Estate Flashcards
Efficient transfer - What is this?
When the assets are transferred to the transferred wishes
Effective transfer - What is this?
When the assets are transferred with the least amount of taxes
What can a CFP do and cant do with in regard of estate planning?
You can explain things to clients but you can’t draft legal documents (that is for attorneys) // CFP should refer clients to attorneys for legal advice
What is a decedent?
Deceasded person
What is a heir? Legatee?
Person who inherits property under state laws (Not a will) // Person who inherits property under a will
What is a donor? Donee?
Person who gives a gift to someone // Person who receives the gift
What is an abatement? Ademption?
When a bequest has been reduced ($100k portfolio reduced to a $20k portfolio) // A right has been extinguished (If a will has me given a mustang, but my mom sells it and buys a tesla, then dies - I don’t get the tesla)
Gift vs Bequest
Gift is when you give something while you are alive // Bequest is when you give something to someone when you are dead
What does a will avoid?
Avoids intestacy
What are the two requirements for a person who writes a will?
1) Age 18 2) Must have a sound mind
Durable power of Attorney - definition
To be able to act on a persons behalf even when the principal is incapacitated
Durable power of attorney for health care - definition
To be able to act on a persons health care decisions when the principal is incapacitated
Advance medical directive - Definition
this directions to the doctors if you are unable to communicate
Holographic will - definition
hand written will, must be sign and dated by testator
Noncupative will - definition & what does this only cover?
Oral will that covers tangible personalty only (Dying declarations with a witness)
Statutory will - definition
Drawn by an attorney (Best choice)
Survivorship clause - Definition + time limit for Unlimited maritial Deduction
Requires the beneficiary to survive the decedent for a specific amount of time (Cannot be longer than 6 months to qualify for Unlimited martial deduction)
Disclaimer clause - Definition
the heir can disclaim the bequest that is supposed to go them and it will be sent to someone else
Disclaimer clause - What are the 3 requirements?
1) disclaiming party can not benefit 2) To disclaim, you need to do this in writing within 9 months of decendent date of death 3) If you disclaim the property, you cannot direct where it goes
Power of attorney - What power is this?
This is the power to act on behalf of the principal
Power of attorney - What are the two types of POA?
General or limited
Power of attorney - What is limited POA? What is general POA?
You are able to act on behalf of the principal in certain areas of life (Ex - Real estate only) // General POA is when you are able to act on behalf of the principal in all areas
Power of attorney - When can this be revoked?
Anytime by principal
Power of attorney - When does this power end? (If it isn’t revoked by the principal)
When the principal dies
Power of appointment - What is this?
Giving someone the ability to transfer assets (attached on the POA document)
Power of appointment - What are the two forms of this?
General or limited
Power of appointment - What does general and limited allow you to do?
General - when you can appoint assets anywhere (To your creditors etc.) // Limited (Ascertainable standard) - You can use the assets for HEMS (Health, education, maintence, support)
Power of appointment - can this survive if the principal dies?
Yes if it’s a trust, No if not
Power of appointment - When can this be revoked?
Anytime by principal
Power of appointment - What is the downfall of this?
If the agent dies before the principal, the all of the assets are under the gross estate of the agent
Power of attorney - what if the agent wants to do harmful action request to the account?
The planner can refuse to take such action (You can protect the principal)
Power of appointment (Limited vs general) - What is used for a maritial Trust and non marital trust?
Marital trust - General // Non-marital trust - Limited
Probate - Advantages
Clears title of assets, the process is a legal orderly process
Probate - disadvantages
Costly, delays, publicity
Testate vs Intestate - what is the difference between the two when they go through probate?
Testate - Will (a letter) to the judge that tells him where the assets go // Intestate - the state laws dictate where the assets go
Probabte - what does not avoid probate?
No survivorship feature, no beneficiary (Sole ownership property, community property, no beneficiaries)
Avoids probate - what does state contract law mean?
Named beneficiaries on LI, annuities, IRAs etc
Sole Ownership - # of owners
1
Sole Ownership - Does this have a survivorship feature?
No
Sole Ownership - Is this included in probate? (How much)
Yes (100%)
Sole Ownership - Is this included in gross estate?
Yes
Sole Ownership - Does this step to FMV at death?
Yes
Tenants in Common - # of owners
2 or more
Tenants in Common - Does this have a survivorship feature?
No
Tenants in Common - Is this included in probate? (How much)
Yes (% Owned)
Tenants in Common - Is this included in gross estate?
Yes
Tenants in Common - Does this step to FMV at death?
% of persons property gets stepped up
JTWROS - # of owners
2 or more
JTWROS - Does this have a survivorship feature?
Yes
JTWROS - Is this included in probate? (How much)
No
JTWROS - Is this included in gross estate?
Yes
JTWROS - Does this step to FMV at death?
%
Tenancy by the entirety - # of owners
2
Tenancy by the entirety - Does this have a survivorship feature?
Yes
Tenancy by the entirety - Is this included in probate? (How much)
No
Tenancy by the entirety - Is this included in gross estate?
Yes
Tenancy by the entirety - Does this step to FMV at death?
%
Community Property - # of owners
2
Community Property - Does this have a survivorship feature?
No
Community Property - Is this included in probate? (How much)
50%
Community Property - Is this included in gross estate?
50%
Community Property - Does this step to FMV at death?
Both halves get stepped up
Gifts - who normally is responsible to pay the gift tax? (Donor or donee)
Donor
Gifts - who pays the tax of the gift when it is a net gift?
Donee
Gifts - what is the annual amount?
$17,000
Gifts - what is gift splitting?
When you and your spouse split the gift ($34,000 together)
Split gifts - what tax return do you file and what happens to other gifts to that year?
Form 709 // all gifts for that year are now split gifts (No more individual gifts for that year)
Split gifts - what happens if one of the spouses die? What can a spouse do for gift splitting?
The surviving spouse can elect to split gifts made by the decedent in the final tax year (Executor can give consent for this) (Surviving spouse cannot remarry in that year)
Gifts - what is the “Super annual exclusion”
Gifts to Non-U.S. citizen spouse limited to $175,000 (2023) - this is because they do not qualify for the unlimited marital deduction
Gifts - What is present interest?
(can have annual exclusion of $17,000) When a gift to the donee is available to the immediate use of the property
Gifts - What is future interest?
(cant have annual exclusion of $17,000) When a gift to the donee is contingent to some sort of date or time (Gift to trust - Cole cannot receive the money until he reaches 30)
Crummey provision - what is the intent of this?
This provision is applicable to a trust and it creates a present interest for the recipient by being able to take the money out so it (Only for a limited time - then the power lapes). Since it creates a present interest, the annual exclusion applies to the trust
Marital deduction - what is so special about this?
Unlimited transfers from spouses without using gift tax (US spouses only)
Charitable deduction - what is so special about this>
The donor gets unlimited charitable deductions to qualified charities
Applicable exclusion amount - What is the amount up to (And credits)
$12,920,000 // $5,113,800
Form 709 - what is this return called?
Gift tax return
Form 709 - when should this be filed?
April 15 of the following year (You can extend this by extending the income tax return)
What is the gift tax for gifts above 1 millon? (Must know this number)
$345,800 plus 40% of the excess amount over $1,000,000
Gifting Strategies - Why should the donor give the appreciating asset away?
Because it will leave the gross estate
Gifting Strategies - Why should you not gift a property that is in a loss position?
You should sell it instead so you can capture the loss and then give the cash to the donee
Gifting Strategies - What asset should you give to the youngest donee?
the greatest appreciation potential asset
Gifting Strategies - What aseet should you give to charity?
the biggest appreciated property (to avoid capital gain taxes)
Gifting Strategies - What asset should you give to the lowest marginal income tax bracket donee?
the highest income-producing asset so the income gets taxed at a lower rate
Per Stirpes vs Per Capita
Per Stirpes - by the root // Per capita - everyone is the same (Not capitalism)
Gift vs Bequest - Differences?
Gifts - made while the donor is alive (can use annual exclusion) // Bequest - gifts done when the donor has pass away (Cannot use the annual exclusion)
Gross estate - Life insurance are in the gross estate when - time limit
transferred within 3 years
Gross estate - Life insurance are in the gross estate when - Owned on another person
IF: 1) Premum pay status - interpolated terminal reserve (Cash value + Accruals) 2) Paid up - replacement value
Gross estate - Life insurance are in the gross estate when - Owned on Decedent
Death benefit (Face Value)
Gross estate - Gift taxes are in the gross estate when…
they are paid under 3 years before death
Reversionary Interest
The grantor will get back the interest from the interest of the beneficiary’s term or death occurs - [Includeable in gross estate]
Retained Interest
The grantor gets some sort of interest benefit despite the gift going to a beneficiary (Ie Grantor gives the house to his kid but reserves the right to live in it whenever he wants) - [Includeable in gross estate]
General or limited power of appointment - which one is includes gross estate?
General power of appointment
How far out is the “Alternated valuation date”
6 moths after date of death
Ascertainable standard - what is this?
When you have power of appointment and you are limited to HEMS (Health, Education, Maintenance, Support) and this does not create inclusion in gross estate
Closely held business - What are the 4 Valuation discounts
1) Minority Discounts 2) Lack of Marketability Discount 3) Blockage discount 4) Key Person Discount
Valuation Discount - Minority Discount
When you have a small portion in the company (Less than 50%)
Valuation Discount - Lack of Marketability Discount
There is not a lot of of demand for this so it is hard to sell
Valuation Discount - Blockage discount Discount
You have so much that if you sell it, the demand will go down (therefore the price will too)
Valuation Discount - Key Person Discount
The business relies on this person and the company suffers without them
Valuation of Financial securities - If it is on a trading day
you will find the average of the high and low FMW on the trading day
Valuation of Financial securities - If it is a stock that is not actively traded
((Trading price AFTER decedent DOD X # of days between DOD and the FIRST preceding trade) + (Trading price BEFORE decedent DOD X # of days between DOD and the NEXT preceding trade)) DIVIDED BY (Sum of days before and after death)
Incidents of ownership for life insurance policy- what are some examples
Name or change of beneficiary, surrender or cancel the policy, receive dividends, borrow from the cash value, assign/revoke rights
When is the 709 Gift tax return due by?
April 15th
When is the 706 estate tax return due by?
9 months from DOD (you can get an extention for an additional 6 months to file BUT not to pay)
Who makes the election to do the alternate valuation date?
Executor
Alternate valuation date - what are the two requirements in order to use this?
1)Lower gross estate 2) Lower estate tax due
Alternate valuation date - what are wasting assets (what is special about them)
Assets that have there value attached to a term - (Notes, patents, annuities) // When calculating them for the alternate valuation date, you only use the DOD value
Alternate valuation date - What happens when assets are disposed?
Instead of using the 6mo revaluation date, you use the sales price
What are examples of deductions from the gross estate? (To get adjusted estate)
Funeral expenses, Casualty losses, Debts, Admin expenses, last medical expenses
How do you get taxable estate?
Adjusted gross estate - (Charitable deduction + Marital deduction) = Taxable estate
What are the advantages to the unlimited marital deduction? (2)
1)You can fund the other spouse’s gross estate 2) Defer estate tax payments
To be eligible for the unlimited marital deduction, there are 2 requirements -
1) Us citizen spouse 2) Married at the time of death or gift
Qualifications for the martial deduction are: (There are 3!)
1)must be in the decedent’s gross estate 2)Has to only be transferred to the spouse, no one else 3)Terminal interest rule (Surviving spouse’s interest cannot terminate at the future date)
Terminal interest rule - Example that would NOT work?
I leave the house to my surviving spouse but after 10 years, the children will take it over
Terminal interest rule - exceptions (you can take the marital deduction still)
1) 6 Month survival contingency 2) A trust (Spouse has GPOA and have terminal interest) 3) QTIP trust 4)CRT where the spouse is the only noncharitable beneficiary
Non-Citizen Spouse - 2 remedies to get unlimited marital deduction
1)Have the surviving spouse become a citizen before the due date of the 706 tax return (9 months) 2) Utilize Qdot
What is a QDOT? Qualified domestic trust
Post mortem election where there is 1 US trustee where the trust has the right to withhold taxes and the executor can elect maritial deduction
What is the applicable estate tax credit?
$5,113,800 - 2023 ($12,920,000 election)
What is “Prior transfer credit”?
This is credit that you can get if you have paid estate taxes in the last 10 years
What is “Foreign death taxes credit”?
credit for the tax you paid on property that is located outside of the US
Estate Taxes - Penalties
Failure to file: 5% per month up to 25% // Failure to pay 0.5% per month up to 25% (Concurrent months are reduced by failure to pay)
Portability - What is this and how form is this elected on?
(Election in 706 )This is a donation of unused exemption to the surviving spouse. (You use the last deceased spouses unused exemption) (Max of $12.92 mil)
IRD - what is this?
Incomes that was assigned to the decedent and entitled to be paid but died before paid
IRD - what is a big downside to this? 2 things
No step up to fair basis AND included in the gross estate
IRD - Examples
All IRAs and qualified retirement account (Excluding all Roth accounts), annuity payments, unpaid debt from installment note
Transfers not subject to gift tax - what are they?
Legal support, qualified transfers (Direct payment to medical/educational institutions, below-market rate loans, unlimited marital deduction
Partial Sale-gift transactions - What is the amount that is subject to a gift?
the gift is the difference between the FMV and the sale price
Private Annuities/SCIN - what condition is the seller usually in?
when the seller in poor health
Private Annuities - what is the risk for the buyer?
that the seller will live longer than initial thought of
SCIN - What is the term of payments?
determined by seller
SCIN - is there deductibility on the interest?
Depends on the property (Business property - yes)
SCIN - What is the buyer’s adjusted tax basis?
Purchase price of the property
SCIN - is ther collateral interest that the buyer must pay the seller? (To make it secure)
Yes
Private Annuity - What is the term of payments?
Life of annuitant
Private Annuity - is there deductibility on the interest?
none
Private Annuity - What is the buyer’s adjusted tax basis?
sum of annuity payments
Private Annuity - is ther collateral interest that the buyer must pay the seller? (To make it secure)
No
Family Limited Partnership (FLP) - what is this?
Partnership created to give assets to the younger generation through gifts of the annual exclusion. Where the general partner (parent) has 1% and the (limited partners) children have 99% by using discounts
Family Limited Partnership (FLP) - what are the two discounts that FLPs use?
Lack of marketability discounts and minority shares
The trustee is held by acting as a _____ to the beneficiaries.
Fiduciary
Why use a trust - management
some people are not capable to manage the assets
Why use a trust - creditor protection (Spendthrift clause)
The beneficiary cannot promise to give assets that are in the trust to anyone and if a promise is made, it is void
Why use a trust - split interest in property
You are able allocate assets without splitting everything up or selling (Gifting the farm to 5 kids where only 2 of them will run it)
Why use a trust - avoid taxes (Irrevocable trusts)
You can transfer future appreciation assets and reduce the gross estate (Does not apply to revocable trusts)
Why use a trust - avoid probate
Takes precedent and the state will oblige to whatever the trust says
Revocable vs irrevocable trust - which is a completed gift?
irrevocable trust
What could cause a non completed gift in an irrevocable trust?
Retained interest (i still get to choose where this goes…)
Grantor trust - who gets taxed
income taxed to grantor
Non Grantor trust - who gets taxed? 1) Distribution 2) accumulation
1) distribution - taxed to the beneficiaries 2) accumulation - taxed at the trust rates
Simple trust
Any income that comes in the trust must be distributed
Complex trust
this allows for income to be accumulated in the trust
What makes a grantor trust?
(Inter vivos trust) the person who put the money into the trust and the income is payable/paid to that person or the spouse // the person has rights to borrow, dispose, or return back to the grantor
Revocable vs irrevocable trust - which can be revoked by the grantor?
the revocable
Inter vivos trust vs testamentary trust - what is the main difference?
Inter vivos - created during life // Testamentary - created at death
Standby trust
this trust is waiting for something to trigger and then this will be filled
Pourover trust
this trust receives assets from another source (Can be from a pourover will)
Inter vivos trust - revocable vs irrevocable for gifts
Irrevocable can do a gift and can use the annual exclusion (If it has crummy powers) // Revocable - not a completed gift
GRAT - how does it pay?
Fixed annuity
GRAT & GRUT - what is the gift amount made?
present value of the remaineder interest
GRUT - how does it pay?
Variable annuity
GRAT & GRUT - what assets would be good to put in each of them?
GRAT - hard to value assets // GRUT - easy to value assets
GRAT & GRUT - which one has to be revalued every year?
GRUT
QPRT - what asset is this for?
Personal residence
QPRT - what is the income?
being able to rent the property for free
QPRT/GRAT/GRUT etc - what is the biggest risk to this?
the grantor dying within the term and the FMV is included in the FMV
ILIT - what is the 2 main reasons for this?
1) Keeping it out of the gross estate (If no incidence of ownership) 2) Providing liquidity to beneficiaries
ILIT - what provision is usually included in this?
cummey provision
Trusts for minors 2503(b) - 1) what is this 2) who is this for?
1) can hold assets for lifetime of beneficiaries but must distribute income annually 2) bad boys (Not trusted)
Trusts for minors 2503(c) - 1) what is this 2) who is this for?
1) Allows the accumlation of assets but when the child gets to be 21, it can be fully available to child 2) choir boys (trusted)
Trusts for minors 2503(b) & 2503(c) - Annual exclusion for each othem?
(b) - annual exclusion available for the income interest to child (c) - annual exclusion available for the contribution
ABC trust arrangement (A trust) - what power does the surviving spouse have?
GPOA and qualifies for maritial deduction
ABC trust arrangement (A trust) - does it qualify for marital deduction?
Yes
ABC trust arrangement (B trust) - what is the point of this trust?
to use the applicable credit amount for nonspousal beneficiaries & no inclusion of gross estate to surviving spouse estate
ABC trust arrangement (B trust) - can the spouse have any access to this?
Spouse can get income (HEMS) “5-and5”
ABC trust arrangement (C trust) - What power does the survivng spouse have?
LPOA
ABC trust arrangement (C trust) - who is the beneficiary?
Annual income for the spouse only
ABC trust arrangement (C trust) - What can the surviving spouse demand of the trustee to do?
Invest more into income producing assets
ABC trust arrangement (C trust) - Who is in control of where the assets go?
the decedent
QTIP Trust - how long does the executor have to elect the QTIP trust? What tax form?
1) 9 Months plus 6 months (Extension) - 15 months 2) 706
QDOT - what is this?
(Post mortem election) Trust which includes a domestic trustee that allows noncitizen spouse to qualify for the marital deduction
Pooled income funds (PIF) - what is this?
Small gifts that are contributed into a trust that the charity manages. Provides income to the donor
CRAT - Length life or term - what is the length of the term can’t be longer than?
Cannot be more than 20 years
CRAT - can there be additional contributions after inception?
No
CRAT - can you change the beneficiary?
Yes
CRAT/CRUT - which can invade corpus if income is insufficient for payment?
CRAT
CRAT/CRUT - what is more flexible?
CRUT
CRAT - what should the amount atleast be to the grantor?
5% or more to the initial FMV
CRAT - what should the remainder interest be?
10% or more to the initial FMV
CRUT - what should the amount atleast be to the grantor?
5% or more to the “revalued” FMV
CRUT - can there be additional contributions after inception?
Yes
CRUT - what should the remainder interest be?
10% or more to the initial FMV
CRUT - when is this valued?
Every year
CRAT - when is this valued?
at inception
Non-Trust Interest Charitable gift
Donate the property to charity (Personal residence or a farm) - you get to live there rent free. When you die, they get the property. (Similar to a QPRT)
Charitable Lead trusts - what is this
the charity is getting income every year (Grantor gets income tax deduction) and the remainder is to a NONcharitable beneficiary
Testamentary (At death) - giving to charities - is there a deduction for 1) income tax 2) estate deduction
1) income tax - no deduction 2) Estate tax - must be mandatory (Already documented)
IRC section 6166 - who is this for and what is this?
1) Closely held business 2) Able to extend estate taxes over a 14 year period (4 years are interest only / 10 years are payments) up to $1,750,000
IRC section 6166 - how much of the value of the business interest must be of the gross estate of the decedent?
at least 35%
IRC section 6166 - what types of closely held business?
Sole proprietorship, partnership (at least 20% of capital interest), Corporation (20% of voting stock)
IRC Section 2032A - what is this for?
FMV implies that it is used at its best use. If a family owned a farm, they are able to decrease the FMV by $1,310,000 to lower estate taxes
IRC Section 2032A - what are the requirements?
Must be actively managed by family after decedent 5 out 8 years, Real/personal property 50% of gross estate, real property 25% of gross estate, use of property must be at least 10 years
Section 303 - what is this for?
you can redeem stock from an estate up to: the estate/inheritance taxes, estate admin costs, funeral costs
Section 303 - 1) Who is this only applicable to? 2) how much of the this stock must be of the gross estate?
1) Corporations 2) Must be more than 35% of decedents gross estate
Skip person - Lineal decendent
two or more generations younger than the transferor
Skip person - Unrelated transfees
37 1/2 years younger than the transferor
When is a trust a skip person?
if all interests are by skip persons // if distributions are only made to skip persons
Predeceased ancestor rule
If the child of a transferor dies, the grandchild moves up in line. (No GST)
What are the 3 types of transfers that are subject to GSTT
Direct skips, taxable terminations, taxable distributions
Direct skip - What is this? Who is paying taxes?
outright gift to skip person, (person giving) is generally liable for the GSTT on a direct skip. If the gift was given from a trust, then trustee is liable
Direct skip - what if it is to the great grandchildren? How many skips are there?
it will still only be taxed once no matter how many skips there are
Direct skip - who usually pays the GSTT?
Transferor
Taxable termination - what is this?
the remainder beneficiary when the trust is being terminated
Taxable termination - who is responsible for the GSTT
Trustee
Taxable distribution - what is this? Who is taxed?
the trust does not end and the money go directly to the skip person BUT money leaves the account. Transferee (Receiving) is liable for the GSTT
Taxable distribution - Who is responsible for the GSTT
Transferee (Person receiving the money)
GST Exlusions - Annual exclusion and lifetime exemption
$17k and 12,920,000
GST Exemptions - What does it mean if the transferor wants to elect out?
They can elect out of paying GSTT until they pay and then they can have it be allocated at death (Direct skips are allocated first)
1) Revocable 2) Irrevocable trusts - Income tax
1)Income taxed to grantor 2)Income taxed to beneficiaries / income to trust is retained - taxed to trust (unless it’s a grantor trust, which all income is taxed to grantor)
1) Revocable 2) Irrevocable trusts - gift tax
1)not a gift because the person can take the property back 2)completed gift and subject to gift tax
1) Revocable 2) Irrevocable trusts - Estate tax - gross estate
1) FMV included in gross estate 2)Not included in gross estate UNLESS: retained an interest as of DOD OR grantor released his interest within 3 years OR funding the trust generated gift tax within 3 years
1) Revocable 2) Irrevocable trusts - Generation skipping tax
1)not an issue because assets are includeable in grantor’s estate 2)Can be an issue depending on the beneficiaries of people
Life insurance - Transfer for value rule exceptions
1)the insured 2)partner of the insured 3) partnership where the insured is a partner 4)corporation where the insured is a shareholder or officer 5) transferee who takes the transferor basis in the contract
1040 - Deduction for Unpaid expenses
yes
1040 - Deduction for casualty losses
no
1040 - Deduction for executor fees
no
1041 - Deduction for Unpaid expenses
no
1041 - Deduction for casualty losses
yes
1041 - Deduction for executor fees
yes
706 - Deduction for Unpaid expenses
Yes
706 - Deduction for casualty losses
Yes
706 - Deduction for executor fees
yes
What is the GSTT rate
40%
