Estate Flashcards

Question

General and Special (limited) Powers

Answer 1

Special Power: Exercisable only with the consent of the creator of the power or a person having substantial adverse interest (not a general power of appointment. No gift tax or estate tax implications Ascertained Standard: Limited by some unit of measurement - A power that is limited by ascertained standard relating to Health, Education, Maintenance or Support (HEMS) determined by the power holder. No gift tax or estate tax implications General Power: allows holder to exercise the power in any manner they wish, virtually the same as outright ownership. Can appoint property to basically anyone. - If power is exercised, released or lapsed then gift tax implications is that it is taxed and estate tax implication is that it is taxed as well. - If power is exercised, released or lapsed with a 5 or 5 power then there is no gift tax implication and estate tax implication is the greater of 5% or $5,000 is taxed Lapse: not exercised in a given period of time Exercise: used in favor of one or more beneficiaries Release: relinquishes all control to determine who the beneficiaries will be

Answer 2

A tax credit is allowed when property passes through two taxable estates, when the transforer dies and passes to a transferee who dies within 10 years, the transferees property received is credited as it was already taxed

Answer 3

Made while the transferor is alive. A gift includes: Sale, exchange or other transfer of property from one person to another without adequate consideration in money or the money's worth A valid gift requires: - Donor being capable of transferring property - Donee capable of receiving and possessing property - Must be delivery and acceptance to the donee or their agent - A valid gift usually requires donative intent on donor's part Federal Gift Tax Requirements: - All valid gift requirements except donative intent is not required for transfer to be subject to gift tax - Gift must be a complete gift. Meaning donor has given up complete control and has no powers to change its disposition

Answer 4

(Type): Highly appreciated property (Donee Consideration): Best for charity or a donee in lower tax bracket. May also want to keep this property until death to get step up in basis. (Type): Property likely to appreciate (Donee Consideration): Good to gift to remove future value from donor's estate (Type): Income producing property (Donee Consideration): Good to gift only if donee is in a lower tax bracket (Type): Loss property (Donee Consideration): Sell to take the loss then gift the cash proceeds from the sale (Type): Property subject to depreciation (Donee Consideration): Keep property until it is fully depreciated (Type): Out-of-State property (Donee Consideration): Gift to avoid ancillary probate (Type): Life Insurance (Donee Consideration): Excellent to gift. Tax based on replacement value, benefit based on face value

Answer 5

The first $17k of the total annual value of gifts of present interest to EACH donee is excluded from the donor's taxable gifts Super Annual gift tax exclusion from U.S. Spouse to non-US spouse: $175k

Answer 6

Present Interest: Enjoyment by the donee can start immediately Future Interest: Recipients possession and enjoyment are delayed. They do not qualify for annual gift exclusion Exceptions to future interest: - Gifts in trust of future interests on behalf of minors - 2503(c) trusts - Crummey trusts - 529 plans

Answer 7

Appreciated Gifts: Value of the gift for tax purposes is its FMV on date of gift. If the FMV is > the donor's adjusted basis on the date of the gift than the donee will use the donor's adjusted basis for future gains and losses Depreciated Gifts: If the FMV on the date of gift is < the donor's adjusted basis, then use the below scenario for calculating gain or loss during sale of the gift. - If sale price is > donor's basis there is a gain - If sale price is < FMV on date of gift there is a loss - If sale price is between donor's basis and FMV on date of gift, no gain or loss

Answer 8

Donee is permitted to increase the basis by the amount of gift tax paid by donor if two conditions are met. - Gift must be appreciated property - Gift tax must have been paid by the donor

Answer 9

When gifting property with debt attached, follow the calculations below Gift = FMV - mortgage amount still owed Capital Gain = Debt - Donor's original basis Donee's Basis = Donor's basis + capital gain

Answer 10

Rules regarding gifts and the donor's estate include the following. (all in chapter 2) - Adjusted gifts exceed the $17k annual exclusion applied in the year of the gift - Adjusted taxable gifts are added to the taxable estate - Gift taxes paid (or payable) are generally allowed as a credit against tentative estate tax - Gift taxes paid on any gifts within three years of death are added to the gross estate - Gift tax exemption is $12,920,000

Answer 11

Form 709 must be filed by donor who in any calendar year gives any of the following. - More than $17,000 in to any non-spouse donee - A gift of a future interest in any amount - A gift for which spouses elect gift splitting

Answer 12

Gift splitting requires non-donor spouse consent. - Two annual returns must be filed for the gift, if after the gift split, the amount of the gift exceeds the annual exclusion (one exclusion for each) - Only one donor needs to file if the gift is below the annual exclusion limit

Answer 13

These gifts are fully deductible for gift tax purposes, reducing the taxable gift amount to zero. - Qualified payments in any amount made directly to institution for tuition - Qualified payments in any amount made directly to provider of medical care - Gifts to a spouse - Gifts to a qualified charity - Gifts to a political organization for its use - Gifts to the president of the United States

Answer 14

Incapacity: lack of physical or intellectual power or of legal qualifications Incompetent: - Not legally qualified - Lacking the qualities needed for effective action - Unable to function properly

Answer 15

Powers of Attorney: Written document which a principal empowers either attorney in-fact, agent or holder of the power to act on their behalf

Answer 16

For Healthcare: Differs from a DPOA by characteristics below. - It concerns medical decisions only. POA can be named to make medical decisions - Always a springing power. When patient can communicate their own wishes, they are granted - It is drafted separately from DPOA For Asset Management: DPOA' are not affected by principal's later incompetency. It can be drafted to empower POA currently or to become effective when principal becomes incompetent. Death of principal terminates POA, whether or not it is durable. Powers that cannot be granted to another: - Execute or revoke a will - Execute a living will Non-Tax related grantable powers: - Buy, Sell or Lease Assets - Collect from Debtors - Sue on principals behalf - Operate principals business - Refuse life prolonging procedures (Also done with living will) Tax-related grantable powers: - make gifts to spouse to equalize estate or gift to heirs to utilize tax exclusion, - make disclaimers, make living trusts to benefit principal, spouse or heirs and complete transfers to said trusts - exercise special powers of appointment - join competent spouse in signing income and gift tax returns

Answer 17

Durable: remains in effect throughout principal's incapacity Non-Durable: ceases when the principal is no longer legally competent Springing Power: Agent has no power over the principals assets until incompetency

Answer 18

General: Grants agent the power to deal with principals assets and take action on principals behalf Limited or Special: Allows agent to perform on certain acts or to control specific property

Answer 19

Two types of guardians: One for residential, healthcare and personal decisions, and a guardian for the property called a conservator who makes financial decisions. Both are court appointed and subject to court supervision Revocable trust: can be used either before or after incompetency. Main advantages are that the trustees powers are universally recognized, where a DPOA authority may not be in certain states. The trust also continues after death, a DPOA does not.

Answer 20

Medicaid: To qualify, applicants income and assets must be below certain limits, in most states it is less than $2,000 in countable assets SNT: Set up to pay for only supplemental needs not covered by medicaid, section 8 housing assistance and supplemental security income. Typically used to keep disabled people from being exploited. A parent or guardian usually transfers the assets to the trust for the disabled person. OBRA: A payback trust that allows for a 60 month look back period, disabled persons can transfer assets into the payback trust and still remain eligible for medicaid

Answer 21

- Must have trust property (known as trust principal or corpus) - Must be a grantor, who transfers property to and dictates the trust - Must be a trustee, who manages the trust (legal title) - Must be one or more beneficiaries, for whose benefit the trust is created (equitable title) - Grantor must be legally competent when the trust is created, trustee must be competent at all times

Answer 22

Per Stirpes: Any property left will be split equally to your descendants who survive you, and their children will receive their shares in equal parts should the descendant be no longer living. If no children of the descendant then their portion is split amongst the other Per Capita: Any property left will be split equally to your descendants who survive you. Equal shares are created for your children and grandchildren

Answer 23

Simple Trust: Acts as a conduit for forwarding income to the beneficiaries. - Income distributed - Income taxed to beneficiaries - No distribution of corpus - No charitable gifts Complex Trust: Trust is taxed as a separate entity on its earned income. Must be irrevocable, the grantor has not retained any control and income is accumulated. - Income must or may be accumulated - Income accumulated taxed to trust, income distributed taxed to beneficiary - Corpus can be distributed until the trust terminates - May make charitable gifts

Answer 24

Revocable: Created during the life when grantor transfers assets to the trust but retains power to assets and ability to alter trust, grantor is taxed and assets are included in his gross estate Irrevocable: Cannot be altered or amended. Property is rarely included in grantors estate Crummey: Irrevocable trust with demand rights. Used for classifying future interests into a gift of a present interest, can be used for minor beneficiary. - Each time a new contribution is made to the trust the beneficiary has the temporary right to demand a withdrawal from the trust - Right of withdrawal is = to lesser of the amount of annual exclusion or value of current year contribution

Answer 25

Revocable trust that has no income tax consequences for taxable gifts during grantors lifetime and becomes irrevocable at their death. All income earned is taxed to the grantor. Advantages: - Organization of property - Potentially lower cost than probate - Alternative to guardianship or conservatorship - Greater privacy than Will - Speedy disposal of property - Avoidance of probate Disadvantages: - Legal fees - Funding burden - Longer creditor period

Answer 26

Created through instructions in person's will. Spendthrift provision: prohibits transfer of beneficiaries interest and stipulates it is not subject to the claims of beneficiaries creditors

Answer 27

First spouse to die controls the property of the trust. Generally gives the descendent postmortem control over the transferred property

Answer 28

The second spouse to die controls the property of the trust. Operates as a power of appointment trust. The surviving spouse has postmortem control over the property in the trust

Answer 29

The first spouse to die controls the property of the trust. Used to provide the surviving spouse a stream of income that will be paid only for life yet also wishes to qualify the property for the marital deduction Lifetime income interest for the spouse Annual payments to the spouse Mandatory payments to the spouse Exclusively for the spouse

Answer 30

A: Marital, Spousal, Power of Appointment Trusts B: Nonmarital, Credit Shelter, Unified Credit, Family, Bypass Trusts C: Qualified Terminal Interest Property, Current Interest Trusts

Answer 31

Estate: Marital trust that does not provide surviving spouse income Pour-over: Used to catch any assets not in a revocable trust at time of death. Revocable trust must be set up first then pour-over will is executed.

Answer 32

UGMA: Only 2 states still use UGMA's, real property cannot be held in account UTMA: real estate can be held, allows custodian gifts at death by authorization in governing will or trust. - Custodial gift may be created for only one person - Income taxable to the minor (kiddie tax) - Custodian can distribute income or principal at any time, If custodian is the donor and dies before the minor is of age, property must be included in the donors estate - Donee must receive property outright at either 18 or 21 depending on state - Accounts may not be used to satisfy obligation to support minor. Property passes to admin or executor of minor's estate if donee dies before age of majority.

Answer 33

Can be used for minors, but usually is for the benefit of adult children. Tax law considers income from the trust as a gift of present interest and the remainder (corpus) to be gift of future interest. Only income needs to be distributed

Answer 34

Enables grantor to make a gift to a minor in trust and still receive annual gift tax exclusion. Gift will not be considered a gift of a future interest if any of these conditions are met. - Trust must provide that income may be expanded by or for the benefit of the donee - Any portion of the property will pass to the donee at age 21 - If the donee dies before age 21 the property must be payable to the donee's estate

Answer 35

Investment: (b) must be income producing. (c) any reasonable investment Transferred: (b) mandatory income distribution but no mandatory corpus distribution. (c) principal at age 21 or sooner to child Gift tax [corpus]: (b) Gift of future interest so donor must use exclusion, but income payout is gift of present interest. (c) gift of a present interest therefore exclusions apply Taxation: (b) maybe subject to kiddie tax. (c) subject to trust tax rules

Answer 36

Sprinkling/Spray: Power to distribute income at the discretion of the trustee for the benefit of the beneficiary Discretionary provision: provides beneficiary with only as much trust income or principal as the trustee alone sees fit Support Trust: Only distributes the amount of income and principal the trustee deems necessary for the support or education of the beneficiary

Answer 37

Is free of estate, gift and generation skipping tax for the lives of the family members alive at the time of the trusts creation plus 21 years and 9 months. Income is taxable to the beneficiaries.

Answer 38

Income to donor Until donor's Death: - income tax deduction based on PV of remainder - not subject to gift tax - at donor's death paid to a charity Trust needed (Max 20 years) ~CRAT (5%): no additions, payments fixed (life or term certain), payable to any charity, 10% ending value (appropriate when providing income stream to last for noncharitable beneficiary) ~CRUT (5%): additions allowed, payments variable (assets revalued annually), payable to any charity, 10% ending value (provides inflation protection) No Trust Needed ~Pooled Income: additions allowed, payments variable (based on fund income), payable to specific charity, must be paid out over life expectancy ~Charitable Gift Annuity: no additions, fixed lifetime income, payable to specific charity, charitable deduction based on gift less annuity Income to charity: - CLAT / CLUT (0%) - income or estate tax deduction - after a period of time paid to a non-charitable beneficiary -Private Foundation (5%) - 30% income tax deduction - payable to a charity or a private individual - can continue for an indefinite period ()= amount of corpus that must be distributed each year

Answer 39

Advantages: Remain in control of the foundation (even over generations) Distribute tax deductible gifts to noncharitable beneficiaries Can make grant to individual if it is for one of the following - Made for study, travel or similar purposes - Scholarship, fellowship, prize or award Disadvantages: Must pay excise tax of 2% of net investment income 15% penalty applied if 5% of corpus isn't distributed each year

Answer 40

Similar to private foundation, but only to benefit one public charity, and controlled by public charity Advantages: No minimum distribution requirements, and no 2% excise tax Disadvantages: Donor nor their family have control of the fund

Answer 41

Fund by a community foundation, where donor can recommend eligible charitable recipients through grants from the fund

Answer 42

-Cannot agree to time or certainty of redemption (no contract or understanding) Stock bailout advantages: saving income tax, helping younger shareholders concentrate their ownership and enabling charity to receive cash. Charitable Bargain Sale: stock is sold to charity for less than FMV, sale must be allocated between portion of the property sold and the portion gifted to charity Sale Price - [(Sale Price/FMV) * Basis] = Taxable Gain

Answer 43

In an insurance policy generally make the life insurance values/proceeds includable in the gross estate of the insured

Answer 44

Trust created to own and be the beneficiary of life insurance policy on trust maker's life. It does not allow the insured to retain any incidents of ownership in the policy.

Answer 45

- Proceeds were paid to the executor of the decedents estate - Descendent at death possessed an incident of ownership in policy - Descendent gifted his/her policy within 3 years of death Incidents of Ownership: right to assign, terminate, borrow against the cash reserves, name beneficiaries and change beneficiaries

Answer 46

You (decendent) Insured You Own Policy and Die: DB not included in your estate Your Spouse Owns Your Policy: 1. You gift to them and die within 3 years = DB included in your estate 2. You gift to them and never changed your beneficiary (your estate) = DB included in your estate. *Included in probate estate You Sold Your Policy: Nothing included in your estate (no 3 year rule) Some else insured (your spouse) Your Own the Policy on Your Spouse: - Replacement cost is included in your estate (no 3 year rule) *Included in probate estate You Gifted Your Spouse's Policy to Your Daughter: Nothing included in your estate (no 3 year rule)

Answer 47

Can either be done by transferring the policy to someone else, or naming someone else as the beneficiary of the policy. Taxable gift amount is = to the interpolated terminal reserve less annual exclusion If policy is gifted with premiums payable, interpolated terminal reserve is added to the value of the unearned portion of the last premium

Answer 48

Minority: recognizes inability of small shareholder to influence corporate policy makes the shares worth less Marketability: lack of established market, make closely held business interests more difficult to sell. Discount can be from 15 to 50% Blockage: if decendent held large block of shares, selling it all at once could depress the market price (discount from FMV could be allowed) Key Person: Discount may be allowed for a business that has lost a key employee who was responsible for its goodwill or admin and management skills

Answer 49

Marital Deduction: Transfers to spouse Unlimited marital deduction if any of below - property is included in decendents gross estate - property passes to surviving spouse - interest passing to the surviving spouse is not a terminal interest - receiving spouse is a U.S. citizen These will also qualify for a marital deduction - Property that transfers outright - Property that passes to a martial trust, estate trust or QTIP Terminal Interest Rule: Interest that might terminate on the happening of some event, contingency or the failure of a contingency. The below are exceptions to that. - Transfer in which surviving spouse receives life estate income, payable at least annually, plus a general power of appointment - Executor elects to treat certain interests as QTIP property - Executor elects to treat certain interests as QDOT property

Answer 50

Exclusions of property from the gross estate: - Spousal property - One half of the community property - Life insurance owned by others - A life estate Besides $17k gift exclusion other planning techniques include - Net gift technique: Gift made on the condition that donee pays gift tax - 12.92 donor gift exclusion must be exhausted - decendents gross estate includes gift tax paid by donee within 3 years of death - Reverse gift: when wealthier spouse gifts assets to relatively short life expectancy spouse, usually assets with low basis to receive the step up in basis and utilize dying spouses exemption amount. Must be done > 1 year before death.

Answer 51

When spouse is not a U.S. citizen limitations are imposed - No unlimited marital deduction - exemption of 12.92 mil remains available - Jointly held property between spouses is not considered 1/2 owned - there is a limited tax free gift between spouses of $175k To qualify for marital deduction property must pass through a QDOT, so that estate taxes on marital deduction property can be collected.

Answer 52

Tax individual wealth in excess of a certain amount each time it passes to the next generation. Skip Person: beneficiary who is at least two generations younger than the transferor. If their parent dies they move up one generation known as the deceased parent rule For each individual donor the first 12,920,000 of property transferred by direct or indirect to all skip persons is exempt. GSTT rate is 40% flat

Answer 53

Direct: GSTT is imposed at the time of the direct skip. Transferor is liable for the GSTT Taxable Terminations: GSTT is paid by the trustee Taxable Distributions: GSTT is paid by the transferee

Answer 54

Executor: Person nominated in the will to be personal representative, court appointed Administrator: no will, court appointed Personal Representative: court appointed representative to act as a fiduciary to represent and manage probate estate Trustee: Trust appointed and current state laws specify their duties. They must be faithful to beneficiaries and act in bene's best interest Guardians or conservator: Guardian for minors, conservator for disabled adults to act in their best interests. must submit annual reports to court and obtain court approval for certain expenditures Fiduciary Duties: - Loyalty to beneficiaries - Duty to not self-deal - Duty to preserve property and make it productive - Duty to be impartial toward all beneficiaries Breach of Fiduciary duties: Beneficiaries can take civil or criminal action against breach of fiduciary duties

Answer 55

Two Types: Property Owner Needs Income = PIGS Private Annuity Installment sale Grantor Retained Annuity Trust (GRAT/GRUT) Self-canceling installment note (SCIN) Grantor Retained Interest Trust (GRIT): No family members Property Owner wants to gift assets an/or income to family Members - Partnership / S Corp - Family Limited Partnership (FLP) - Gift Leaseback - Qualified Personal Residence Trust

Answer 56

Sale of property at FMV in exchange for payments. Spreads out taxable gain of the property - PV of remaining payments included in owners estate (disadvantage) - Property is secured - Gain is capital gain. Do not use if property is subject to recapture (1245 depreciation)

Answer 57

A variation of an installment sale. Appropriate when seller desires to retain a payment stream which will not continue beyond their death. Buyer pays a premium, seller pays more in income tax while living. - No value is included in the owners estate - Gain is a capital gain - Assets can be depreciated - Interest can be deducted - Higher payout than installment

Answer 58

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 gain which would have been recognized over the life of the annuity now will be taxed in the year in which the private annuity is established

Answer 59

An attractive approach to transfer equity in a closely held family business because income can pass through to its shareholders, gifts of shares can be made to younger family members over the years to take advantage of annual exclusion. -ineffective if child is under 24 - Business must be capital sensitive, not available if business is service related

Answer 60

Gift interests to limited partners to reduce the estate. Income and tax benefits must be distributed or allocated according to each owner's % General partners may be paid a salary for personal service to partnership Capital must be a material income producing factor, it cannot come from personal services of the general partner - Qualifies for various valuation discounts allowing for a lower gift tax ~ Lack of control and marketability - General partner maintains control - Family members lose step up in basis at death (disadvantage) - Partnership interest could miss out on ancillary probate

Answer 61

Gift of fully depreciated property - Lease payments are a business deduction, income to family member - Do not use if child is under age 24

Answer 62

Combination of both the gift and sale of a specific property. Arranged so that the buyer (generally a charity or family member) pays less than FMV.

Answer 63

Irrevocable trusts that allow the grantor to make gifts of property while retaining an income interest. - At the end of a term, corpus is distributed to a remainder person - The value of the gift is discounted due to retained interest - Owner must outlive term or the asset is brought back into the estate Best asset: Likely to appreciate GRAT: pays fixed income and assets need to be valued one time GRUT: principal needs to be valued annually GRIT: At the creation of the trust, the value of the property transferred into the trust is reduced by the retained interest (normally 0), non family member GRITs may provide a tax loophole

Answer 64

Irrevocable transfer of a personal residence. - At the end of the term the residence is eliminated from the grantor's estate - The value of the gift is discounted - Owner must outlive term, or asset is brought back into Grantor's estate

Answer 65

Postmortem elections for Estate Liquidity: Postmortem election for estate tax reduction: