Estate Flashcards
Separated Assets of a Married Couple
- Income earned prior to marriage
- Gift received prior to marriage
- Inheritance received prior to marriage
- Interest earned in separate account owned by one spouse
If assets are comingled, they are no longer separate assets
JTWROS
- Property can be held by anyone together
- Control, ownership, enjoyment equally shared
- On death, the property is passed to the remaining owners
- Avoids probate, not subject to will
- Can disclaim assets (not take inheritance)
Non-Spouse
- first to die rule: first to die may have 100% go I to estate unless other joint owner can prove contributions
Tenancy by the Entirety
- Only for spouses
- Shared ownership
- Creditors for specific spouse CAN’T claim the other spouse’s portion of the asset
- Joint creditors CAN claim the tenancy by the entirety asset
- Both spouses need to consent to terminate
- Can’t disclaim assets (not take inheritance)
- avoids probate
Tenancy in Common
- Each owner has a share equal to their own ownership (doesn’t have to be equal)
- Income is distributed by ownership %
- Owners can transfer their ownership to anyone at any time
- Owner % goes through probate
Assets That Avoid Probate
Anything with a beneficiary or survivorship avoids probate.
- Assets with beneficiaries (IRAs, retirement plans, etc.)
- JTWROS
- Revocable Living Trusts
- Payable on Death Accounts (POD)
- Totten Trust
Assets Subject to Probate
- Sole ownership assets
- Tenancy in Common assets
- Estate is the named beneficiary
- Community Property not JTWROS
Gross Estate (Inclusions)
- Single Owned Assets
- Estate is Beneficiary
- Ownership % in JTWROS/Tenancy in Entirety/Tenancy in Common
- Assets the dead has general powers on
- Gift taxes paid within 3 years of death (GSTT taxes are not included)
- Life Insurance owed by the dead (on themselves, others)
- Life insurance benefits paid to the estate
- Life insurance gifted within 3 years of death
Life insurance is included based on the replacement cost of the life insurance if owned on someone else.
Gifting Valuation
- Use the basis of the donor
Gifting Cap Gains for Recipient
- If sold and price is higher than donor basis, its a gain (price - donor basis)
- If sold and price is lower than the FMV at date of gift, it’s a loss (price - FMV)
- If sold and price is between donor original basis and FMV at date of gift, there is no gain or loss
Non-Taxable Gifts (deductible gifts)
- gifts to spouse
- gifts to qualified charities
- payments made DIRECTLY to educational tuition, medical/dental provider
- gifts to politicians
Gifts: Estate Implications
- Gifts subject to $12,920,000 lifetime exemption
- Can always use the $17,000 annual exclusion in addition to the $12,920,000 lifetime exemption
- Gift taxes paid within 3 years of death are added back to the Gross Estate
- Taxable gifts (where gift taxes were not paid), are added back to the Taxable Estate
- Gift taxes paid/payable on the year of death are subtracted from / added to the Tentative Tax
Powers of Attorney
- Power of Attorney (traditional, non-durable): ends at incompetency
- Durable Power of Attorney: stays live through incompetency
- Springing Power of Attorney: starts when the incompetency begins
Trusts: Power of Appointment
Power: ability to determine who can enjoy, use, and possess the property subject to the power
General Power: person can do what they want
- exercise, lapse, release: both gift and estate tax
- 5 or 5 Power: no gift tax, estate tax: greater of 5% of FMV or $5,000
Ascertainable Standard: person can only do things related to health, education, maintenance and support (HEMS)
- no gift or estate tax
Special Power: person can only do things with the consent of the creator of the power having Substantial Adverse Interest
- no gift or estate tax
Lapse: don’t exercise the power over a period of time
Exercise: take action for the beneficiary
Release: relinquish control
Trust: Gift and Estate Tax (General Power)
Based on if the General Power was exercised, released or lapsed
- Gift Tax: taxed, lapsed with a 5 or 5 power: not taxed
- Estate Tax: taxed, exercised released or lapsed with a 5 or 5 power: greater of the 5 or 5 is taxed
Trust: General Power: 5 or 5 Power
- A 5 or 5 general power is a limited power where the beneficiary can take out $5,000 or 5% of the trust assets without the full trust being part of the beneficiaries full estate
- If 5 or 5 power is not used that year (lapsed), it is not taxed as a gift
- If beneficiary with 5 or 5 power dies, the estate is only subject to the greater of $5,000 or 5% of the trust assets
Trust: Grantor Trust
- Also called tainted or defective trust
- If the donor has any control or benefit of the trust, its a grantor trust
- Income from the grantor trust is paid by the grantor
- The grantor trust assets are added to the gross estate
Trust: Definitions
- Trust includes property (corpus, principal), grantor, trustee (legal title), beneficiary (equitable title)
- Grantor and trustee must be legally competent
Trust: Simple vs. Complex
Simple Trust
- Marital, QTIP, 2503(b) - bad boy
- Pass through income only to beneficiaries
Complex Trust
- separate tax entities
- 2503(c) is a complex trust
- can be irrevocable or revocable
- can pass through income or principal/assets
- grantor has no control
Trust: Crummey Trust
- Irrevocable Trust with Demand Rights
- minor (through their guardian) can demand a payout of the lessor of the gift contribution or the annual $17,000 exclusion
- a trust with Crummy provisions allows for gifts of present interest ($17,000 annual exclusion) even if the beneficiary doesn’t take anything out each year.
Bypass Trust (“B” Trust)
- Property transferred to trust at death
- Income only distributed to spouse or other individual
- Dead retains control after death (post-mortem control)
- Dead can name beneficiaries after original person paid from the trust dies
- uses the lifetime exception to shelter estate taxes of the first to die spouse
- assets bypass the surviving spouse’s estate and pass to the beneficiaries estate when second spouse dies
- also known as Family Trust, Credit Shelter, Unified Credit Shelter
Trusts: A, B, C
A Trust
- Martial Trust
B Trust
- Bybass Trust
C Trust
- QTIP Trust
Trusts: QTIP (“C” Trust)
QTIP Trust
- Surviving spouse receives income for life
- Dead defines beneficiaries after spouse dies
- Assets pass to the surviving spouse through unlimited marital deduction
- the assets are then part of the surviving spouse’s estate with the beneficiaries named by the first to die spouse
- Often used with second marriages
- used so surviving spouse can’t change beneficiary to new spouse (new husband takes the trust assets), the original spouse names beneficiaries after surviving spouse dies so new husband doesn’t get the money
Trusts: Marital Trust (“A” Trust)
- surviving spouse has control of assets and beneficiaries
- assets pass through unlimited marital deduction
- added to surviving spouse’s estate
Trusts: Qualified Domestic Trust (QDOT)
- for non-U.S. citizen spouses
- if assets passed into a QDOT, it allows for pass through by unlimited marital deduction
- estate can pass to surviving spouse
If not in a QDOT
- assets don’t pass through unlimited marital deduction, assets are subject to $12,920,000 lifetime exemption
- limited gift of $175k each year to spouse
Gifts: Strategies for Present Interest
UGMA/UTMA
- kiddie tax
- part of donors estate if die before distribution
2503(c)
- children’s trust (complex trust)
- trust pays taxes on retained income at trust rates
- distributed by 21
- can be part of grantor’s estate
- distributions subject to kiddie tax
529 accounts
- tax deferred for education
Present Interest: direct use for the person’s full use
- present interest gift can use the $17,000 annual exclusion
Future Interest: held out of the person’s hands and subject to rules in the future to which it becomes a present interest
- future interest cannot use the $17,000 annual exclusion
Charity: Contributions/Transfers
Income to Donor Until Death
- Income paid, then assets transfer to charity at death
- CRAT/CRUT - 5% required, max 20 years or until death, deduct for PV of remainder interest. NIMCRUT allows for makeup income years if 5% income not earned or exceeded.
- Pooled Income Fund - no 5% required,. deduction based on PV of remainder interest, paid out over life expectancy, distributions can be variable based on investment team managing the fund.
- Charitable Gift Annuity - no 5% required
Income to Charity Until Death
- Income paid to charity until death, then assets go to non-charity beneficiaries (children, etc.)
- Charitable Lead Trust (CLAT/CLUT) - no 5% required, passes to non-charity after SPECIFIC period of time
- Private Foundation - 5% required, can give to individuals, subject to 2% tax on net investment income, 15% penalty if don’t distribute 5%
5% required payout for assets the donor controls. Not required for structures where income is paid to the charity (CLAT/CLUT), that are managed by others (pooled income, donor advised fund) or fixed payout (Charitable Gift Annuity) from others.
Paid To Specific Charities
- pooled income fund
- charitable gift annuity
Interfamily Transfers: Donor Needs Income
Types
- Installment Sale: could be stuck in estate if die before sale complete. If related person sells within 2 years, pay full capital gains.
- Self Cancelling Installment Note (SCIN): out of estate at death, if die before payments the remaining payments are forfeited, sell the asset at a premium and get higher income payout than installment sale.
- Private Annuity: out of estate, transfer property for income as an unsecured life estate, usually between family members
- Grantor Annuity Trusts (GRAT/GRUT): pulled back into estate if die before term has ended, needs a specific term defined. Assets given to beneficiary after term ends. No $17,000 exclusion as the assets are held until the future.
Interfamily Transfers: Donor passes income and assets to family
Donor wants to reduce estate and pass income and assets to family
Types
- Partnership/S-Corp: can’t be a service related company, needs to be capital sensitive. gift of shares at $17,000 exclusion
- Family Limited Partnerships: general partner can still retain control, rest gifted to limited partners (family), qualified for valuation discounts, get $17,000 annual exclusion with the added discount valuation benefit
- Gift Leaseback: gift property to family member, pay lease money to family member to use the property for the business, take a tax deduction on the lease expense, better to do after leased property is fully depreciated
- Qualified Personal Residence Trust (QPRT): pulled back into estate if die before term period, at the end of the term the property is out of the estate. Can have 2 properties.
- Bargain Sale
Disclaiming Property (Don’t want it)
In order to disclaim property to keep out of estate
- must be an irrevocable refusal
- in writing
- received within 9 months of death
- no interest/benefits received
- can pass freely to anyone else without the disclaimer direction
Post Mortem Estate Planning: Need Liquidity
Usually so people don’t have to sell the family business, farm, etc.
Stock Redemption (Section 303)
- can sell the stock for stepped up basis cap gains instead of a dividend paid (so less taxes for estate and get some liquidity)
- needs to be closely held corporation
- total value of company must be 35%+ of total ADJUSTED Gross Estate
- redemption can’t exceed the total estate taxes and estate admin expenses
Installment Payment of Estate Taxes (Section 6166)
- needs to be sole proprietorship, partnership or corporation
- allows for deferral (4 years) and installment payments (10 years) of estate taxes
- used if business is valued at 35%+ of ADJUSTED gross estate
- 2% interest
Post Mortem Estate Planning: Reduce Estate Taxes
Special Use Valuation
- can reduce estate taxes if business has real property, farming or ranch
- 50% of gross estate must be real and personal property
- 25% of the gross estate needs to be real estate
- must be in qualified use 5 out of 8 years before death and 10 years after death
- get an exemption to reduce gross estate (up to $1.31 million value of real estate) and the associated taxes. It’s a direct exemption on the real estate value
- if 2032A is available then 6166 installment estate taxes is available
Testamentary Trust
Normally funded at death by will, but can be established while living.
Assets go through probate before they are placed in a testamentary trust
After the estate pays the decedent’s expenses, taxes, and debts, the remainder goes into the testamentary trust.
The trust is not funded until all aspects of the probate estate are settled
The trust itself is not in the probate or gross estate. it does not operate until the estate is settled and all the taxes are paid.
Gifts: Spousal Split Gift
Need approval to allow other spouse to split a full gift of $34,000
If gifts above the $17,000 annual exclusion for each spouse, each spouse needs to file gift tax returns.
Trusts: General Powers
A decedent that has general powers on a trust would have that trust included in the gross estate.
A general powers trust does not go trough probate (by will, the courts). It goes to beneficiaries named in the trust. General powers (ability to do something) can’t be transferred automatically through probate (the courts)
Elective Share
Minimum amount of inheritance for spouse
Insurance in Estate
Insurance is part of estate but can bypass probate if named beneficiary on it.
In community property, insurance is half owned and half in estate.
3 Year Look Back Rule
Only gift taxes paid and insurance ownership transfers have a 3 year look back period
Any other gift does not have a look back period
Life Estate vs Retained Life Estate
Life Estate that doesn’t allow power during life and ends at death not included in gross estate
Retained Life Estate that allows retained power through life is included in gross estate
Estate Calculation
Gross Estate
- expenses, debt, etc.
= Adjusted Gross Estate
- unlimited marital and unlimited charity deductions
= Taxable Estate
+ taxable gifts exceeding annual $17,000 exclusions
= Tax Base
- $12.92 million exemption
= Taxable Amount
x 40%
= Tentative Tax
- Gift Taxes Paid
= Net Estate Tax
Gift Tax Paid Right Away on Appreciated Property
If Gift Tax is paid right away, the recipient of the gift gets a higher basis in the gifted property rather than just the donor”s original lower basis
Basis increased by the gift taxes paid on the amount of the appreciation = (FMV - Original Basis) x 40%
Gifts With Debt Attached
The gift given with debt has the debt considered forgiveness so the debt is a capital gain for the donor.
Gift Splitting
If gifting over $34,000, both spouses needs to file with the other spouse signing the form 709
- same for community and common law property
If under $34,000 and gifts sourced from joint property/accounts, don’t need to file
If under $34,000 and not from joint property, then one spouse filed and the other signs
Living Will
Legal document that directs the physician to follow the directions of the person
Medicaid Planning
Has a 5 year look back, if give away before that, can’t get Medicaid
Special Needs Trust vs. OBRA
OBRA Payback Trust:an irrevocable twut. good for those that have assets. Can pay back the government at death. No 5 year look back for Medicaid.
Special Needs Trust: disabled has no assets, trust funded and can have a beneficiary
Per Stirpes vs. Per Capita
Per Stripes: passes to beneficiaries children if beneficiary dies
Per Capita: equal to all beneficiaries
Trustee Distribution Provisions
Sprinkling/Spray Provision: income only
Discretionary Provision: income or principal
Support Trust: income or principal
Marital Deduction
Only used if spouse gets assets or if in a marital trait, QTIP, or QDOT for the benefit of the spouse.
Net Gifting
Net Gift: when recipient pays the gift tax
Requires full $12.92 million exemption to be used up
The purpose is to get the appreciated property out of the estate and the donor not having cash to pay the gift tax but the recipient does
Net Gift Tax Paid by Recipient = Normal Gift Tax Paid / 1.40
Reverse Gift
Gift low basis property to dying person that has plenty of room under estate gift tax exemption
Dying person names you beneficiary
Dying person needs to live at least 1 year
You get property back with a step up in basis
Estate Freeze
An estate freeze is an asset management strategy whereby an estate owner seeks to transfer assets to his or her beneficiaries, without tax consequences.
Generation Skipping Transfer Tax
GSTT Payable = Taxable Gift - Gift Taxes Paid (40%) x 40% GSTT Tax
Direct Skip: donor pays GSTT
Taxable Termination: trust (trustee) pays GSTT. No $17,000 exclusion
Taxable Distribution: beneficiary (transferee) pays GSTT
IRD: Income in Respect of a Decedent
Income still payable to the decedent
Added to Gross Estate
Get income tax deduction by comparing the estate tax with and without the IRS
If estate tax greater with IRD, get an income tax deduction by the difference between IRD added and regular estate tax without it.
Alternative Valuation Date (AVD)
Up to 6 months after death
Needs to reduce estate taxes
Can’t include assets that fall in value over time
Can’t use if there is no estate tax anyway
If asset sold before AVD, use sale date.
