Estate Flashcards
Best donee for highly appreciated property
Good to gift to charity or donee in lower tax bracket
Note: May want to keep until death to get a step-up in basis
Gifting property likely to appreciate
Good gift to remove future growth from donor’s estate
Best donee for income-producing property
Good gift only if donee is in a lower tax bracket
Best donee for loss property
Sell to take the losses then gift the proceeds from the sale
Best donee for out-of-state property
Gift to avoid ancillary probate
Best donee for property subject to depreciation
Keep property until fully depreciated
Best donee for fully depreciated property
An excellent gift using gift-leaseback technique
Gifting life insurance
Excellent to gift– valued at replacement value but “blossoms” to face value
Gift tax return form
Form 709
Living will
Directs physician to discontinue life-sustaining procedures if you are in a terminal condition or permanently unconscious state
A reversionary interest that exceeds ___% of the trust value at the time of creation is retained by grantor or grantor’s spouse makes a trust defective/tainted
5%
Distributable net income (DNI)
Limits the amount that trust (or estate) beneficiaries must report as gross income for income tax purposes
What are the two conditions that make a trust complex?
A complex trust is taxed as a separate tax entity on income earned if it meets two conditions
- It is irrevocable, and grantor has not retained any control
- Income is accumulated
How is income taxed in a simple and complex trust?
Simple: taxed to beneficiary
Complex: Accumulated income is taxed to the trust and income distributed is taxed to beneficiary
Annual right of withdrawal in a Crummey Trust
Equal to the lesser of the amount of the annual exclusion ($17k) or the value of the gift transferred
The typical use of Crummey trust is in an unfunded life insurance trust
Ascertainable standard
A power limited by some specific measurement:
HEMS: health, education, maintenance, and support
Distributions are not subject to estate tax or gift tax
Five or five power
Provides that property subject to a general power will be included in a donee-decedent’s estate (or considered a taxable gift) only to the extent that the property exceeds the greater of $5k or 5% of the total value of the fund subject to the power
The withdrawal is only available only after Crummey right is settled
Who controls a bypass trust?
First spouse to die
How much is typically put in a bypass trust?
$12,920,000
The C trust is also called?
QTIP Trust
QTIP property is included as an asset in the gross estate of ____?
Surviving spouse
Keys for a QTIP Trust
L - Lifetime income interest for the spouse
A - Annual payments to the spouse
M - Mandatory payments to the spouse
E - Exclusively for the spouse
Trust tax rate
37%
How long can Dynasty Trusts last?
For the life of all lives in being plus 21 years and 9 months or as long as local law allows
Pooled income funds are not allowed to have what?
Munis
Term limit for CRAT/CRUT
Life of income recipient, or 20 years
Are additions allowed in CRATs or CRUTs?
CRUTs only
Are payments fixed or variable in CRATs/CRUTs?
Fixed in CRATs, variable in CRUTs
How much younger does someone need to be to be a step-person?
37.5 years
2503(c) trust conditions to obtain annual gift tax exclusion
- Trust must provide that the property and income may be expended by or for the benefit of the donee before the donee attains age 21
- Any portion of the property not so expended 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
Is income from a 2503(b) trust subject to gift tax?
No, but it is subject to income tax (kiddie tax)
Can real estate be added to a UGMA/UTMA?
Only UTMA
Can 529 plans be used to pay student loans?
Yes, up to $10k in beneficiary’s lifetime
Type of payments in a CRAT/CRUT
CRAT = fixed payments (lifetime or term certain)
CRUT = variable payments (assets revalued annually)
Charitable Gift Annuities
- No additions
- Fixed lifetime income
- Payable to one specific charity
- Charitable deduction based on gift less annuity
- No 5% rule
How much must be distributed as income annually in a CRAT/CRUT?
At least 5%
Donor Advised Fund (DAF)
Donor makes a gift to a public charity or community foundation, then the public charity sets up a sub-account or fund in the donor’s name
A poor person’s private foundation
No income stream to donor or other non-charitable beneficiaries
Another term for a wealth replacement trust
ILIT
How much can be distributed from a Crummey trust within 30 days of transfer?
Lesser of $17k or amount of gift transferred
What type of trust should someone use if they are in a second marriage with kids from a first?
B trust for max exclusion, then C trust so assets don’t go to the second spouse exclusively
Who controls assets in a C trust?
First spouse to die
Who controls assets in a B trust?
First spouse to die
Who controls assets in an A trust?
Second spouse to die
Why would someone do an A trust?
If they want to name a trustee to take care of the trust that isn’t the spouse
Reverse QTIP
For if you want QTIP assets to go to grandchildren instead of their children and not lose the GSTT exemption
Does a spouse get marital deduction if they are a resident alien?
Yes, but only for $12,920,000
Non-citizen spouse marital deduction (annual)
$175k annually, no lifetime exclusion
QDT/QDOT
Same as a QTIP but for a non-citizen spouse
Good for huge estates that are over $12,920,000 because estate taxes wouldn’t be owed on it until the non-citizen resident spouse dies and then the next inheritor will pay estate taxes on it
non-citizen spouse can use it basically as a piggy bank and take income from it
What is deducted from the Adjusted Gross Estate to get to the Taxable Estate?
Marital deduction and charitable deduction, NOT the $12,920,000 exclusion
2503(b) Trust
- Income distributions only
- Must use the $12,920,000 exemption to fund
- Income payout subject to kiddie tax
UGMA
- Must be funded with EEs, securities, mutual funds, annuities, etc. Not real property
- Normally distributed at age 18
- Can be included in custodian’s estate
UTMA
- Can be funded with any type of asset including real property
- Normally distributed at age 21
- Can be included in custodian’s estate
T for Trump (real estate)
2503(c) Trust
- Can be funded with any type of asset
- Normally distributed at age 21
- Costs to setup and maintain (legal and accounting)
- Can be included in grantor/trustee’s estate
- Trust tax rates (37% for $14,450+)
Are 529 assets included in owner’s estate?
Nope! And it’s not in the bene’s estate either
Options for income to donor until donor’s death
- CRAT
- CRUT
- Pooled Income
- Charitable Gift Annuity
Options for income to charity
- CLAT
- CLUT
- Private Foundation
CRAT
- 5%
- No additions
- Payments fixed (lifetime or term certain)
- Payable to any charity
- 10% ending value
CRUT
- 5%
- Additions allowed
- Payment variable (assets revalued annually)
- Payable to any charity
- 10% ending value
Pooled Income Fund
- no 5%
- Additions allowed
- Payments variable (based on fund income)
- Payable to a specific charity
- NO MUNIS
Charitable Gift Annuity
- No 5%
- Fixed lifetime income
- Payable to a specific charity
- Charitable deduction based on gift less annuity
CLAT/CLUT (charitable lead trusts)
- 0%
- Income/estate tax deduction
- After a period of time paid to a non-charitable beneficiary
Private Foundation
- 5%
- 30% income tax deduction
- Payments can be to a charity OR a private individual
- Can continue for an indefinite time period (assume to be non-operating)
Installment Sale
Sale of property at FMV in exchange for payments
- PV of remaining payments is included in owner’s estate
- Property is secured
- Gain is capital gain. Do not use if property is subject to recapture (1245 depreciation)
Do not use if there is an estate issue
Self-canceling installment note (SCIN)
- No value is included in the owner’s estate
- Gain is 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 owner’s estate
- Property is transferred (exchanged) for a promise. No recourse!
- Taxation to the seller - all the gain that would have been recognized over the life of the annuity now will be taxed in the year in which the private annuity is established
Grantor Retained Annuity Trust (GRAT/GRUT)
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 the retained interest)
- Owner must outlive term or the asset is brought back into the estate
Best asset - one likely to appreciate
Partnership / S Corporation (gifting shares)
- Family member receives conduit income. Ineffective if a child is under age 24 (kiddie tax)
- Business entity must be capital sensitive. Not available if business is service related
Family limited partnership (FLP)
Gifts interests to limited partners to reduce the estate
- Qualifies for various “valuation discounts” allowing for a lower gift tax
- General partner maintains control
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
Qualified Personal Residence Trust (QPRT)
An irrevocable transfer of a personal residence
- At the end of a 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 estate
GSTT tax rate
40%
What is a skip-person?
A related person at least 2 generations younger than the transferor (typically a grandchild) is a skip person. If parent is deceased, it moves up a generation
Unrelated persons who are more than 37.5 years younger than the transferor are skip persons
GSTT lifetime exemption
$12,920,000
Also a yearly $17k annual exclusion
Postmortem elections for estate liquidity
- Section 303 stock redemption
- Installment payment of estate taxes (6166)
Postmortem elections for estate tax reduction
Special use valuation (2032A)
Section 303 stock redemption
Postmortem election for estate liquidity
1. Business must be incorporated (closely held stock)
2. Value of stock must exceed 35%
3. Amount of stock redeemed as capital gain cannot exceed the sum of the estate taxes plus administration expenses
Special use valuation (2032A)
Postmortem election for estate tax reduction
1. Real estate used for farming or a closely held business
2. Several rules to qualify
- 50% of the gross estate must consist of real and personal property
- 25% of the gross estate must consist of real property
3. $750k reduction in decedent’s gross estate ($1,310,000 in 2023)
4. Must be qualified use: 5-out-of-8 rule before death / 10 years after death
Installment payment of estate taxes (6166)
- Property must be in a sole proprietorship, partnership, or corporation. (Aggregation is allowed if more than 20% interest in each business)
- Interest must be carried on as the day of death
- Value of the business(es) must exceed 35% of decedent’s adjusted gross estate
- During first 4 years (of 14 years) can pay interest only on taxes due
- The interest rate will be 2% on the first $1,750,000
- The 2% is not deductible
Are dynasty trusts simple or complex?
Simple
Are dynasty trusts gifts of present or future interest?
Future interest
Can QTIPs be used for anyone other than a spouse?
No
Do CLATs have a 5% requirement?
No
Do pooled income funds have a 5% requirement?
No
Do charitable gift annuities have a 5% requirement?
No
Do private foudnations have a 5% requirement?
Yes
What is a recapitalization?
Freezes asset in the gross estate
What is a key person discount?
A discount that may be used when a key employee is lost
When can co-ownership discounts be used?
For real estate when owned with another person
A QDOT qualified the estate for
The marital deduction
When is a reversionary interest tainted for income tax purposes?
When the interest exceeds 5% of the trust value at the time of creation
Is debt included in the gross estate?
No, it is deducted from the gross estate to get to adjusted gross estate
