Estate Flashcards
Probate
Testamentary trust does not go through probate. However, the property passing through the will does.
Ancillary Probate
Secondary probate in another state. Happens when real estate is also owned in another state.
Totten Trust is the same as POD acct
Revocable trust that the depositor is named trustee for another’s benefit. At death, proceeds go to bene. No probate.
If you die and own life insurance, it goes to probate.
Community Property
Each spouse owns an equal half. Since being married, all property aquired is presumed to be community property. There are no survivorship rights.
PROPERTY IS SUBJECT TO PROBATE.
-Appreciated property gets full step up at death. (Home, life insurance, NOT cars or IRAs)
-If you die with a house 1/2 of house is owned by surviving spouse, the other 1/2 passes through will.
-if you own insurance or sole proprietorship, then half is subject to probate.
Non community property
gifts received by one spouse
property inherited by one spouse
income earned prior to marriage
interest earned on sperate assets held by one spouse as sole owner.
Gross estate
-for community prop is 1/2.
-full value of anything owned solely
-tenants in common or JTWROS = 1/2
–add full value of anything you died w/ POA
-life estate is NOT included, retained life estate is.
JTWROS
Not subject to probate! Non spouse Bene - It is included in gross estate of deceased joint owner, unless survivor can prove their contribution. Gifts do not count as contribution. Interests that is generated from gifts do count.
Tenancy by Entirety
Not subject to probate. Only spouse can have this. Must have mutual consent to transfer or sever any property. Equally divided for estate tax purposes.
Tenancy in Common
1/2 IS subject to probate and in deceased owners estate. This is a way property can be owned unequally.
Testamentary Trust
Created by a will.
-Becomes effective only if the will creating the trust is admitted to probate. A testamentary trust itself does not go through probate.
Gift taxes paid within 3 years of death are added to gross estate. Generation skipping transfer tax paid within 3 years is not added back.
Form 706
Gross Estate- Less funeral expenses, administration expenses, debts, taxes, and casualty losses = Adjusted Gross Estate
Less marital deduction and charitable deduction = taxable estate
plus taxable gifts = tax base
less estate tax deduction ($12,060,000 for 2022) Remainder at 40%=Tentative tax
less gift taxes paid = net estate tax
3 yr rule
-certain transfers of life insurance
-any gift tax paid out of pocket
*a gift of property or cash does is NOT subject to 3 yr rule.
*do not confuse gift tax with generation skipping transfer tax. GSTT is not included in gross estate.
Cash Value of life insurance
cash value is retained by carrier at death typically. Usually insurer only pays death benefit,
Five or five Power
$5,000 or 5 percent of total value of fund subject to power. ex. If trust is $500,000 and bene did not exercise 5 or 5 power and passed away, $25,000 would be included in the bene’s estate. Not $500,000.
Provides flexibility and financial security for bene with minimal consequences.
HEMS support does not count as POA so will not be factored in gross estate.
Must include the word support though, otherwise it will be a general power.
Gifts of future interest
They do not qualify as annual gift exclusion. EXCEPT: gifts in trusts of future interests on behalf of minors, 2503(c) trusts, Crummey trust, 529 plan.
Gifts to non citizen spouse
Non citizen spouse do not get unlimited marital deduction. Instead, they get super annual exclusion of $164,000.0
Increasing basis on appreciated gift
if gifted an appreciated gift, then the basis may be increased by amount of gift tax paid if it was paid by the donor.
Gift tax exclusion
$12,060,000
Gift tax filing requirements
more than $16,000
a gift of future interest in any amount
a gift for which spouses elect gift splitting. (No gift tax return filed if its jointly held or community property)
Charitable Contribution for Life insurance
charitable cont. is the cash value of the policy or the cost basis, whichever is lesser. Then further limited to 50% of AGI.
Guardian and Conservator are appointed by court
Complex trust
Taxed as separate entity on its income earned. Must be both: irrevocable AND grantor has not retained control. AND income is accumulated.
Trust MAY distribute income.
Simple trust
Income is distributed, income taxed to beneficiary, normally no distribution of corpus.
Crummey trust
An irrevocable trust that gives a minor rights to withdrawal anytime a NEW contribution is made. The right is the LESSER of the amount of annual exclusion or value of current year contribution.
Often seen in Life insurance trust. Donee should waive fight to get trust income because it’s needed for the life insurance premiums.
Can allow for split gifts a year ($32,000)
Intervivos trust
Revocable. A transfer to it had no tax consequence since usually grantor names themselves as trustee do the gift is not complete.
Purpose is to avoid probate, can be bene of pension plan benefits, and to avoid will contests.
Testamentary trust
Trust created through will.
Bypass trust (aka nonmarital trust, B trust, family trust, applicable credit amount trust)
Contains property transfer to the trust at the time of the decedent’s death. Usually gives the decedent post Mortem control over the transfer of property.
Income can be for spouse or spouse and others. At death of surviving spouse, it is not included in estate.
Cant use marital deduction through this. must use applicable exclusions instead. $12,060,000
Pick this is spouse wants income stream but remaining asset go to kids.
Marital trust also known as an A trust
Second spouse to die controls the property of the trust. The surviving spouse has post Mortem control of her property in the trust. in a bypass trust, the decedent has a control.
As a result, the A trust property is included in the decedents estate. It’s not subject to estate tax. It must be included in the gross estate of the surviving spouse.
Q-tip trust
First spouse to die controls the property of the trust. AKA current income trust or C trust.
Used when income will be paid only for life yet qualifies for marital deduction. This allows decedent to ultimately control, who receives the property when surviving spouse dies.
Pour over trust or pour over will
The purpose is to catch any assets The client owns, but not controlled by revocable trust.
2503(b)
interest distributions only.
gift of future int.
-generally not a children’s trust
UGMA
must be funded with cash type assets (EEs, mutual funds, ect)
normally dist. at 18.
gift of present int.
Income taxed to minor
If donor is named custodian and predeceases minor, it will be included in donors estate
UTMA
can be funded with any type of asset including real estate.
normally dist. at 21.
gift of present int.
Income is taxed to minor
If donor is named custodian and predeceases minor, it will be included in donors estate
Section 529
lump sum of 80k
k-12 10k per year
10k towards student loans/person
2503c trust
Allows grantor to make a gift to a minor and still get gift tax exclusion. It will not be considered a gift of future interest. If it is used for donee before age 21, or will pass to Donee at age 21, or if Donee dies, it’s payable to Donees estate
Kiddie tax applies to unearned income
No tax applies to first $1,150
Next $1,150 taxed at 10% rate ($115)
Amounts greater than $2,300 taxed at parents marginal tax rate.
Earned income: earned income plus $400.
2503c
can be funded with any type of asset
normally dist. at 21
-(a children’s trust)
Sprinkling or spray provision in trust
power to direct INCOME at discretion of the trustee fbo of bene
discretionary provision in trust
power to direct income OR principal at discretion of the trustee fbo of bene
Rules against perpetuities RAP
Used often in a dynasty trust
RAP means an interest in land must vest but later than 21 years 9 mos after death if the youngest child in being when interest was created.
It’s free of estate, GSTT, and gift tax.
CRAT
Donor receives income tax deduction for present value of remainder interest
donor can only make one initial transfer of property to the trust, no additions.
Must pay out at least 5% and that amount remains fixed.
Raw land not appropriate (isn’t income producing)
If term of years is used it can’t exceed 20 years.
Remainder interest must be at least 10% of the initially contributed amount .
CRUT
May provide level of inflation protection
Donor can make more than one transferred to trust
Must pay out at least 5% fixed of the re-appraised value
If term of years is used it can’t exceed 20 years.
If donor donates land to trust, the property can be sold and then invested in municipal securities,
Charitable lead trust
Upfront income, tax deduction for the present value of the payment stream distributed to charities. However, future income and gains will be taxable to grantor and are not entitled to any additional charitable deductions for annual distributions.
Pooled income fund
Donor transfers property into a common trust fund. That’s commingled with property of other donors. A single public charity controls and manages the assets.
After the income distributions terminate (typically a death of donor), the public charity received the remainder interest in the assets.
Donor cannot change your mind about who gets remainder.
No 5% rule
Cannot invest in tax exempts
Private Foundation
Distributes a minimum of 5% of it’s investment assets each year.
By creating a private foundation the donor has complete control over amounts and recipients of annual gifts.
Donor advised fund
controlled by sponsoring organization (donor can make recommendations though)
funded by individual donor.
Life insurance
gifting life ins within 3 yrs of death results in it being included in decedent’s estate.
Paying premium on policy is not an incidence of ownership
Gifting life insurance
If wife purchase life insurance on husbands life and name son as beneficiary, upon husband’s death, the wife will have made a gift to son.
If you gift your policy, then the taxable gift is the interpolated terminal reserve plus an earned premium minus annual exclusion of $16,000.
Gift of stock
If parent gives you stock you assume their basis. The taxable gift is the current market value minus the annual exclusion of 16,000.
Recapitalization
Reducing value of business interest in their estate.. (Transferring closely held business)
All original owner stock should be reissued as preferred, This would produce a dividend for original owner. All future appreciation will be for whomever it is gifted to.
Gift value is all common stock less value of preferred shares.
Life estate is excluded from gross estate.
Net Gift Technique
Gift where DONEE pays gift tax.
$12,060,000 exclusion must first be used.
Donor’s estate gets a gift tax credit.
Gift tax would be much less. Usually its 40% on anything over the 12.06M. (Such as: if gift is 1,500,000 over the exclusion. Then gift tax is normally $600,000. But, if donee pays it’s the 600,000/1.4)
QDOT
This passes by marital deduction but then is taxed at second to die spouse. A bypass trust allows 12.06M exemption for spouse to use during life and the passes estate tax free to children at his death.
(QTIP also passes by marital deduction.)
Installment sale
If owner needs income can use an installment sale
Present value of remaining payments is included in the owners estate
Don’t use if property is subject to re-capture (1245 depreciation)
If property is sold by a related party buyer within two years of the date of the installment sale, The seller is deemed to have been paid in full for income tax purposes.
Self canceling installment note (SCIN)
Used if owner needs income.
No value is included in the owners estate.
The buyer pays a premium for the cancellation feature at death
Gain is capital gain
Assets can be depreciated and interest can be deducted
Higher pay out than installment
Private annuity
(Sale of property in exchange for periodic payments)
No value is included in owners estate
Property is transferred (exchanged) for a promise
Taxation to the seller
All the gains that would have been recognized over the life of the annuity is now tax in the year the private annuity is established .
Not used typically unless very little gain or they have lots of losses to wash the gain
S corp/partnership
Family members receive conduit income. This doesn’t work if children are under 24. (kiddie tax)
Not available this business is service related (CPA, financial planner, attorney)
S corp cannot issue preferred stock and can’t have over 100 shareholders. Remember S for simple.
Family Limited Partnership
Used to shift income from parents and grandparents to children or other family members. Basis stays the same and no step up.
general partners may be paid a salary for personal services to partnership.
It allows owner to maintain control of business.
2 discounts allow for valuation to be discounted on the LP interest. These are lack of control and marketability.
general partner is responsible for all partnership debt. the general partner is the only party liable to creditors.
Bargain sale
Buyer generally pays less than the fair market value for the. (usually is a charity or family member)
The difference between the fair market value in the price paid by the buyer is a gift
GRAT is a gift of future interest there’s no 16,000 annual exclusion
GRAT is more convenient than a GRUT
GRAT pays fixed income. The assets only need to be valued once upon initial transfer.
GRUT is determined annually (revalued)
Best to transfer a GRAT an asset that is likely to appreciate such as stocks.
QPRT
Up to two residences allowed. One must be primary residence
It’s used often when residence is valued over 1M or estate is large (over the exemption. (12.06 million.))
Gift leaseback
Transaction, where one party gives property to another party and then leases it back from them
Skip person
A beneficiary (related person) who is at least two generations, younger than the transferor is a skip person. Often a grandchild.
Unrelated person who is more than 37 1/2 years younger than the transferor is a skip person.
However, if the individuals parent who is a lineal descendent of the transferor is deceased, then the succeeding generations move up one generation
Generation skipping transfer tax (GSTT)
Is not pulled back into the estate if paid within three years like gift tax is
Estate receives no credit for GSTT paid
If GSTT and federal estate tax apply because it’s over the 12.06 exemption and going to skip person…
Example: 17.06m transfer. 5 million is taxed at 40% for the estate which equals $2 million in estate taxes.
Then you take 1706 million - (12,060,000+$2 million) = 3 million
3,000,000×40% equals 1.2 million GST tax.
Income in respect of a decedent (IRD)
income which a decedent had the right to receive, but wasn’t actually received.
for example: unpaid salary, dividends declared, but not received, capital gains
Usually must be included in income of the estate, however, a deduction is normally permitted .
Alternative valuation date (AVD)
Can’t use if using the unlimited marital deduction, if assets pass to qualified charities, or if assets pass to children are less than the $12.06M exemption
Assets that reduce in value just because of time does not get to use AVD (annuity payouts, retirement plans in payout, notes receivable, ect)
Can’t use AVD if under the $12.06m exemption because no estate tax is due
Inherited stock can gifted stock
Inherited stock gets step up. Gifted stock uses old basis
You can subtract commission from me as well to get gain
Disclaimer must be made within 9 months
Tenants by entirety, cannot be disclaimed.
Section 303 stock redemption
-Business must be corporation
-value of the decedents stock must be more than 35% of the adjusted gross estate
-Only an amount equal to a total of all the estate, taxes and administrative expenses can be redeemed
Installment method (section 6166)
The estate tax attributable to the closely held business interest can be paid in 10 equal installments, beginning four years after deceidents deaths
(Closely held: sole, proprietorship, partnership, or a corporation)
Special use valuation 2032A
Valuation method used for eligible real estate in connection with closely held business or a farming operation.
(value of real property must be at least 25% of gross estate)
- whenever a 2032 a election is available this they will also qualify for a 6166 election
