related parties where seller needs cash for life
- - term: life of annuitant
- deduct interest: none
- basis: sum of annuity payments
- collateral interest: no (i.e., can’t take property back if buyer doesn’t pay)
- other: good to use if you think you’ll live less than IRS does, but CAN’T be terminally ill
FLP
- limited partnership used to transfer assets to younger generation
- parent keeps 1% general partner share so they can maintain control of assets
- remaining 99% kept as limited and transferred to children over time via annual exclusion
- able to utilize minority shares and marketability discounts
who holds the legal title of a trust?
- trustee who must act as fiduciary
- beneficiaries hold benficial title
spendthrift clause
- trust clause used for creditor protection
- says beneficiary can’t assign/pledeg/promise assets to anyone
- can’t be used if grantor is the beneficiary
- must allow distributions to be made on a discretionary basis for this to work
spenthrift clause
- trust clause used for creditor protection
- says beneficiary can’t assign/pledeg/promise assets to anyone
- can’t be used if grantor is the beneficiary
- must allow distributions to be made on a discretionary basis for this to work
reasons to use trusts
- management - beneficiary isn’t capable of managing
- creditor protection - spendthrift clause
- there’s a valuable asset that can’t be split up (e.g., farm)
- avoid taxes - transfer future appreciation, transfer to younger generations, avoid gross estate inclusion
- avoid probate - living trust
what is a living trust
- revocable trust managed by grantor
- becomes irrevoacable at death
- INCLUDED in gross estate because incident of ownership
how is trust income taxed?
- grantor trust: taxed to grantor
- non-grantor: depends on whether income is distributed (beneficiaries) or accumulated (taxed at trust rates)
simple vs complex trust
simple: requires distribution of income
complex: permits accumulation of income
what makes a trust considered a grantor trust
- income is or can be paid to grantor or spouse
- income is or may be used to buy life insurance on grantor or spouse
- grantor has right to alter beneficiary/enjoyment of trust
- trust assets will return to grantor or spouse
- grantor can dispose of < FMV
- grantor can get loans from trust
inter vivos trust
created/funding during life
testamentary trust
created/funded at death
standby trust
unfunded or minimally funded trust waiting for some triggering event (usually incapacity)
pourover trust
receives assets from another source
why use inter vivos recocable trust
to maintain privacy (avoids probate)
to avoid probate costs
to discourage will contests
GRAT and
What kind of assets to put in it
irrevocable trust that pays fixed annuity to grantor for defined term
- use when in good health when it’s likely grantor will outlive term
- pays fixed annuity
- put highly appreciating assets (higher than 7520 rate) to get the appreciation out of the gross estate/gift tax
- remainder goes to non-charity at end of term (usually kids)
- gift: PV of expected remainder is a future gift
GRUT
- like a GRAT but Uncertain payment based on % of assets
- must be valued annually
- infrequently used
QPRT
- like the GRAT but for personal residence
- ideal if home is appreciating faster than 7520 rate
- gift = PV of remainder interest
- estate: if grantor dies before term, FMV of home is included in gross estate
ILIT
- irrevocable life insurance trust
- not included in probate or gross estate if Crummy provision is used
- grantor typically puts money in for premiums
- can allow liquidity by allowing trust to purchase assets of the estate and make loans to the esate (don’t require it)
requiring trust to pay estate admin or taxes causes inclusion in estate
2503(b) and 2503(c)
trusts for minors used to be able to utilize the annual gift tax exclusion
B: bad boy
- hold assets but must distribute income annually
- use annual exclusion for PV of income interest
C: chior kid
- allows them to accumulate interest but assets made available to child at 21
- use annual exclusion for contribution
ABC trust arrangement: A
- A: general power of appointment trust
- for spouse so marital deduction can be used
- 2nd spouse controls assets and it will be included in 2nd spouse’s estate
- may be used to avoid GSTT
not necessarily any better than just gifting the assets
ABC trust arrangement: B
- B: bypass (aka credit shelter) trust
- assets ultimately go to non-spouse beneficiaries (kids)
- transfer amount over estate tax limit (~$12M) when first spouse dies, not to exceed second spouse limit (~$24M) so nothing is included when 2nd spouse dies
- spouse can get income for HEMS, Crummy
- use for highly appreciating assets
ABC trust arrangement: C
- C: QTIP
- usually created at death
- exception to allow qualification for marital deduction but still control ultimate disposition
- must give spouse income for life and allow spouse to be able to sell non income-producing assets (e.g., to replace with income-replacing property that spouse can get)
- included in gross estate of 2nd spouse
Can choose whether to apply it for estate tax but not GSTT
how and when to make QTIP election
executor elects it on the 706 by the due date (15 months = 9 months + extension)
QDOT
- allows noncitizen spouse to qualify for marital deduction
- requires domestic trustee who withholds tax
CRAT
- fixed annual annuity 5-50% of initial FMV
- life or term if 20 years or less
- CAN change charitable beneficiary
- no contributions after inception
- remainder interest 10%+ of initial FMV
CRUT
- more flexible than CRAT
- annual annuity of 5-50% of annual FMV
- can contribute after inception
- remainder interest 10%+ of initial FMV
- catch up provision allowed if it doesn’t earn enough for interest (so you don’t dilute principle)
PIF
- pooled income funds
- basically a poor mans CRUT
- contributions pooled into trust maintained by charity (so can’t change charity)
- income for life to donor
- good for small gifts
charitable lead trust
- like CRAT/CRUT, can be CLAT/CLUT
- charity receives income and remainder goes to noncharitable beneficiary
- used by high net worth people who don’t need income so asset goes to kids
- choose AT or UT based on how long you want to pay interest to the charity and whether you want it to be a fixed amount
installment payments of estate tax
if it is a closely held buisness (>35% adjusted gross estate where decedent owned >20%), can extend payment of estate tax over 14 years (interest only for 4 years then amoritize)
special use valuation
- normally FMV implies highest and best use
- if not using asset at highest and best (e.g., farm in gentrifying area), can reduce to current use value as long as reduction is <$1.23M
- must have managed it 5/8 years before death
- must be 25%+ of gross estate
- heirs must use for 10 year period
section 303
- stock can be redeemed from an estate to pay for taxes, admin, funeral without being treated as a dividend
- to qualify the business must be a C corp with >35% of adjusted gross estate
what is the GSTT rate?
40%
gift tax paid is also taxed at the additional 40%
who is considered a skip person?
- lineal descendant 2+ generations down
- unrelated person >37.5 years younger
- 2+ generation becomes non-skip if non-skip person dies (e.g., if dad dies, grandson becomes nonskip)
- trust can be a skip person if all beneficiaries are skip people
taxable termination vs direct skip vs taxable distribution
- direct skip: outright gift to skip person
- taxable termination: any termination of a trust interest unless trust property is subject to estate or gift tax, non-skip person receives interest, or distribution will never be made to a skip person; trustee is liable for GSTT
- taxable distribution: any distribution from trust to skip person that is not a taxable termination or direct skip; transferee is liable for GSTT
GSTT exclusions and exemptions
what does the exemption apply to first?
- qualified transfers
- $16K annual exclusion
- same lifetime exemption amount as estate tax but doesn’t function as a credit
- exemption is automatically allocated first to direct skips; transferor or executor allocate exemption to transfers and doing so is irrevocable
arms-length transaction
transfer between unrelated parties
TPPT
- like QPRTs but for personalty
- gift = PV of remainder interest
- estate: if grantor dies before term end, included in gross estate
medicaid
who is it for, requirements
- who: 65+, blind, disabled US resident or citizen
- SSI: $2K countable assets for single, $4K married (excludes primary home, car, term life insurance, biz property)
- income: varies by state but usually < 133% federal poverty level
- lookback: 5 years
rule against perpetuities
all trust interests must vest within lives in being (when the last person identified in a group; can include child in womb) +21 years
when does a trust have gift tax?
when it is irrevocable
Totten trust
not really trusts
basically bank accounts that include POD benficiary
blind trust
revoable trust
used for high ranking political figures
used so grantor is not able to manage the assets
when is an appraisal required for donations?
> $5K ($10K for nonpublicly traded stock)
exceptions to GSTT
transfers between sep ‘85 and oct ‘86 unless:
- to irrevocable trust established before sep ‘85
- related to will before sep ‘85
- mentally disabled
Who pays estate tax on a bequest?
If it doesn’t specifically say how (e.g., out of residual estate), it comes out of the bequest
Is a testamentary will safe from will contests?
No; it is created in the will, so it can be contested to block creation
do assets in a testamentary trust go through probate?
yes
can a disclaimant disclaim part of an asset?
yes; they can disclaim some or all of it
is GSTT paid on top of gift tax or is gift tax paid on top of GSTT?
gift tax is paid on top of GSTT
e.g., if GSTT = $400K on $1M gift, gift tax = $1.4M x 40% = $560K
what are requirements of a family partnership?
- The partnership interests must receive a pro-rata share of distributed income.
- General partners must be adequately compensated for services rendered.
- Capital must be a material income-producing factor.
NOT required: Personal service income may be earned by the partnership.
who can be the beneficiary of marital trusts?
only the spouse (e.g., QTIP)
can the annuitant deduct interest payments with a private annuity?
no
do revocable living trusts avoid dissipation of assets?
yes
what is an Estate Trust?
a special type of power of appointment trust which grants surviving spouse a testamentary general power of appointment over assets
what is a life estate
an interest in property that ceases upon the death of the owner of that life estate
what happens to appreciation with an estate freeze?
future gain would occur in the transferee’s estate
what kind of property transfers at death by contract?
something with a beneficiary designation like a Roth IRA
do Totten trusts go through probate? are they included in the gross estate?
they do not go through probate but they are included in the gross estate
are grantor trusts included in the gross estate?
yes, even though there is a beneficiary and it’s irrevocable, it still has a life interest in income
what is a reversionary gift?
included in gross estate? how far prior to death must it be completed?
- a gift given with the intention that the donor will receive it back with a step-up in basis
- property is included in gross estate
- gift must be completed one year prior to donee’s death
is property acquired via gift or inheritance during marriage considered community property?
generally no
what are the ways a will can be revoked?
by shredding or by writing, dating, and signing a new one
a codicil is NOT a proper way
in what ways can tenancy by entirety be terminated?
and what happens when terminated in each scenario
- death (survivor takes entire tenancy)
- mutual agreement
- divorce (converts to tenancy in common or joint tenancy)
what is ancillary probate?
decedent is resident of one state and owns realty in another state
in the hands of the creator, what can be deducted for charity?
only materials and actual costs
e.g., rental of a space is not deductible
for medical concerns, what is the difference between power of attorney, living will, and DNR?
- power of attorney: providing of medical care but NOT ending of life sustaining treatment
- living will: ending of life sustaining treatment but NOT providin of medical care
- DNR: not a replacement for either; additional document that addresses prevention of resuscitation
how many residences can a QPRT hold and how many QPRTs can one person have
- it can hold only one residence
- you can have 2 QPRTs
who retains the tax advantages of a QPRT, donor or donee?
donor
is a CRUT for life included in the gross estate of the grantor?
yes if it is for the life of the grantor
what type of charity trust requires invasion of corpus to meet income payout requirements
CRAT
who are the parties to a power of attorney?
principal and agent
if a couple elects to split gifts, which gifts does that apply to?
all gifts that year that occured PRIOR to death
Devisee
Devisee is a gift of real property through a will
under what circumstances is a decedent required to file an estate tax return?
when the gross estate, plus adjusted taxable gifts, exceeds the applicable exclusion amount ($12,060,000 for 2022).
what is a defective grantor trust
treated as a grantor trust for income tax purposes but as a completed gift for gift and estate tax purposes.
no contest clause
if legatee contests, they get nothing, so they must have enough skin in the game
forced heirship
only in Louisiana; requires some assets to go to children
divorce statute
provision that leaves assets to ex-spouse; otherwise, if not specifically spelled ouit, it will typicaly be assumed that the ex-spouse legatee is an old provision and they wont get anything
