Estate Flashcards
Probate
Process of orderly distribution of property to beneficiaries from deceased. Court supervised, filing of claims against the estate by creditors and publication of last will by deceased dying with a will.
Will is made by testator, it creates a testamentary transfer (accomplished by probate).
Testamentary Trusts do not go through probate, only property in the will
If no will, client has died intestate
Assets Included in Probate:
- Singly owned property (fee simple)
- Property held by tenancy in common (TIC)
- Community property (half at first death)
- Assets designating the beneficiary is as the “estate of the insured”
Advantages and Disadvantages of Probate
Advantages:
- Administration of the estate by court supervision
- Marshalling of all assets (inventory/valuation)
- Paying of bills and resolving of credit issues
- Overseeing distribution of the estate as directed by will or intestacy law
Disadvantages:
- Loss of privacy
- Possibility of a will contest
- Court, other costs and delays
- Possible multiple state proceedings (ancillary probate)
Ancillary probate
Double probate procedure when real property is located in a separate state from which the deceased was domiciled
Probate strategies
Avoidance: done by revocable or inter vivos trusts (effective)
Transfer by operation of law: done by joint tenancy with rights of suvivorship
Transfer by contract: done in pursuant to a contract typically with beneficiaries , property conveyed by deed or title, and co-ownership (government savings bonds)
Election against the will (elective share):
A surviving spouse who does not receive a certain minimum amount provided by state law has the right to take a share of the deceased spouse’s estate.
Uniform Simultaneous Death Act (USDA)
If any person dies within 120 hours of the other they are deemed to have died together. Keeping their assets together instead of going through separate probates
Transfers Trusts
Revocable Living Trust: May be altered or canceled by the grantor
Totten Trust: Only operates in a few states, but kept in a bank account and depositor is named the trustee
Payable/Transfer on Death: Funds deposited for the benefit of another, depositor has complete control over the funds. At death funds are transferred to the other person named (if depositor becomes incapacitated nobody can withdrawal funds on their behalf without DPOA)
Community Property
9 states have community property laws (California big one). Spouse owns equal interest in all property acquired during the marriage.
No survivorship rights, thus a will is needed in these states.
Tax Advantages:
- Full step up in basis for long term cap gain property (not ordinary income property) for entire property if at least 1/2 is includable in deceased spouse estate
Interests for equal parties:
- Income earned during marriage
- Appreciation of solely owned property attributable to contributions of nonowner
- Separate assets that have commingled with community assets and can no longer be determined which are separate and which are community
Noncommunity Property in community property states:
- Property received as gift by one spouse
- Property inherited by one spouse
- Income earned by one spouse prior to marriage
- Interest on separate assets held by one spouse
Sole Ownership
Property described as outright ownership or fee simple by deceased. It is subject to probate and can be disclaimed.
JTWROS (Joint Tenancy with Rights of Suvivorship
Property is not subject to probate and can be disclaimed. Can be held by spouses, parent and child/children, siblings or business partners. Must be adults.
Characteristics:
- Property held is shared by adult owners and is controlled/shared equally by all tenants
- Upon death of one tenant the property immediately passes to remaining tenants equally
- The property is not controlled by the terms of the will
- Excluded from probate estate of the deceased
Estate Tax:
Non-Spouse joint tenant
- Full value of jointly held property is included in gross estate of the 1st to die, unless the survivor/survivors can establish (consideration) some portion of property before joint tenancy was created. * Gifts of property are not a contribution or consideration
Spousal joint tenant
- When the first spouse dies, their gross estate must include 1/2 of the property’s fair market value as of date of death
Tenancy by Entirety
Not subject to probate and cannot be disclaimed. Can only be held by spouses, and can only occur with the mutual consent of both parties.
In most states, the assets held in Tenancy by entirety are protected from claims of each spouses separate creditors, but are not protected from claims of joint creditors
Tenancy in Common
Subject to probate and can be disclaimed. Property can be owned unequally by several owners simultaneously.
Characteristics:
- Undivided interest in the property but does not equalize each tenants interest in the property
- Tenants are entitled to a division of income from income producing properties with respect to their percentage of interest
- Tenants can transfer their respective shares of property to other parties
- Upon death of one of the tenants, the deceased shares will go to probate and be included in their gross estate
Estate Planning Documents
Will: Disposes of a deceased’s property when they die if validly executed (deceased is said to have died testate)
- It must conform to specific legal requirements to the state it is created in, generally in
writing and witnessed (
- Some states require attestation clause to validate will (follows states guidelines and is
witnessed)
- Can be amended or revoked at any time, if revoked a new will must state it is intended
to revoke prior will. Can be revoked by being destroyed or torn up. Depending on
state, some wills may or may not revoke certain portions of the will
- To avoid will contestation, attorneys will videotape signing of the will. Some will’s
include a no contest clause, meaning person contesting will gives up rights to
decedent’s property
POA: Written document which owner of assets empowers another person to act on their behalf
Trusts:
Revocable
- Trustees are given authority to act in managing assets in the trust
- Trust continues after the death of the grantor, where DPOA expires at death
Testamentary Trust
- Created by a will
- Designates a person to serve as trustee, they designate beneficiaries of the trust and
how assets are to be administered.
- Only becomes effective if the will creating it is admitted to probate. The trust itself
doesn’t go to probate
Key Elements of Form 706
Gross Estate: all probate assets + all non probate assets
Probate Assets = fee simple, tenancy in common, estate of beneficiary, community
property
Nonprobate assets= JTWROS, Life insurance, general powers of appointment, gift taxes
paid within 3 years of death
(Generation skipping transfer taxes paid within 3 years are not added back)
- Less funeral expenses, administration expenses, debts, taxes and casualty losses ↓
Adjusted Gross Estate:
- Less marital and charitable deductions
↓
Taxable Estate:
- Plus adjusted taxable gifts (amounts exceeding annual gift tax exclusion)
↓
Tax Base:
- Less estate tax deduction (12,920,000 for 2023, remainder at 40%
↓
Tentative Tax:
- Less gift tax paid
↓
Net Estate Tax:
Gross Estate
Fair market value of all probate and non probate assets at the time of death.
Probate Assets = fee simple, tenancy in common, estate of beneficiary, community
property
Nonprobate assets= JTWROS, Life insurance, general powers of appointment, gift taxes
paid within 3 years of death
(Generation skipping transfer taxes paid within 3 years are not added back)
3 year rules: If made within 3 years of deceased death, its included in gross estate
- Certain transfers of life insurance by the insured
- Any gift tax paid out-of-pocket on gifts (not generation skipping trust tax)
Survivorship annuities are includable in deceased gross estate, as well as property that is transferred during their life that the deceased retained the right to use or enjoy (529’s are an exception to this rule)
Exclusions from Gross Estate
- Life insurance owned by others (even when the deceased is the insured)
- Completed gifts (donor parted with dominion and control)
- Life estate for the deceased’s own life only (retained life estate is included)
Adjusted Gross Estate (Net Estate)
Gross estate less funeral expenses, administration expenses, debts, taxes and casualty losses.
Taxable Estate
Net estate less marital and charitable deductions.
Marital Deductions: unlimited amount of property passing to spouse estate tax free if
- Property is included in deceased gross estate
- Property actually passes to the surviving spouse
Charitable Deductions: Outright transfers to qualified charities, are 100% deductible for
both estate and gift tax purposes.
State estate taxes: State level death or inheritance taxes may also be deducted from net
estate
Tax Base
Amount used to calculate estate tax due (if any).
Adjusted taxable gifts: taxable gifts made after 1976, they are added to taxable estate
Tentative Tax
12,920,000 (exemption) - Tax base = Excess
Excess x 40% = Tentative tax liability
Net Estate Tax
Tentative Tax less gift taxes paid = Net estate tax
Lifetime Gifts and Testamentary Transfers
It’s easy to confuse gift tax on lifetime gifts and estate tax on testamentary transfers because….
- share same tax rate, exemption amount, provide unlimited marital deductions and
provide unlimited charitable deductions. It can be used in full while living and again
in full at death.
However, it cannot be used twice because the taxable gifts must be added back to the taxable estate
Sources for Estate Liquidity
Sale of Assets: Assets need to be liquidated to pay the taxes of the estate
- Appreciated assets generally receive a step up in basis.
Life Insurance: If the insured possesses any incidents of ownership on a policy covering his or her own life, the full proceeds are included in the gross estate
Powers of Appointment
Use and Purpose:
Interest held by a person (the holder) providing them with the ability to determine who shall enjoy, use and possess the property. They generally occur in trusts
5 or 5 power
Technique used by estate planners to provide flexibility and financial security for beneficiary with minimal tax consequence.
- property subject to general power will be included in the donee decendents estate
only to the extent it exceeds the greater of $5,000 or 5% of the total value of the fund
subject to the power as measured at the time of lapse.
General and Special (limited) Powers
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
Prior transfer credit
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
Inter-vivos gifting
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
Appropriate Gift Property: Recommendation & Justification
(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
Gift Tax Exclusion
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
Gifts of Present and Future Interests
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
Basis of Gifts
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
Increasing Basis On Appreciated Gift
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
Gift Subject to Indebtedness
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
Taxable Gifts and Estate Tax
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
Gift Tax Filing Requirements
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
Gift Splitting
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
Deductible (exempt) Gifts
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
Incapacity & Incompetent
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
POA
Powers of Attorney: Written document which a principal empowers either attorney in-fact, agent or holder of the power to act on their behalf
Durable Powers of Attorney
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
Durable vs Non-Durable
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
General vs Limited Powers
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
Planning For Incapacity
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.
Special Needs Trusts and Medicaid Planning
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
Elements of a trust
- 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
Per Stirpes vs Per Capita
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
Simple and Complex Trusts
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
Irrevocable vs Revocable vs Crummey Trust
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
Inter-Vivos Trust
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
Testamentary Trusts
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
Bypass Trust
First spouse to die controls the property of the trust. Generally gives the descendent postmortem control over the transferred property
Marital Trust
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
QTIP Trust
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
A B & C Trusts
A: Marital, Spousal, Power of Appointment Trusts
B: Nonmarital, Credit Shelter, Unified Credit, Family, Bypass Trusts
C: Qualified Terminal Interest Property, Current Interest Trusts
Estate Trust & Pour-over Trust
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.
UGMA & UTMA
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.
Section 2503 (bad boy) Trust
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
Section 2503(c)
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
2503(b)bad boy vs 2503(c)
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
Sprinkling Provisions
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
Dynasty Trust
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.
Charitable Contributions & Transfers
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
Pooled Income Fund
Private Family Foundations
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
Supporting Organizations
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
Donor Advised Fund
Fund by a community foundation, where donor can recommend eligible charitable recipients through grants from the fund
Charitable Stock Bailout & Bargain Sales
-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
Incidents of Ownership
In an insurance policy generally make the life insurance values/proceeds includable in the gross estate of the insured
ILIT
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.
Life Insurance to be included in decedent’s estate
- 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
Life Insurance Inclusion in Decendent’s Estate
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)
Gifting Life Insurance
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
Valuation discounts for business interests
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
Valuation techniques and the federal gross estate
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
Deferral and minimization of estate taxes
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.
QDOT
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.
Generation Skipping Trust Tax (GSTT)
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
Types of Transfers to Skip Persons
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
Fiduciaries and Duties
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
Intra-Family Business and Other Business Transfer Techniques
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
Installment Sale
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)
Self-canceling installment note (SCIN)
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
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 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
S Corp
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
Family Partnership
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
Gift-leaseback
Gift of fully depreciated property
- Lease payments are a business deduction, income to family member
- Do not use if child is under age 24
Bargain Sale
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.
Grantor retained annuity trusts (GRATS) / unitrists (GRUTS) / income trust (GRIT)
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
Qualified personal residence trust (QPRT)
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
Income in respect of a decendent (IRD)
Alternative Valuation Date (AVD)
Inherited Property Capital Gains
Exceptions to the AVD election
Disclaimers
Disclaimer Trust
Postmortem elections
Postmortem elections for Estate Liquidity:
Postmortem election for estate tax reduction:
Estate Planning for Special Circumstances
