Estate Flashcards
How is the probate process characterized?
Court supervision, filing of claims against the estate by creditors, and publication of a will and testament.
What happens when no will is found?
The decedent has died intestate.
Ancillary probate
Separate probate procedure for property in another state.
Example of transfer by operation of law to avoid probate
Property held by joint tenancy with rights of survivorship
Uniform Simultaneous Death Act (USDA)
Rule keeps the property of one deceased person from passing through the estate of another deceased person.
Revocable living trusts
May be altered or canceled by the grantor or originator of the trust while living.
Totten trust
Revocable trust in a bank account where the depositor is named as trustee for another’s benefit.
Community property
Each spouse owns a one-half interest. There are no survivorship rights, so a will is needed. California is best known CP state.
Separate property interests in CP states
Property received as a gift by one spouse
Property inherited by one spouse
Income earned by spouses prior to marriage
Interest earned on separate assets held by one spouse as sole owner
Tax advantages of community property
100% step-up in basis in LTCG property if at least one-half of property is includible in the deceased spouse’s gross estate.
What is not included in probate in a community property?
Those with a beneficiary designation, such as an IRA or life insurance being passed to a spouse.
JTWROS survivorship feature
Upon the death of each tenant, the property passes to the surviving joint tenants in equal shares, which means the property is not controlled by a will and excluded from probate.
Tenancy by the entirety
Property is not subject to probate and cannot be disclaimed. Ownership can only be held by spouses.
Benefits of tenancy by the entirety
Property are protected from the claims of each spouses separate creditors, though not protected from the claims of both spouses’ joint creditors.
Tenancy in common
Property is subject to probate and can be disclaimed. Property can be owned unequally be several owners. Upon death of holder, their share will go through probate.
Difference between holographic wills and nuncupative wills
Holographic is handwritten and signed. Nuncupative are oral wills and made in the presence of witnesses generally during a final illness.
When is an estate settled?
When the executor makes the final distributions and is discharged by the probate court.
Testamentary trust
Created by a will that designates a person to serve as trustee, names the beneficiaries of the trust, and includes directions on administering trust assets. Becomes effective only if the will creating the trust is admitted to probate.
Difference between tenancy in common and tenancy by entirety
Tenancy in common can leave share of property by will and no consent is needed.
What happens when separate property is commingled with community assets?
It becomes community property.
Exclusions from gross estate
Life insurance owned by others, completed gifts, and life estate for the decedent’s own life only
Adjusted gross estate
Less funeral expenses, administrative expenses, debts, taxes, income taxes, and casualty losses.
Taxable estate
Adjusted gross estate less marital and charitable deductions
When can property pass to the surviving spouse tax-free?
The property is included in the decedent’s gross estate and it passes to the surviving spouse.
Flat rate tax
40% that applies to estate, gift, and GST.
Which power is included in the gross estate?
General power of appointment
Taxable gift
Included in the estate’s tax base but not in the gross estate.
Deductible debts in estate
Gift taxes payable, debts, and interest due.
Net estate tax formula
Taxable estate less exemption ($12,920,000) times tax base (40%)
Why would there not be any taxes in an estate if total is over the exemption of $12,920,000?
Half the amount passes by the spouse via marital deduction and the other half passes by the exemption.
Lapse of a general power of appointment with no 5 or 5 limitation
Likely trigger federal gift tax.
What is well-being in regards to power?
General power of appointment and not an ascertainable standard.
Inter-vivos gifting
A transfer of property among the living.
What do gifts of a future interest not qualify for?
Annual gift exclusion.
Exceptions to the present interest requirement
Gifts in trust of future interests on behalf of minors
2503(c) trusts
Crummey trusts
529 plans
Basis of appreciated gifts
The value of the gift is its fair market value at the date of the gift.
Taxable gift formula
Current worth minus $17,000 annual exclusion
Basis of depreciated gifts
If the FMV on the date of the gift is less than the donor’s adjusted basis in the gift, then a loss is measured using the FMV on the date of the gift, but a gain is measured using the donor’s basis.
Increasing basis on appreciated gift
It must be appreciated property and the gift tax must have been paid by the donor.
When does a gift tax return (Form 709) need to be filled out?
More than $17,000 gifted to any non-spouse donee
A gift of a future interest in any amount
A gift for which spouses elect gift-splitting
Example of a completed gift
Lending money and forgiving the debt
Carry-over basis example
Mother gifting daughter stock. Daughter’s basis will be the same as mother’s basis when she received the stock years back.
Gift-tax formula example
Gift less $17,000 annual exclusion less $12,920,000 exemption
Largest gift amount without causing federal gift tax
$12,920,000 + $17,000 = $12,937,000
Federal estate tax form
706
Springing power in durable power of attorney for health care (DPOAHC)
When the patient can communicate his or her own wishes they are generally granted.
How does a power of attorney differ from a durable power of attorney?
It terminates upon the incompetency of the principal.
Main advantage of a springing durable POA over a durable POA.
It becomes effective only when the principal becomes incapacitated.
Advantages of a nondurable POA
It becomes effective ASAP, inexpensive, and may be revoked at any time by a competent principal.
Who holds what in an inter-vivos trust?
Trustee holds legal title while the beneficiary has equitable title.
Simple trust
Income is distributed
Income taxed to the beneficiary
Normally, no distribution of corpus
No charitable gifts
Complex trust
Income must or may be accumulated.
Income accumulated is taxed to trust.
Income distributed is taxed to the beneficiary.
Corpus can be distributed until the trust terminates.
May make charitable gifts.
Property difference between revocable and irrevocable trusts
Property in irrevocable living trusts is rarely includible in the grantor’s estate for tax purposes.
Crummey trust
Irrevocable trusts with demand (withdrawal) rights
Crummey provision
The right of withdrawal is the lesser of $17,000 or the amount of the gift.
Purposes of an inter-vivos trust
Avoids ancillary probate.
To be the primary beneficiary of pension plan benefits.
To avoid will contests.
Disadvantages of an inter-vivos trust
Legal fees.
Funding burden.
Longer creditor period.
Testamentary trust
Created through instructions contained in a person’s will.
Bypass trust
The first spouse to die controls the property of the trust.
Marital trust
The second spouse to die controls the property of the trust
Qualified Terminal Interest Property (QTIP) Trust
First spouse to die controls property of trust.
Lifetime income interest for spouse.
Annual payments to spouse.
Mandatory payments to spouse.
Exclusively for spouse.
Difference between Bypass and QTIP trusts
In bypass, income stream can also be split among the spouse and other individuals if the decedent chooses
Estate trust
Marital trust that does not provide the surviving spouse an income stream.
Pour-over trust
It catches any assets that the client owns but are not yet controlled by the revocable trust at death.
How should the bypass trust be fully funded?
Using the exemption of $12,920,000
Difference between UTMA and UGMA
UTMA allows any property interest to be transferred, including real estate, partnership interests, parents, royalty interests, and intellectual property
What happens if the donor is named the custodian in an UTMA/UGMA and predeceases the minor?
The custodial property must be included in the donor/custodian’s gross estate.
Kiddie tax calculation
- Child gets $1,250 standard deduction. If there is earned income greater than $1,250, amount is earned income + $400.
- Next $1,250 is taxed at 10%.
- Amounts greater than $2,500 are taxed at parent’s marginal rate.
Why is a custodial account (UTMA) preferable to a Minor’s trust [2503 (c)]?
Simplicity, cost, and earnings are taxable to the child.
Revocable trust tax rule
Tax neutral. Functions as a tax conduit, passing income and tax liability to the grantor.
What does DNI account for?
The income to the beneficiary as well as the corresponding deduction for the trust.
Who shouldn’t the 2503(b)-trust income be distributed to?
The donor because they have gifted the property to the trust and should not be the income beneficiary.
What is mandatory in a 2503(b) trust?
Income distributions
Gifts in trusts without Crummey provisions
They are future interest gifts.
Advantages of CRUT vs. CRAT
Donor can make more than one transfer and distributions provide inflation protection with a fixed percentage (rather than amount)
CRUT and Pooled Income Fund similarity
Provides income that can rise with inflation.
Difference between a CLAT/CLUT and CRAT/CRUT/family foundation
No required minimum gifting amount for a CLAT/CLUT. The other is atleast 5% distributions to beneficiary.
CLUT minimum distribution
No minimum distribution, unlike the CRAT and CRUT with 5%.
Charitable Lead Trust
Distributes the income “the lead interest” to the charity for a term with the remaining principal going to a non-charitable beneficiary.
Incidents of ownership
The right to assign, to terminate, to borrow against the cash reserves, to name beneficiaries, and to change beneficiaries. Premium paying is not included.
Irrevocable Life Insurance Trust (ILIT)
A trust created to own and be the beneficiary of life insurance policy on the trust maker’s life. Does not allow the insured to retain any incidents of ownership in the policy.
What causes life insurance to be included in the decedent’s estate?
The proceeds were paid to the executor of the decedent’s estate.
The decedent at death possessed an incident of ownership in the policy.
The decedent gifted his/her policy within three years of death.
When is a SCIN appropriate?
When the seller desires to retain a payment stream which will not continue beyond his/her death and may end at an earlier date.
What happens with transfers with a retained interest?
They are brought back into the gross estate.
How does a SCIN differ from a private annuity?
It allows the buyer to depreciate assets based on the purchase price paid and to deduct the portion of the payments attributable to the interest expense.
What exactly does the buyer of a SCIN purchase?
Pays an increased price (a premium) for the cancellation feature.
How is an S corporation beneficial?
You can transfer equity in a closely held family business because income can pass through to its shareholders.
Disadvantage in gifting assets in a FLP
Property and the family members (children) lose the step-up in basis at the death (of the parent).
Grantor Retained Income Trust (GRIT)
A client transfers property into an irrevocable trust, retaining a right to income for a period of years. Does not assure that income will be distributed to grantor.
How is a GRAT similar to a GRIT?
A gift of a future interest.
When does a Qualified Personal Residence Trust (QPRT) make sense?
When the residence is large.
When the life expectancy is reasonable (10+ years).
When the donor continues to live in the residence.
When the estate is large ($12,920,000+).
Gift leaseback
Income is provided to a family member in a lower marginal tax bracket. An income tax deduction is available for the donor’s business.
What intra-family techniques should you use when the owner needs income?
GRAT, installment sale, and SCIN
What do the SCIN and Gift-leaseback have in common?
Nothing will ever be included in the donor’s gross estate should they die.
Why is private annuity rarely used?
It creates phantom income.
GRAT & QPRT “freezing technique”
The value of the transferred assets are frozen when transfer is made and a taxable gift occurs.
Preferred stock recapitalization (recap) “freezing technique”
Using preferred stock
Private annuity and SCIN “freezing technique”
The property is transferred for a stream of income, and if the owner dies, no value is included in the estate.
Main purpose of a GRAT
Save on future estate taxes, which means you should transfer property likely to appreciate.
GRAT income
Fixed income for a number of years, not for the remainder of life.
Liability for payment of the GSTT tax if the transfer is a direct skip
The transferor pays the GSTT.
Liability for payment of the GSTT tax if the transfer is a taxable termination
The GSTT is paid by the trustee.
Liability for payment of the GSTT tax if the transfer is a taxable distribution
The GSTT is paid by the transferee.
Income in respect of a decedent (IRD)
Income that a decedent had a right to receive but was not yet given (ex. unpaid salary)
What happens to property that is disposed of between the date of death and the alternative valuation date (AVD)?
It is valued as of the date of distribution.
Disclaimer
A refusal by a primary beneficiary to accept the property.
303 Stock Redemption
Allows a corporation to make a distribution of a portion of the decedent’s stock that will not be taxed as a dividend.
What can special use valuation only be used for?
Real property held in conjunction with a farm, ranch or closely held business.
Holding period for property acquired from a decedent
Long-term, even if held less than a year.
Disclaim for JTWROS and Tenants by Entirety
You can disclaim for JTWROS, but not for Tenants by Entirety.
When does a property not get a full step-up in basis?
When it is not community property (ex. JTWROS).
Result of naming a beneficiary or owning property in joint tenancy
Allows assets to flow by contract and avoid probate. Still included in the gross estate for estate tax purposes.
Life insurance payable to a decedent’s estate
Subject to probate.
A decedent’s fractional interest in tenancy in common property
Subject to probate.
What is the first step in a testamentary trust?
Assets must first go through probate before placed in the trust.
How do you consider life insurance with spouse as a beneficiary when filing a federal gift tax return?
You don’t since it will pass by marital deduction.
Why would the basis be the same if a mother gave her daughter stock?
Because it was inherited.
When is a testamentary trust funded?
After death by the will. It is normally funded at death, but it can be established while living.
Which trusts could include ascertainable standard provisions (HEMS) for a widow?
QTIP trust and Disclaimer trust
Which trust does not qualify for the marital deduction?
Bypass trust, unlike the QDT, QTIP, and A.
What do high yield corporate bonds and STRIPS produce, in regards to an UTMA account?
Income and phantom income, respectively, which could cause kiddie tax problems.
When is an UTMA account included in the gross estate?
When there is general power, causing beneficial enjoyment.
Why would an insurance policy be in the probate estate?
When they own the policy on the spouse’s life and they are still alive.
Debt on jointly held property
It is not subtracted to calculate the probate or gross estate, only for the adjusted gross estate.
What does gifts of a future interest not qualify for?
Annual exclusion.
How does a pooled income fund and a CRUT differ?
In a CRUT, the client does the trust while the charity does it in a PIF.
What does initial ownership cause?
Policy to be included in the client’s estate.
How are the 303 Stock Redemption and 6166 Installment sale similar?
Only usable at death.
What is needed when a spouse consents to gift splitting?
They must file a gift tax return.
What can provide 401(k) provisions?
Profit-sharing and stock bonus plans.
Municipal bond interest
Federally tax exempt but not tax deferred.
What is punitive damages included in?
Gross income. Damages received due to personal physical injuries or physical sickness are not.
