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Estate Flashcards

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1
Q

Probate

A

Public process for orderly distribution of property from the decedent to one or more beneficiaries.
Advantage is an orderly process that is overseen by courts
Disadvantage is publicity, challenges, costs and potential for multiple state proceedings

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2
Q

Testator

A

Person making a will

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3
Q

Testate vs. Intestate

A

Dying with a will vs. dying without a will.

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4
Q

Assets included in the probate estate (COMESTIC)

A

Community property
Estate as the beneficiary
Singly owned assets
Tenants in Common property

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5
Q

Ancillary Probate

A

Probate for real estate located in a state outside of the decedent’s state of domicile.

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6
Q

Probate avoidance strategies

A

Revocable (inter-vivos) trusts
Transfer by operation of law (joint tenants with rights of survivorship)
Transfer by contract - beneficiary designations, deed of title, co-ownership
Election against the will (elective share)

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7
Q

Elective share

A

In virtually all states, a surviving spouse who has not inherited a certain minimum amount (provided by state law) has a right to take a share of the deceased spouse’s estate.
States differ not only of the amount of property, but which property qualifies.
Some states the rule is 1/3, others it is 1/2 or more.

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8
Q

USDA

A

Persons who die within 120 hours (5 days) of each other are said to have pre-deceased one another. This keeps property of one person from passing through the estate of another person before ultimately passing to those who survive both

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9
Q

Totten Trust

A

Similar to a POD/TOD, but for bank accounts. Balance passes to a beneficiary.

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10
Q

Community Property rules

A

Separate, equal and undivided interest in property. Each owns 1/2.
Even if only one spouse earns income, both are said to have contributed equally.
All property acquired during marriage is presumed to be community property.
There are no rights of survivorship, thus a will is needed and property will be subject to probate.

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11
Q

Community Property Interests

A

Income earned by spouses or only one spouse during marriage
Appreciation on solely owned property that is attributable to the contributions of the non-owner spouse
Separate assets that have been comingled with community assets where it can no longer be determined which should be separate.

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12
Q

Noncommunity Property Interests

A

Property received as a gift by one spouse
Property inherited by one spouse
Income earned prior to marriage
Interest earned on separate assets held by one spouse as sole owner

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13
Q

Tax advantage to community property

A

100% step up on long-term capital gain property if at least one-half of the property is includible in the deceased spouse’s estate.

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14
Q

Sole Ownership (outright ownership/fee simple)

A

Subject to probate and can be disclaimed

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15
Q

JTWROS

A

Not subject to probate and can be disclaimed
Joint tenants must be adults
Control, ownership and enjoyment of the property are shared equally by all tenants
Income from income-producing property is split equally among tenants
Surviving joint tenants receive equal share from the decedent

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16
Q

Non-Spouse Joint Tenant (JTWROS)

A

Full value of the jointly held property is included in the gross of the first tenant to die unless the survivor can establish ownership (consideration) of some portion of the property before joint tenancy was created. Meticulous records should be kept. Gifts are not consideration.

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17
Q

Spousal Joint Tenant (JTWROS

A

One half of the jointly held property is included in the decedent’s gross estate.

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18
Q

Tenancy By The Entirety (TBE)

A

Not subject to probate and cannot be disclaimed.
Spouses only
Severance only by mutual consent of both parties
TBE protects property from individual creditors (but not joint creditors)

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19
Q

Tenancy In Common (TIC)

A

Subject to probate and can be disclaimed.
Each tenant owns an undivided (not necessarily equal) interest in the property
Entitles tenants to division of income from income producing property
Tenants are free to transfer their share to other parties
No survivorship rights - decedent’s share goes through the probate process

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20
Q

Trust Ownership

A

Fiduciary arrangement where the trustee holds legal title to property (trust corpus) with the obligation to accumulate or distribute income or principal (or both) for the benefit of the beneficiary.

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21
Q

Holographic Will

A

Handwritten, signed document that includes instructions for disposition of property. Can be admitted for probate.

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22
Q

Nuncupative Will

A

Oral will that must be witnessed and generally only during final illness or combat situation.

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23
Q

Revocable Trusts advantage over POA

A

Trustee’s authority to act while grantor is incapacitated or incompetent can be enforced in virtually all states. POAs may not be recognized in all states.
Trust continues in death (becomes irrevocable) while a POA ceases.

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24
Q

Testamentary Trust

A

Created by a will. The will goes through probate, creating the trust. The trust itself does not go through probate.

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25
Q

Elements of Form 706 (Estate Tax Return)

A

Gross Estate (Probate and Non-Probate Assets)
Less Funeral Expenses, Administration expenses, debts, taxes and casualty losses
=Adjusted Gross Estate
Less Marital and Charitable Deductions
=Taxable Estate
Plus taxable gifts
=Tax Base
Less estate tax deduction ($12,060,000)
=Tentative Tax
Less gift tax paid
=Net Estate Tax

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26
Q

Gross Estate

A

All Probate Assets:
Singly owned (fee simple)
Tenancy in Common
Estate as Beneficiary
Community Property
All Non-Probate Assets:
JTWROS and TBE (50%)
Life Insurance
General Powers of Appointment
Gift Taxes Paid within 3 years of death
Certain transfers of life insurance within 3 years of death
Survivorship annuities (lump sum or net present value of payments)

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27
Q

Transfers with retained life estate

A

Property is included in the decedent’s gross estate if they retained a right to use or enjoy the property or receive income from it during their lifetime. Even trusts (revocable trusts) will fall into this category.
529 plans are an exception
UTMA/UGMA are included up until the beneficiary reaches the appropriate age.
RETAINED life estate is the key. A life estate is excluded from the gross estate

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28
Q

Exclusions from Gross Estate

A

Life Insurance owned by others
Completed gifts to others
Life estate for the decedent’s life only (not a RETAINED life estate - which would be included)

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29
Q

Adjusted Gross Estate

A

Gross estate less funeral and administrative expenses, debts, taxes, income taxes and casualty losses. (State level inheritance taxes may also be deducted here)
Also called tentative taxable estate.

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30
Q

Taxable Estate

A

Adjusted Gross Estate, less marital and charitable deductions.
In some cases, state level death or inheritance taxes are also deducted.

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31
Q

Adjusted Taxable Gifts

A

Gifts made after 1976. Not included in gross estate.
Added to taxable estate to arrive at tentative tax base.

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32
Q

Tax Base

A

Amount used to calculate estate tax due

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33
Q

Tentative Tax

A

Subtract the lifetime exemption ($12,060,000) from the tax base and multiply any remainder by 40%

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34
Q

Net Estate Tax

A

Gift taxes paid are subtracted from the tentative tax to arrive at the net tax due.

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35
Q

Four Tax Corners

A

Income Tax
Gift Tax
GST Tax
Estate Tax

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36
Q

Lifetime Gifts and Testamentary Transfers

A

Gift Taxes and Estate Taxes use the same lifetime exemption ($12,060,000 for 2022) (remember, taxable gifts are added back to the taxable estate)
Allow for unlimited transfer of property between spouses
Allow for unlimited gifting of property to charity

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37
Q

Taxable gifts are not all bad

A

May help a wealthy individual get appreciation out of their estate.

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38
Q

Components of the transfer tax system

A

Gift Tax
GST Tax
Estate Tax
(Cumulative in nature)

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39
Q

Prior Transfer Credit

A

An estate tax credit is available for property received from a prior taxable estate within 10 years. This credit avoids double taxation on property transferred.

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40
Q

Sources for Estate Liquidity

A

Sale of assets (including marketable securities, annuities and business interests - taxability is a consideration)
Life Insurance (direct ownership, life insurance trust, buy sell)

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41
Q

Power of Appointment

A

An interest held by a person providing the ability to determine who shall use, enjoy, and possess property subject to the power. Generally occur in estates and trusts.

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42
Q

General Power of Appointment

A

General Power is generally deemed outright ownership of property. There are no restrictions on this type of power.

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43
Q

Special or Limited Power of Appointment

A

The holder of this type of power can only transfer the property to specific designated individuals (typically children of the holder or someone other than the holder) or only under certain circumstances (consent of another that has an adverse interest to the holder).

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44
Q

Five or Five Power

A

Property subject to a general power will only be included in a donee-decedent’s estate (or considered a taxable gift) up to the greater of:
$5,000 or
5% of the total value of the property subject to the general power

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45
Q

Lapse/Exercise or release of power

A

Power not exercised within a given time period is considered lapsed
When the holder uses it in favor of one or more beneficiary, it is exercised
A release of power occurs when the holder relinquishes all control to determine who the beneficiaries of the property will be.

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46
Q

Distributions for an Ascertainable Standard

A

An ascertainable standard is not a general power. It is a limitation on the right to exercise a power for the needs (health, education, maintenance and support). Also known as HEMS

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47
Q

Tax Implications of Powers of Appointment

A

Special Power and Ascertainable Standard - No gift or estate tax implications
General Power - Both gift and estate tax implications (fully taxed)
5 or 5 power - No gift tax implications. Estate tax = greater of 5% or $5,000 is taxed

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48
Q

Requirements for Taxation of Gifts

A

Donor must be capable of transferring property
Donee or Donee’s agent must be capable of receiving and possessing the property
There must be delivery and acceptance
Donative intent is not required for federal taxation, but is required to be a valid gift
The gift must be a completed gift

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49
Q

Examples of non-completed gifts

A

A non-canceled check
A revocable trust

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50
Q

Examples of completed gifts

A

A canceled check
An irrevocable trust
Retitling the ownership of a house or car

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51
Q

Gift Matching

A

Highly appreciated property - Charity or person in low tax bracket (may want to keep to gain a step-up in basis)
Property likely to appreciate - Good gift to remove from future value of an estate
Income-Producing Property - Good to gift to a donee in a low tax bracket
Loss Property - sell to take the loss then gift proceeds
Property Subject to Depreciation - Keep until fully depreciated
Out of State Property - Gift to avoid ancillary probate
Life Insurance - Excellent to gift - tax based on replacement value; benefit based on face value

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52
Q

Gifting strategies for closely held business owners

A

Family Limited Partnerships (FLPs)
Limited Liability Corporations (LLCs)
Preferred Stock Recapitalizations
Gifting closely held stock
These transfers reduce the value of the business interest in the donor’s estate
Care must be exercised in making gifts of closely held stock, because such gifts may disqualify the estate from making Section 303 or Section 6166 elections
Gift fully depreciated property to family members and then lease it back.

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53
Q

Gift Tax Exclusion (annual)

A

$16,000 in 2022
Gifts of present interest qualify for this exclusion
Gifts of future interest do not qualify for this exclusion (exceptions are gifts in trust of future interest for minors, 2503(c) trusts, Crummey trusts and 529s)

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54
Q

Non-Citizen Spouses

A

Do not enjoy unlimited marital gift (or estate) exclusion of US citizens. Super annual gift exclusion if $164,000 is available.

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55
Q

Increase in basis of appreciated gift*

A

Must be appreciated property (same value as original owner’s basis does not count)
Donor must have paid gift tax
Calculation = Original owner’s basis, plus gift tax paid that was attributable to appreciation (calculated by taking the total gift, less original basis times 40%)

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56
Q

Gift subject to indebtedness*

A

Only the net gift (property value less the encumbrance) is subject to gift tax.
If the encumbrance is greater than the donor’s basis in the property, the donor will also realize a capital gain.

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57
Q

Singlely owned asset gift splitting

A

Consent of the non-donor spouse is required
Two gift tax returns (709, one by each spouse) if the value of the split gift to an individual donee exceeds the annual exclusion.
Only the donor needs to file a 709 if the value of the split gift to an individual donee is under the annual exclusion. There is a line for the spousal consent that must be signed.

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58
Q

Gifts of property in Joint Tenancy/Community Property

A

Most types of property are considered transferred when documents proving the transfer of title are executed. Exceptions:
Joint tenancy bank account - gift arises when funds are withdrawn by the donee, not upon creation.
Joint tenancy US Government bonds, a gift arises when the bond is redeemed.

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59
Q

Prior Taxable Gifts

A

If a person gives more than the annual exclusion to a single donee, that person uses their lifetime exemption. The gifts accumulate on form 709. Once the lifetime exemption is used up, the donor is subject to immediate gift tax on gifts exceeding the annual exclusion.

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60
Q

Deductible or Exempt Gifts

A

No gift tax for:
Qualified payments made directly to an educational institution for tuition
Qualified payments made directly to a provider of medical care
Gifts to a spouse (provided they are not a terminal interest)
Gifts to a qualified charity
Gifts to a political organization
Gifts to the President of the US

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61
Q

Joint Property and Community Property gift splitting

A

No 709 needs to be filed unless the gift exceeds the annual exclusion. In cases where property is owned 50/50, it is automatically assumed the gift is split, and no spousal consent is needed.

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62
Q

Differences between DPOAHC and DPOA

A

DPOAHC is drafted separately
DHOAHC is always springing

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63
Q

Powers afforded a DPOA

A

Buy, sell, lease assets
Collect debts
Operate a business
Sue others
Refuse life-prolonging procedures
Make gifts
Make disclaimers
Make living trusts
Sign income and gift tax returns with competent spouse
Exercise special powers of appointment

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64
Q

Powers not afforded to a DPOA

A

Cannot execute or revoke a will
Cannot execute a living will

65
Q

Nondurable POA

A

Power ceases when the principal becomes incompetent

66
Q

Revocable Trust vs DPOA

A

The trust is recognized generally universally
Revocable trust continues after death (becomes irrevocable)
Revocable trust is the better answer for planning

67
Q

Special Needs Trust

A

Expenditures need to be approved by the trustee, protecting a disabled person from exploitation
Allows the beneficiary to continue to receive public benefits like Medicaid, Section 8 housing assistance, and SSI
The trust can only pay for supplemental needs not covered by public programs, like private nursing, furniture, supplemental housing, and a few luxuries
Can be used by parents for a disabled child or in litigation settlements where someone becomes disabled.

68
Q

Payback Trust (OBRA)

A

An OBRA or payback trust is a type of trust that allows a disabled individual who is under 65 to remain eligible for Medicaid. The person transfers their assets into the trust. If any assets remain when the disabled beneficiary dies, the state is entitled to be paid back for any costs Medicaid paid while they were living.

69
Q

Elements of a trust

A

There must be trust property (corpus)
There must be a grantor
There must be a trustee. The trustee holds legal title to the property.
There must be one or more beneficiaries
The grantor must be legally competent at the time the trust is created
The trustee must be competent at all times

70
Q

Simple Trust (or Estate)

A

Operates as a conduit for income to beneficiaries.
Passes income and deductions to the beneficiaries who then report it with the same character it had for the trust, paying taxes at their marginal rate
Normally no distribution of corpus
Cannot make charitable gifts

71
Q

Distributable Net Income (DNI) and Trusts/Estates

A

Distributable Net Income (DNI) is the accounting rule that limits the amount that the beneficiaries must report as gross income for income tax purposes.
Provides the trust or estate with a deduction for the amount distributed to beneficiaries. The deduction is the lesser of the actual amount distributed or the DNI
Limits the portion of the distribution that is taxable to the beneficiaries
Ensures the character of the distribution remains the same in the hands of the beneficiary as it was in the trust.

72
Q

Complex Trust (or Estate)

A

Taxed as a separate entity on its income. To be taxed separately, a trust/estate must meet two requirements:
It is irrevocable, and the grantor has retained no control
Income is accumulated in the trust (either because the trust document requires income to be accumulated or the trustee has the discretion to accumulate)
Income accumulated is taxed to the trust, income distributed is taxed to the beneficiary
Corpus can be distributed
May make charitable gifts
An irrevocable trust is generally, but not always, a complex trust.

73
Q

Crummey Trust

A

An irrevocable trust with demand rights
Classifies a gift of a future interest as a gift of a present interest, making it eligible for the annual gift exclusion (including split gifts).
The demand (or withdrawal) right can be granted to a minor through a guardian.
Each time a new contribution is made to the trust, the beneficiary has a temporary right to withdraw from the trust. The withdrawal amount is the lesser of the annual gift exclusion or the current year contribution.
If the demand is made, the trustee must deliver the funds.
Most frequently added to life insurance trusts.

74
Q

Inter-vivos Trust

A

Revocable living trust. The grantor is generally the trustee during their lifetime. At death, the trust either terminates with the corpus distributed to the remainderman, or becomes irrevocable

75
Q

Advantages of an inter-vivos trust

A

Organization of property during lifetime
Potentially lower cost than probate
Alternative to guardianship or conservatorship
Greater privacy than a will
Speedy disposal of property
Avoids probate

76
Q

Disadvantages of an inter-vivos trust

A

Legal fees
Funding burden
Longer creditor period

77
Q

Testamentary Trusts

A

Created through instructions from a will.
Does not result in immediate estate or income tax savings, but eventually can as the will is executed.
Can protect trust property from successive estate tax levies as it passes from one beneficiary to another.

78
Q

Spendthrift Provisions

A

A provision that prohibits the transfer of the beneficiary’s interest and stipulates that it is no subject to claims of the beneficiary’s creditors.

79
Q

Bypass Trust

A

First spouse to die controls the corpus
Property is transferred at the time of owner’s death
Give the decedent post-mortem control
Property up to the federal estate tax exemption
Provides income to surviving spouse or whoever the decedent chooses
May have 5 or 5 power or HEMS
May be excluded from surviving spouse’s estate and pass estate tax free

80
Q

Bypass Trust other names

A

Non-marital trust
Non-marital B trust
B trust
Family Trust
Applicable Credit Amount Trust
Applicable Credit Amount Shelter Trust

81
Q

Portability of Unused Exemption

A

2013 Law allows executors of a deceased spouse’s estate to transfer any amount of the unused estate tax exemption to the surviving spouse

82
Q

Marital Trust

A

Second spouse (surviving spouse) to die has control of the corpus.
Property transfers at the death of the owner
Passes estate tax free under the unlimited marital estate tax deduction.
Surviving spouse has post mortem control and can leave the property to whomever they wish when they die.
Included in the decedent’s estate, but not subject to estate tax
Included in the gross estate of the surviving spouse (subject to estate tax)
No HEMS or 5 or 5 power

83
Q

Marital Trust other names

A

Power of Appointment trust
A Trust
Marital A trust

84
Q

Qualified Terminal Interest Property Trust (QTIP)

A

First spouse to die maintains control of the corpus
Appropriate when the owner wants to leave the surviving spouse with a stream of income that will be paid only for life but also wants the property to qualify for the marital deduction.
Lifetime Income for the spouse
Annual Payments to the spouse
Mandatory payments to the spouse
Exclusively for the spouse
The executor must make an election on the decedent’s federal tax return for the property to be treated as QTIP property
Estate tax paid on death of second spouse
Surviving spouse may be given 5 or 5 power or HEMS over corpus

85
Q

Qualified Terminal Interest Property Trust (QTIP) Other Names

A

C Trust
Current Income Interest Trust

86
Q

Estate Trust

A

Marital trust that does not provide the surviving spouse with an income stream. Generally holds non-income producing assets

87
Q

Pour Over Trust

A

Also called pour over will
Catch any assets a client owns that is not yet controlled by the revocable trust at death
Trust is setup first, then pour-over will is executed

88
Q

UGMA

A

Uniform Gifts to Minors Act
Securities
Cash
Life Insurance
Annuities
No real estate

89
Q

UTMA

A

Uniform Transfers to Minors Act
Any property including
Real Estate
Partnership Interests
Royalties
Intellectual property
Can be testamentary in nature

90
Q

UGMA/UTMA Rules

A

Created for one minor
Income is taxable to the minor
Custodian can distribute income and principal at any time
If Donor is custodian and predeceases the minor, the property is included in the donor’s gross estate
Donee must receive property by 18/21 based on state law
May not be used to satisfy obligation to support the minor
Property passes to the administrator or executor of the minor’s estate if they pass before age of majority

91
Q

Section 2503(b) Trust (Bad Boy Trust)

A

Can be used for minors but often used for adult children
Provides a stream of income
Income is a gift of a present interest
Remainder interest is a gift of future interest
Only income needs to be distributed

92
Q

Section 2503(c) Trust

A

Enables grantor to make a gift to a minor in trust and still obtain the annual exclusion.
Not a gift of future interest if the following conditions are met:
Property and Income can be expended before beneficiary attains age 21
Any portion of the property not expended passes outright to the beneficiary (trust does not have to be terminated, but they must have unfettered access)
If the donee passes before 21, the property must be included in the donee’s estate or the donee must hold a general power of appointment over the property
If donor acts as trustee and predeceases the minor, the property is included in the donor’s estate (like UGMA/UTMA)

93
Q

Complex Trust Standard Deduction

A

$100

94
Q

Sprinkling or Spray Provision

A

Power to direct income at the discretion of the trustee for the benefit of the beneficiary (estate or trust)

95
Q

Discretionary Provision

A

Power to direct income and/or principal at the discretion of the trustee (trust only)

96
Q

Support Trust

A

Trust which distributes only the amount of income and principal the trustee deems necessary for support or education of the beneficiary

97
Q

Income and Remainder Beneficiaries

A

These are future interests or trust corpus and income that pass to another beneficiary after termination of the prior interest to the first beneficiary.

98
Q

Rule Against Perpetuities (RAP)

A

Interest in property is invalid unless the interest vests no later than 21 years plus 9 months (period of gestation for a posthumous child) after the youngest life or lives in being when the interest was created. Typical application is a dynasty trust.

99
Q

Dynasty Trust

A

A B trust for multiple future generations
Free of estate, gift and GST tax for lives in being plus 21 years, 9 months or as long as local law allows.
Beneficiary interests are limited to life estates

100
Q

Charitable Remainder Annuity Trusts (CRAT)

A

Donor wishes to provide a non-charitable beneficiary with a stream of income either for life or period certain (not more than 20 years).
Donor receives a tax deduction for the present value of the remainder interest (after income has been paid out).
Property passes to the charity upon termination of the income stream.
One initial transfer only
Remainder must be at least 10%
Payout is a specific amount and must be at least 5% to the beneficiary (fixed/sum certain)

101
Q

Charitable UniTrusts

A

Similar to a CRAT, except:
More than one transfer can be made into the trust
Income paid out is fixed percentage of corpus. Corpus value adjusts each year, so income is variable.

102
Q

Net Income With Make-up Unitrust (NIMCRUT)

A

Beneficiary receives the lesser of the percentage of the trust’s value or the net income earned by the trust.
Income lost due to low yields can be made up in future years.

103
Q

Charitable Lead Trust

A

Lead Trusts allow a grantor to claim an upfront income tax deduction for the present value of the immediate payment stream distributed to charities (or estate tax deduction if formed at death)
Payments are made for 24 years
Future income and gains are taxed to the grantor
Present Value is provided on a table (given on the exam)
The non-charity beneficiary is the remainderman who receives all remaining trust corpus upon income stream termination.
Annuity and Uni versions

104
Q

Charitable Gift Annuity

A

Property is transferred to a charitable organization and income is received in return
The value of the property exceeds the value of the guaranteed annuity.
The excess value of the property is the deduction.
The transaction is both an acquisition of an annuity and a charitable contribution, simultaneously.

105
Q

Pooled Income Fund

A

Donor transfers property into a common trust fund
Property is comingled with other donors
Single public charity controls and manages the trust assets
After income distributions terminate (at death of donor) the charity receives the remainder interest.
Cannot be invested in tax-exempt securities
Each beneficiary receives a pro-rated share of the income from the trust.
Donor receives an income tax and gift tax deduction of the present value of the remainder interest that goes to the charity.
Donor cannot be trustee
Income must be paid out over the life of the donor (no period certain)

106
Q

Wealth Replacement Trust

A

Essentially an Irrevocable Life Insurance Trust

107
Q

Private Foundation

A

Separate Legal Entity that holds and invests funds and distributes a minimum of 5% of it’s investment assets each year (either income or income and principal if income alone is insufficient) to support charitable activities and other charitable organizations.
Established as a trust or nonprofit depending on state law.
State requirements and language to satisfy federal tax law should be incorporated into the organizational documents.
Without state and federal backing, contributions to the organization will lose tax deductibility.

108
Q

Advantages of Private Foundations

A

Donor has complete control of amounts and recipients of annual gifts
5% must be distributed annually
Control may remain with the family for generations
Can distribute tax deductible gifts to individuals and noncharitable beneficiaries.
Grants must be made for:
Study, travel or similar purposes
A scholarship, fellowship, prize or award
Intended to improve or enhance literary, artistic, musical, scientific, teaching, or other similar capacity, skill or talent of the grantee.

109
Q

Disadvantages of Private Foundations

A

Subject to a number of excise taxes
2% excise tax on net investment income
15% penalty if the foundation does not distribute 5% of the fair market value of its assets.

110
Q

Supporting Orgnanizations

A

Similar to a private foundation, but only created to benefit one public charity.
Operated, supervised and controlled by the selected public charity.
Not controlled by the donor’s family
Board of directors with 50% or more control by the charity.
Donor and donor’s family can serve on the board but may not have veto power.
No excise taxes or minimum distribution requirements

111
Q

Donor Advised Fund

A

Fund held by a community foundation or other public charity
Donor or committee appointed by the donor can recommend eligible charitable recipients for grants from the fund
The charity’s governing body must be free to accept or reject the recommendations.
Can be opened with very low initial deposits
Controlled or owned by the sponsoring orgnanization
Funded by an individual donor

112
Q

Charitable Stock Bailout

A

Gift of closely held stock to a charity which is then redeemed back to the corporation for cash.
Corporation receives a tax deduction and a bail out of corporate earnings without incurring dividend income.
Younger family shareholders concentrate their ownership
Charity receives cash
Cannot be an agreement as to the timing of the redemption
Corporation should redeem the stock. If not, adverse dividend treatment could occur.

113
Q

Incidents of Ownership (life insurance)

A

Right to assign
Right to terminate
Right to borrow against cash value
Name beneficiaries
Premium payment is not an incident of ownership

114
Q

ILIT

A

Used to replace wealth to younger family members when their parents have charitable remainder trusts.

115
Q

Estate and Gift Taxation of Life Insurance

A

Proceeds were paid to the executor of the decedent’s estate
Decedent possessed an incident of ownership at death
The decedent gifted the policy within 3 years of death

116
Q

Gifting Life Insurance w/ Premiums Payable

A

The value of the gift is established by adding the interpolated terminal reserve (adjusted reserve at the date of the gift) plus the value of the unearned portion of the premium.
Actual change in value is adjusted to the period before the gift, then the premium paid after the gift is added.

117
Q

Corporate and Partnership Recapitalizations (IRC S. 2701)

A

Business owners who wish to reduce the value of their business interest may do so through stock recapitalization or by gifting closely held stock.
Shifts appreciation out of the owner’s estate.

118
Q

Valuation Discounts for Business Interests

A

Minority Discounts
Marketability Discounts
Blockage Discounts
Key Person Discounts

119
Q

Minority Discounts

A

Discount recognizes the inability of a small shareholder to influence corporate policy, making their shares worth less.

120
Q

Marketability Discounts

A

Due to lack of established market, closely held business interests are more difficult to sell. The discount can range anywhere from 15% to 50%.

121
Q

Blockage Discount

A

If the decedent holds a large block of a publicly traded stock’s shares, selling it all at once could depress the market price. A discount from FMV is given.

122
Q

Key Person Discount

A

May be allowed for a business that loses a key employee who was responsible for its goodwill or administrative and management skills.

123
Q

Terminal Interest Rule

A

A terminal interest is one that might terminate on the happening or failure of a certain event or contingency.

124
Q

Exceptions to the Terminal Interest Rule

A

A transfer in which the surviving spouse receives a life estate income, payable at least annually, plus a general power of appointment.
The executor elects to treat certain property as QTIP property
The executor elects to treat certain property as QDOT property

125
Q

Qualified Domestic Trust (QDOT/QDT)

A

Non-US spouses do not get the unlimited marital deduction
The $12,060,000 exemption remains available
Joint property between spouses is not considered 1/2 owned (consideration must be established)
There is a tax-free gift of $164,000 between spouses
In order to get the marital deduction, property must pass through a QDOT.

126
Q

Exclusion of property from the gross estate

A

Spousal property
One half of community property
Life insurance owned by others
Life estate (no retained interest upon death)

127
Q

Net Gift Technique

A

Gift where the donee pays the gift tax
Lifetime exemption must be used up before NGT will work
Gift Tax to the donee is lower because the tax reduces the gift
Divide the normal gift tax that would be paid by the donor by 1.4
Gift taxes paid by donee within 3 years of death will still end up in donor’s estate

128
Q

Reverse Gift

A

Appealing when one spouse possesses most of the wealth and the less affluent spouse has a relatively short life expectancy
Wealthier spouse gifts low basis assets to dying spouse
Steps up the basis of the property
Non affluent spouse must live for 1 year

129
Q

Review Question at the bottom of 7-9 of estate

A

Interpolated Terminal Reserve for Gift Valuation of life insurance:
1. Calculate the amount of policy growth to be included in the gift:
a) Number of months from policy anniversary to death
b) Divide by 12
c) Multiply the result to the change in value of the contract by next anniversary
Write that answer down (need for final answer)
2. Calculate the amount of premium to be included in the gift:
a) Number of months from insured’s death to next contract anniversary
b) Divide by 12 (should be opposite of factor in step 1)
c) Multiply the result by the last premium paid
3. Add result from 1 and 2 together.

130
Q

Installment Sale (business transfer technique)

A

Spreads out taxable gain from sale
Removes appreciating asset from estate
Only works well if it remains in tact for full term. Any cancelation or forgiveness is ends up back in the seller’s estate:
If seller dies before completion, present value of remaining payments is added back to estate
If installment sale is forgiven in seller’s will, remainder is added back to deceased’s estate
If the sale is canceled between parties, seller is on the hook for remaining tax bill while alive (and the remaining canceled amount is a gift)
If related party sells property within 2 years of initial sale, seller is on the hook for the full tax bill (and the full amount of the agreement becomes a gift)
If the property was depreciated, seller has to recapture depreciation and pay 25% in tax

131
Q

Self-Canceling Installment Note (SCIN)

A

Variation of an Installment Sale
Remaining payments are automatically canceled at seller’s death
Retains a payment stream for seller while alive (ends at death)
Depreciated assets are ok - no recapture
Buyer pays interest, but can depreciate the asset and write off the interest paid
Buyer essentially pays a premium for the property in return for the self canceling feature. Premium is calculated using a factor from a mortality table
Seller pays more in income tax while living, but saves greatly on estate tax
Estate still pays capital gains tax on the remainder of the installment sale, but only up to 20%. A SCIN avoids estate tax

132
Q

Private Annuity

A

Unsecured promise of a life annuity (generally by a family member)
It eliminates estate tax on the transferred property as long as the property value equals the discounted promised annuity payments.
Relative to income tax, however, all the gain that would have been recognized over the term of the annuity are taxable in the year the annuity is created.
Usually a wrong answer for the test
Only works if property being transferred as little gain, or if transferor has sufficient losses to offset the gain.

133
Q

S-Corporation (Capital Sensitive/Not Service-Related)

A

Can be used to transfer equity in a closely held business (income passes to shareholders)
Gifts of stock can be made to younger family members using annual exclusion
Kiddie tax can apply to under 24 year old recipients
No service related businesses because of assignment of income doctrine
Note - Only Certain Types of Trusts can own stock in an S-Corp

134
Q

Family Limited Partnerships

A

Owned by members of a family (spouses, ancestors, lineal descendants and trusts)
If it has a business purpose, it is taxed like any other partnership
Income and tax benefits get distributed to partners according to their share
General partners can be paid a salary for personal service to the partnership
Capital in the partnership must be the income producing factor, not the service/labor of the general partner
Donor (general partner, as little as 1% ownership) retains control of the business
Allowed to use discounting for the valuation of gifts
Gifted property does not step up in basis at death
Same limited asset protection afforded a regular limited partnership

135
Q

Discounting Values of Gifts (Family Limited Partnership)

A

Lack of Control/Marketability allow for discounts of gifted property. More value can be gifted but treated as a lesser amount for the purpose of using gift exclusion or exemption

136
Q

Gift Leaseback

A

Business owning parent wants to gift to a child but has no money or assets
Parent gives fully depreciated business assets outright or in trust to lower-bracket family member
Leases the equipment back for use in their business
Parent can use the asset and deduct the lease payment as a business expense
To deduct lease payments, must be a legitimate business use, must be a reasonable lease amount and must have a written contract for the lease
If the gift is made in trust, the trustee cannot be subservient to the donor parent

137
Q

Bargain Sale

A

Sale to charity at a discount from FMV. Basis is adjusted by the amount of the charitable donation (seen in previous examples)
Sale to some other party - basis is not adjusted. Discount is a taxable gift over and above the annual exclusion.
Both get appreciation out of the estate.

138
Q

Grantor Retained Annuity Trust (GRAT)

A

Irrevocable Trust into which the Grantor transfers appreciating or income producing property (appreciating is better)
Assets valued once (at inception)
In exchange, receives a fixed annuity for a guaranteed term
When the term ends, assets transfer to beneficiaries tax free
If the grantor does not outlive the term, property is brought back into the their estate at the date of death value with certain adjustments
The gift amount is the property value less the present value of the annuity to be received by the grantor (reduced gift tax exposure)
Considered gift of future interest (no $16,000 exclusion)

139
Q

Grantor Retained Unitrust (GRUT)

A

Irrevocable trust into which a Grantor transfers appreciating or income producing property (appreciating is better)
Assets are valued every year
In exchange, grantor receives a fixed percentage of corpus for a guaranteed term
If grantor doesn’t out live the term, the property is brought back into their estate at the date of death value with certain adjustments
The gift amount is the property value less the present value of the annuity to be received by the grantor (reduced gift tax exposure)
Best in cases where you’re trying to combat inflation

140
Q

Grantor Retained Income Trust (GRIT)

A

Not as effective as a GRAT or GRUT because the mere right to income does not guarantee that there will be any distributed.
No discounting for the present value of the annuity because there is no annuity.
The gift is the full value of the GRIT when established which triggers gift tax. There is nothing gained by establishing the GRIT (for related parties)
Gift of a future interest (no $16,0000 exclusion)
May be useful for unrelated parties because of a tax loophole (treated like a GRAT)

141
Q

SPLIT

A

Arrangement where two parties agree to purchase an asset.

142
Q

Qualified Personal Residence Trust (QPRT)

A

Grantor transfers personal residence into the trust, retaining an interest for personal occupancy (or for related person) for a period of years, at which point it passes to beneficiaries either outright or in trust.
Up to two residences may be transferred in (one MUST be primary)
Residence should be $1,000,000 or more
Life Expectancy is reasonable (10+ years)
Donor wishes to continue living in the residence
Estate is large (over the exemption amount)
If the donor dies before the term is up, the full FMV on date of death is included in their estate. (this is the same effect as if the trust was never established)
If residence is sold within the term of the QPRT, and a new residence is not purchased within 2 years, the corpus must be paid out or the trust must meet the requirements of a GRAT

143
Q

Generation Skipping Transfer Tax (GSTT)

A

Transfer tax system designed to catch wealth transfers not covered under estate tax law
Has a separate $12,060,000 lifetime exemption (for gifts while alive or at death)
Has a separate $16,000 skip exclusion (gift splitting is allowed)
Flat tax of 40%
Gifts can be subject to both Gift Tax AND GSTT
Estate transfers can be subject to both Estate Tax AND GSTT
GSTT is secondary to Estate and Gift Tax, meaning the amount of Estate or Gift Tax paid is excluded in the calculation of GSTT

144
Q

Skip Person

A

A person two generations younger than the transferor (if related) or
A person who is unrelated and more than 37 1/2 years younger
Exception to the two generation rule - if an individual’s parent who is a lineal descendant from the transferor is deceased, the individual and all their lineal descendants move up a generation (deceased parent rule)

145
Q

Direct Skips (no trust)

A

GSTT is imposed at the time of the direct skip (person to person, no trust involved)
Transferor is liable for the GSTT on direct skips
Exemption utilization is automatic for direct skips, but can be opted out (all, portion or none)

146
Q

Taxable Terminations (trust)

A

Occurs at the termination of a non-skip person’s interest in income or principal of a trust resulting in skip persons becoming the remainder beneficiary.
Considered a gift of future interest (no $16,000 exclusion)
Exemption utilization is NOT automatic for taxable terminations. Must be elected by the executor/trustee (can be all, portion or none)
Trust is responsible for the GSTT

147
Q

Taxable Distributions (trust)

A

Distribution of property out of a trust to a skip person (other than a direct skip or a taxable termination).
Trust has beneficiaries in two or more generations.
If the trustee makes a distribution from the trust to a skip person, it is taxable.
Gift of future interest (no exemption applies)
Exemption utilization is NOT automatic for taxable terminations. Must be elected by the trustee (can be all, portion or none)
Beneficiary is responsible for the GSTT if it is due

148
Q

Fiduciaries

A

Person or entity that occupies a position of special trust in relation to another
Hold legal title to property (trustee)
Makes personal decisions (Medical POA, POA, Guardian)
Executors or estate administrators (personal representatives)

149
Q

Duties of Fiduciaries

A

Loyalty to the beneficiaries
No self-dealing
Preserve and make property productive
Impartiality to all beneficiaries
Breach of these duties can result in civil or criminal proceedings against the Fiduciary

150
Q

Income in respect of a decedent (IRD)

A

Income (including capital gains) which a decedent had a right to receive but was not received.
Unpaid Salary
Renewal Commissions
QP Distributions
S Corp Income
Partnership Income
Gain on an Installment Sale
IRD is included in the income taxable calculation for the decedent’s estate (usually)
Normal deductions apply (including for GST and Estate taxes paid)

151
Q

Postmortem Planning Techniques

A

Alternate Valuation Date (reduce estate)
Section 303 stock redemption (closely held stock) (liquidity for taxes)
Section 6166 Installment payment of estate tax (liquidity for taxes)
Special Use Valuation 2032A (reduce estate)

152
Q

Alternate Valuation Date

A

Personal Representative or Executor can elect the AVD (6 months after death)
Must:
Reduce the gross estate
Reduce federal gift tax liability
Be applied to ALL property in the gross estate with some exceptions
Cannot be applied to assets that decrease with the passage of time (annuities, retirement plan payouts, mortgage payouts or notes receivable)
Cannot be applied to assets that pass to spouse, charity or children (less than exclusion) because no estate tax would be due.
Property distributed between date of death and AVD is valued at date of distribution

153
Q

Step Down in basis

A

If the FMV of a stock is lower than the cost basis of a decedent, a step down in basis can occur for beneficiaries.

154
Q

Disclaimers

A

Refusal of a beneficiary to receive property that is bequeathed to them
Requirements:
Must be irrevocable
Submitted in writing
Received within 9 months after transfer was initiated or after person disclaiming became 21
Cannot have accepted any interest in the benefits
Interest passes to someone else

155
Q

Disclaimer Trust

A

Trust designed to allow a spouse to disclaim bequeathed assets, but receive an income stream from those assets.
Usually a clause in a decedent’s will (testamentary in nature)
The trust is irrevocable
Spouse CANNOT invade corpus (exception - HEMS, if provided)

156
Q

Section 303 Stock Redemption

A

Must be a closely held corporation (S or C, because there has to be stock)
Decedent’s stock interest (closely held) must be more than 35% of gross estate
Only an amount equal to the ALL estate tax or administrative expenses may be redeemed (not limited to estate tax attributable to the business interest like 6166)
Qualifies for special LTCG treatment (versus dividend treatment)

157
Q

Section 6166 Installment Method

A

Allows estate tax attributable to a closely held business to be paid in 10 equal installments beginning 4 years after decedent’s death.
2% interest rate applies
Maximum of $1,640,000 in estate tax ($1,000,000 indexed for inflation) can qualify for 6166
Interest paid (2% or 45%) cannot be deducted for estate or income tax purposes
45% interest applies to the amount of estate tax above $1,640,000
Business interest (closely held) must be more than 35% of gross estate
Aggregation of business interests can occur provided decedent owned at least 20% of each business (must be closely held)
Can only apply 6166 to the amount of estate or GSTT attributable to the business interest. Any additional balance must be paid on the regular payment date

158
Q

Closely Held Business Definition

A

Can be sole prop, partnership or a corporation.
Must be actively carried on and require a management function

159
Q

Section 2032A Special Use Valuation

A

Valuation Method for Real Estate used in connection with a closely held business or farming operation.
Maximum Reduction of $1,230,000 if elected by the executor
Requirements:
Qualified Use/actively managed by decedent or decedent’s family for 5 out of 8 years prior to decedents death
50% of the value of the gross estate (reduced by liens) must consist of real OR personal property devoted to qualifying use
25% of the value of the gross estate must be real property
Property must pass to qualifying heir and continue in qualified use for at least 10 years after decedent’s death

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