Estate Flashcards
Community Property Step Up with rental property vs personal residence
It is the exactly the same, if it is community property then it gets a full step up in basis at death of first spouse.
Probate Advantages and Disadvantages
Pros:
- Court supervision
- Marshalling of decedent’s assets
- Paying bills
- Overseeing distribution of estate
Cons:
- Loss of privacy
- Exposure to a will contest
- Court costs and delays
- Ancillary probate
Ancillary Probate and how to avoid
Real estate in other states
Avoid by placing those assets in a revocable trust
Transfer by Operation of Law and Contract
Operation of Law: JTWROS
Contract: Beneficiary designations, Government savings bonds, property conveyed by deed of title.
Election Against the Will (Elective Share)
Surviving spouse who has not inherited a certain minimum has a right to take a share of the deceased spouse’s estate. States differ in amount but it is usually 1/3 to 1/2.
USDA Rule
If you die within 120 hours of each other, it counts as if you both pre-deceased each other.
Totten Trusts and POD/TOD
These are all essentially vehicles with a depositor that has full control of assets that at the depositor’s death, transfers to the beneficiary.
Totten is for bank accounts
POD/TOD is for brokerage accounts
Community Property Rules and Benefits
Community property is: income earned during marriage / appreciation on solely owned property that is attributable to the non- owner spouse / Separate assets that have been commingled
Community property is subject to probate.
Half is owned equally between spouses.
If half is included in estate, then there is a full step up in basis.
Generally equalizes the estate.
Employer-provided fringe benefits count as community property.
Items that CANNOT step up in basis
Items that do not have appreciation or are depreciated
Ordinary income property (annuities, IRAs)
CDs are not appreciating, so they are not included in step-up
Assets not considered community property
Gifts received
Inheritances received
Income earned prior to marriage
Interest earned on separately held property
Assumption of ownership
For community property questions, assume that it is was bought during marriage unless the question specifies that the property was separate.
Term Insurance with community property
Because the premiums are paid during marriage, then the death benefit is deemed to be half owned by each spouse and it does get a step up in a way.
Probate and Disclaiming
Sole Ownership is subject to probate and can be disclaimed by beneficiary.
JTWROS is not subject to probate and can be disclaimed
TE is not subject to probate and cannot be disclaimed (unless by divorce, both spouses, or joint creditors)
TI is subject to probate and can be disclaimed
JTWROS for spouses and non-spouses
Spouses:
Considered 50/50 ownership and enjoyment
half included in estate at death
half step up in basis
Non-spouses:
Considered equal ownership and enjoyment
FULL amount is included in estate at death UNLESS the other people can prove the amount that they contributed to prove their share
step up dependent on amount bought
If gifting an amount and that is used by a person to buy the interest, then it is still fully considered as if the first person bought it (substance over form)
Survivors receive the shares
Pro of TE
Main benefit is that it is protected from individual creditors but not from joint creditors.
Tenants in Common
Held by different people and go to their own people at death.
Undivided interest.
Does not equalize interests.
Free to transfer shares.
No survivorship rights.
Trust ownership
Trustee holds the legal title to the property.
Beneficiary holds equitable title.
Wills - Legal requirements
Wills dispose of property when someone dies. Intestate if no will and testate if with a will.
To be enforceable it needs to conform to specific legal requirements and must be writing and must be witnessed.
An attestation clause is sometimes required to validate a will. States that the will was validly executed and must be witnessed.
Changing a will
To modify you need to write codicil.
To revoke you need to write in your new will that you are changing it and shred the old.
Oral and Handwritten Will
May count in some states.
Nuncupative is oral
Holographic is handwritten
Avoiding will contests
Usually started by disgruntled people.
Can have a no contest clause that takes away any right to property if anyone contests the will but not always upheld.
Advantage of Revocable Trust over POA
Revocable trust authority is recognized in more states and
Is still in power after death.
Estate Tax Calculation
Gross Estate (all the estate things plus 3 year look-back items)
Less taxes, debts, expenses
Adjustable Gross Estate
Less charitable and marital deduction and state taxes
Taxable Estate
Plus adjusted taxable gifts
Tax Base
Less $13,610,000 and multiply by 40%
Tentative tax
Less gift tax paid
Net Estate Tax
Three year look back rule
Gift taxes paid within last 3 years are included in gross estate
Transfers of life insurance by the insured within three years are added back
Survivorship annuity add back
Added back if there is a lump sum benefit or if there is a survivor annuity amount. The annuity amount is the present value of the future stream of payments.
Retained Life Estate vs Life Estate
Retained life estate are included in estate
Life estate are not included in estate
Both are essentially having claim to property for your life. Interest ends at your life for life estate.
Exclusion from Gross Estate
Life insurance owned by others
Completed gifts
Life estate on donors own life only
Lifetime Gifts and Testamentary Transfers
Gift tax and Estate tax both:
- Use same tax rate
- Apply single, shared exemption amount up to same amount
- Both provide an unlimited marital and charitable deduction
Exemption is used in full for both but gifts are added back
Exemption vs Annual Exclusion
Exemption is $13,610,000 for each person
Exclusion is $18,000 per person to each donee
Prior Transfer Credit
When a person dies and transfers their property to another person and that person receiving the property dies within 10 years, second person may be able to take a credit on the amount of estate tax paid that the first person to die had to pay.
Estate Liquidity
Appreciated assets that are marketable are good because they receive a step up in basis.
Annuities and ordinary income assets do not get a step up.
Closely held businesses need buy-sell agreements.
Estate could be forced to sell assets for cheap to raise cash.
Life insurance is great too.
Life Insurance Ownership
If incidents of ownership exist, then the life insurance is included in the gross estate.
Powers of Appointment
If a general power that is not a 5 or 5 power, then it is always taxed for estate and gift tax if lapsed, exercised, or relinquished.
This power is held by donee and they can have either general or special or the others.
Requirements for Valid Gift
Donor must be capable to transfer
Donee must be capable to accept
Must be delivery and acceptance by donor and donee
Valid gift requires donative intent by donor
To be subject to taxation under federal law, then a gift must meet the above and these two modifications:
Donative intent is NOT required
Gift must be a complete gift when donor has parted with dominion and control
Gift giving techniques
Forgiveness of debt
Below market rate loan
Assignment of benefits of a life insurance policy
Transfer of property to a trust
Appropriate Gift Property
Highly Appreciated (Low Basis): Best for a charity or donee or low tax bracket. May want to keep until death for step-up
Likely to Appreciate: Good to gift to remove appreciation
Income Producing: Gift to low income tax bracket donee
Loss Property: Best to sell and take the loss then gift cash
Depreciating Property: Best to to keep until fully depreciated
Out-of-State Property: Gift
Life Insurance: Excellent to gift, tax is based on replacement value but benefit is on face value
Present vs Future Interest Gifts
Present Interest Gifts get the full exclusion but Future Interest Gifts do not get the full exclusion
Exceptions are 529s, future gifts for minors, 2503(c) trusts, or Crummey trusts
Gifts to noncitizen spouses
Only up to $185,000 is non-taxable if from US Citizen to Foreign Spouse
Increasing Basis on Appreciated Gift
Property must have had appreciation AND gift tax must have been paid by donor
If these are both true, then the tax attributable to the appreciation is added to basis
Gifts that have Debt
Usually involved gifting the property along with its mortgage.
FMV - Debt = Amount of gift
if debt is greater than basis then: Debt - Basis = amount added to basis of the gift
if debt is greater than basis then: Debt - Basis = amount of capital gain to gifter
When to file Gift Tax (709)
When:
- More than $18,000 is gifted
- Gift of future interest is any amount
- Gift splitting between spouses (must be done while married) (need to have been married when you make the gift to actually split it)
Gift Splitting
If splitting a single owned asset:
- If over $18,000 (maybe any amount) then return is required just for the one filing and signed by other
- If over $36,000 then both need to file 709
If splitting a dual owned asset (community property or JTWROS):
- If under $36,000 then no 709
- If over $36,000 then you both need to file 709
Gifting Jointly Held Property
Gifts are completed when fully transferred. Exceptions:
- Joint tenancy bank account, gift is only when the donee withdraws funds
- Government savings bond, gift is only when donee redeems the bond
Deductible Gifts
Qualified payments in any amount made DIRECTLY to medical or educational institutions on behalf of someone
Gifts to spouse or charity
Gifts to politics
Definition of Incompetent
Not legally qualified
Lacking qualities needed for effective action
Unable to function properly
DPOAHC
Concerns medical decisions
Always springing
Drafted separately from DPOA
DPOA
Given basically all financial powers except for power to execute a will or living will
Living Will (Advance Medical Directive)
Legal document directing the client’s physician to discontinue life sustaining procedures if in a terminal condition.
Guardian vs Conservatorship
Guardian takes care of kids
Conservator takes care of financial decisions
Both are appointed by the courts but they will usually follow the will
Revocable trust (incompetency)
Can have provisions that specify management by the trustee in the event of the grantor’s incompetency.
Medicaid Planning
Below $2k in countable assets and cannot transfer assets out within 5 years or else those will have to be outlived first. Annuities have to be titled to state.
Special Needs Trust
For special needs people who do not have assets themselves. People can transfer funds into these trusts and they do not count as assets for the person. They provide coverage for supplemental needs not covered by Medicaid, section 8 housing, or Supplemental Security Income ONLY.
Gives a private source of funding and is sometimes used by people disabled and receiving settlement payments.
Helps prevent exploitation of disabled people.
Anything left to go to a beneficiary.
OBRA (Omnibus Budget Reconciliation Act of 1993)
Payback trust is for someone that does have money, is disabled, and is younger than 65. They transfer assets into this trust and it avoids the 5 year lookback rule but then the state gets to collect the costs that it spent on you (so it’s like the first beneficiary).
OBRA payback trust.
No direct access to trust funds I believe.
Per Stirpes vs Per Capita
Per Stirpes is per category of people
Family of 5 kids, each kid gets 20%
If one of the kids dies then their kids (grandkids) get 20%
Per Capita is per person
Family of 5 kids, each kid gets 20%
If one of the kids dies then the deceased has 4 kids then the inheritance is split 8 ways (4 original kids and 4 grandkids)
If only per kid, then if one died the inheritance is split 25% each
Distributable Net Income (DNI)
Three components:
- Provide the estate or trust with a deduction for amount distributed to beneficiaries
- Limit the portion of the distribution that is taxable to the beneficiaries
- Ensure the character remains the same so there is no double taxation. Trust receives a deduction and beneficiary is taxed on the lower of the amount actually distributed or DNI.
Revocable vs Irrevocable Trusts
Revocable trusts the grantor reserves the right to alter or terminate the trust and take the property back. Grantor is usually the trustee.
Irrevocable trust the grantor cannot alter or change the trust unless with approval from court. Rarely included in grantor’s estate.
Crummey Trust Withdrawal Right
The donee can ONLY withdraw the lesser of the amount contributed or $18k.
If there was no amount contributed to the trust (not income) then the donee cannot withdraw anything.
Inter-Vivos Trusts (usually revocable) vs Testamentary Trusts
Inter-Vivos are established during life and are taxable to the grantor. Transfer to it is not a taxable gift. It organizes property, avoids probate, alternative to guardianship or conservatorship, greater privacy, speedy disposal.
Disadvantages are fees, funding, and longer creditor period.
Testamentary trusts are created through a will.
Spendthrift Provision
Beneficiary cannot mortgage their share or sell a future interest in their amount. Creditors are not subject to it.
“A” Trust - Marital Trust
Second spouse gets to control the assets
Property passes by spousal exemption
Included in estate of both spouses but estate taxes at death of second spouse. Decedent spouse gets marital deduction.
Pays income out annually
Surviving spouse has lifetime or testamentary general power of appointment over property and can send it to whoever they wish.
Surviving spouse has all right to income and can invade corpus
Technically a simple trust.
Portability of Unused Exemption
If spouse does not use their full exemption, the surviving spouse can use it up to the unused amount
Estate Trust
Marital trust that does NOT provide an income stream.
Usually holds non-income producing assets.
Gets marital deduction.
Pour-over Trust
A pour-over will catches any assets that the client owns but are not controlled by the revocable trust at death. Trust needs to be set up first.
Questions wanting to reduce estate tax between spouses
Fill up the bypass trust to the full amount of the exemption first and then go to QTIP or whatever.
Tax attributable to a QTIP
The taxes attributable to a QTIP received from a surviving spouse have to be taken by the QTIP. So if anyone’s estate pays tax on it, then it gets reimbursed from the QTIP.
Satisfying family members and spouses with a house
If you want the assets to go back to the original kids, then you can do a QTIP provision but could be easier to have an agreement where you agree to sell the house to the spouse.
UTMA/UGMA
UGMA can only take cash, life insurance, securities, and annuities.
UGMA cannot be funded testamentary.
18 becomes theirs
UTMA can take just about anything including LPs and real estate.
UTMA can be funded testamentary.
21 becomes theirs
For both, if the donor dies before the kid gets to the age of majority then the amount is included in the donor’s estate. (Technically a general power of appointment)
Custodial gift may only be for one person.
Not a trust.
Account cannot be used to fulfil legal obligations.
Any adult can be the custodian
2503(b) Trust
Income-producing investment
Gifts are a future interest but income is a present interest
Income needs to be distributed annually, corpus does not
Income is subject to kiddie tax
2503(c) Trust
Can take any investment
Taxed at trust rates
Costly to set up
Funded as present interest
Trust must provide that the income may be used for the minor before 21
At 21 the minor has to be able to use the assets
If donee dies before 21 then the assets go to the donee’s estate
Trust does not have to end at 21
If the donor dies before 21 then the full value of the trust is included in their estate.
Complex Trust vs Simple Trust Exemption
$100 for Complex
$300 for Simple
529 Plans
Can contribute up to $90k a year but need to outlive 5 years and cannot contribute anymore next 5 years (no gift tax)
$10k for student loan interest (lifetime) and K-12 expenses (per year)
Donor retains control.
Investments are limited and you don’t control them in a 529.
Types of Trusts for Education
529s are great but you can also use a 2503(c) trust, really any of the trusts work but there are better options.
Sprinkling vs Discretionary vs Support Trust Provisions
Sprinkling: Only INCOME is distributed at the discretion of the trustee for the beneficiary.
Discretionary: Trustee can distribute income and principal to beneficiary.
Support: Income and principal can be distributed to beneficiary for their support or education.
Income and Remainder Interest
Remainder interest is a future interest.
Rules Against Perpetuities (Dynasty Trusts)
The max you can do is up the youngest living person in a trust as a beneficiary PLUS 21 years and 9 months.
Dynasty trusts act like a bypass trust with using the full exemption and income benefiting the beneficiaries. Beneficiary interests are limited to life estates. Can be longer if state allows.
Stating a number of years can violate a dynasty trust.
CRATs
Fixed payment to beneficiary
no additional payments allowed
payable to any charity
Income tax deduction for the present value of the remainder interest. Must be at least 10% ending value.
Term of years cannot exceed 20 years. Can also be life estate.
Property may remain in trust and go on indefinitely being held by the charity.
5% minimum payout.
CRUTs
Same 20 year rule (or life income) and 5% minimum requirement for payment.
CRUT provides inflation protection
Can make more than one transfer into trust
Corpus must pay out a specified percent each year of the reappraised value of the corpus.
Terms for both are held by the trustee.
Trust must not provide a discretionary benefit for beneficiaries
Property for both needs to be income-producing. (not land)
both can invest in MUNI bonds
Income tax deduction for present value of remainder interest.
If grantor is recipient of income, no gift tax because it is theres.
If spouse, they get spousal deduction.
If child then it is present value of payments as gift tax.
Get income stream, current year tax deduction, and get the asset out of your estate by having it go to the charity.
Included in gross estate but removed by charitable deduction.
NIMCRUT
Essentially this is a deferred CRUT. Great way to defer income.
Receive the lesser percentage of the trust’s value of net income earned during that year. The account accrues in the years when net income is less than the fixed percentage of the trust’s value.
Wealth replacement trust
Donors may still need to meet the financial needs of heirs or provide estate liquidity. This trust is an ILIT with a face amount that is less than or equal to the value of the property in the trust.
Great way to save estate taxes and benefit his children.
Charitable Lead Trust
CLAT
Get an upfront income tax deduction for present value of payment stream.
Future income will be taxable to grantor.
If established at death, estate can take the then-present value of the payment stream as an estate tax charitable deduction.
Any excess income goes to children.
Works best for wealthy, estate-tax avoiding clients. Highly appreciating assets can be a very solid technique to have the growth, avoid the estate tax and get it to your beneficiaries.
Charitable Gift Annuity
Donor transfers cash or other property to a qualified charity who exchanges it for a specified amount each year. Difference between the amount contributed and present value is a deductible charitable gift.
Property is transferred to a charity.
Charity receives the money now.
Value of property exceeds the annuity.
No 5% rule applies
Life income only
Pooled Income Fund
Donor transfers property to a charity that is a common trust fund. Your income is mixed with everyone else.
This is NOT a fixed annuity, it is a percentage of income based on the trust income that is distributed on an annual basis.
No 5% rule
Cannot invest in munis.
Lose control of the assets.
Charity keeps the assets after you die.
Cannot change your mind.
Income tax deduction and gift tax deduction on present value of the remainder interest. Remainder interest is irrevocably earmarked to charity.
Cannot be term of years, has to be life.
Donor cannot be trustee.
Life income only.
Selling Property and then gifting to charity
Usually don’t want to recognize tax and then gift
When asked for a MAX charitable deduction
This means what is the overall max not just for that year. If it specifies for that year then go with that but if not then it is asking for overall largest between all years.
Private Foundations / Family Foundations
Need to distribute 5% to either a charity or even to a noncharitable person for either: Skills, School, or Scholarships
Family keeps control and it needs to follow state laws to stay a qualified charity
Family has control to direct the payments to any charity they want
Excise tax of 2% of net investment income
15% tax if the 5% annual distribution is not met
5% Mandatory Distribution
For CRATs, CRUTs, and Private Foundations
Supporting Organizations
No 5% mandatory distribution
Created to benefit one charity or a couple.
Good for a person wanting to support a charity but over time.
Needs to be operated, supervised, by the charity. Charity needs 50% or more of the board of director seats and no veto power to the donors.
No 2% excise tax
Donor Advised Fund
Three requirements
- It is separately identified for gifting referencing the donor
- The organization owns and controls the DAF
- The donor can advise where the money goes and investment advice (they can only recommend)
Controlled by the organization but funded by the donor.
Conversion of appreciated securities into tax-exempt securities
Can use CRATs or CRUTs to create tax-exempt income but it is not safe to assume the capital gain realized on that conversion will not be attributed to the donor.
Charitable Stock Bailout
Client owning stock in a closely held corporation may want to gift some. Charity will tender the stock for cash.
Advantages include saving income tax, “bailing out” corporate earnings and profits without incurring dividend income, helping others concentrate their ownership, and enabling the charity to receive cash.
Stockholder and charity cannot agree to the time or certainty. Cannot be an understanding or contract to redeem stock at a specific time.
Donor gifts the stock and charity redeems it.
Charitable Bargain Sales
Property sold for less than FMV.
Basis = (FMV / Price sold) * Original Basis
Price sold - basis = recognized gain
FMV - price sold = charitable deduction
Incidents of owernship
Cash value
Changing beneficiary
Naming beneficiary
NOT paying the premium
Ownership for life insurance
Best between spouses but if estate tax is a concern then it is good to have spouse as owner and beneficiary, mature child, or irrevocable trust
Usually best to keep secondary beneficiary away from young kids and better to have that go to a trust
ILIT
Owner and beneficiary of a life insurance policy. Does not allow any incidents of ownership.
When are life insurance proceeds included in estate
- Proceeds are paid to executors estate or to help with any of the estate taxes of the decedent
- Decedent possessed an incident of ownership in the policy
- Decedent gifted their policy within three years
Life insurance inclusion in estate
ONLY when decedent was the owner and is the insured.
Decedent is the owner and insured:
- he dies, then included in estate
- transfers to anyone else and dies within three years, included in estate
- transfers to anyone else and outlives three years, not in estate
- sold the policy, not in estate (no 3 year rule)
Decedent is the owner but not the insured:
- gift it to someone else, gift tax but nothing with estate (no 3 year rule)
- die with this ownership, estate tax on replacement value (no 3 year rule)
included in your probate estate if beneficiary is your estate for owner and if there was no secondary owner on a policy you owned
Gifting life insurance
Taxable gift can arise (less annual exclusion)
Term - unused premium
Whole - interpolated terminal reserve
If three different people are the owner, beneficiary, and insured, then it turns out to be a gift from the owner to the beneficiary in the face value amount
Interpolated Terminal Reserve
Difference between the two terminal reserves given (a)
Months since the last premium paid (b)
Months until the next premium (c)
Premium payment (d)
Start terminal reserve (e)
(a)(b) = (f)
(c)(d) = (g)
(e)+(f)+(g) = Reserve
Preferred Stock Corporate and Partnership Recapitalizations (2701)
Can reduce the value of the business interest in estate through stock recap or by gifting closely held stock.
With a regular C Corp you can gift common shares, keep all the preferred shares that pay dividends with voting rights and in that way get rid of the appreciating stock and keep the dividend paying and controlling stock.
This freezes the stock.
Retained Life Estate
Transfer in a trust for less than full consideration and retaining the control makes it a retained life estate.
Valuation Discounts
Minority: Small shareholder cannot influence policies
Marketability: Lack of an established market, discount can go from 15% to 50%
Blockage: Large block of publicly held stock and selling it all could decrease the market price
Key Person: Available for a business that lost a key employee
Marital Deduction Rules
Need to be one of these situations:
- included in decedent spouse’s estate
- property passes to surviving spouse
- interest passing to the surviving spouse is not a terminable interest
- receiving spouse is a US citizen
These qualify:
- Outright transfers
- Property passing to a A Trust, Estate Trust, or QTIP
Terminal Interest Rule
Interest that is contingent upon something, if it end then it does not qualify for the marital deduction
Exceptions:
- Life estate for income but a general power of appointment
- QTIP
- QDOT
QDOT
When transferring property from a US Citizen spouse to non citizen spouse then you can use this to defer the tax. This qualifies for the marital deduction. Estate tax is paid on the second death.
If going to a US spouse then you have full marital exemption available.
To qualify for deferment if going to non-US spouse it has to be through a QDOT. Exemption of $13,610,000 would be available for resident alien through this.
If no QDOT the US spouse can use their exemption.
Exclusions from Gross Estate
Spousal property
One half of community property
Life insurance owned by others
Life estate
Net Gifting
Two qualifications
- Need to have maxed out your exemption
- Gross estate needs to include the gift tax paid if dead within three years of transfer
Donor gifts property to donee and donee agrees to pay the gift tax. That would be 40% on the value of the gift and then take that amount and divide it by 1.4
$1M gift = $400,000 / 1.4 = $285,714 in gift tax paid (less than what donor pays)
That gives you the amount of gift tax that needs to be paid by the donee. If the donor dies within 3 years then the gift tax is included in gross estate.
Donor gets credit for that amount of gift tax paid.
Great if donor wants to gift a lot but does not have the cash to pay the gift tax.
Reverse Gift
Gifting to a person who then dies and you inherit the property with a step-up in basis. Person needs to live at least 1 year for this to work.
If beneficiary is someone other than you then they get a full step-up.
Bypass trust questions
Only add up to the exemption amount and no more. Max the exemption and move on.
If there is a big estate and you want to get assets out
Transfer the more expensive assets to get them out of the estate with a Net gift but doing small things may not accomplish as much
Gifts into irrevocable trusts
A future interest so no annual exclusion.
Where to send a life insurance death benefit to pay estate taxes
Send to the estate
If you exercise your 5 or 5 power is there any amount that is included in their gross estate relating to the trust?
NO!
Since you exercised the right, you took the greater of $5k or 5% so that is now your money, no part of the trust is in your estate now.
But, if you do not exercise that then that amount is included in your estate.
General Power of Appoint - Gift and Estate Tax
General Power of Appointment with no 5 or 5 power is always subject to some sort of tax if released, lapsed, or exercised.
Power of Appointment Options
Exercise
Lapse
Release
Taxable Gift vs Gift Tax
Taxable Gift can be absorbed by the gift tax exemption
Gift tax is when it is over the $13,610,000 + $18,000 if applicable
Gift Tax Exemption vs Exclusion
Exemption is $13,610,000
Exclusion is $18,000
Tax Forms
706 - Estate Tax
709 - Gift tax and GSTT
Paying for medical expenses or college tuition
Does not produce a taxable gift if paid directly to the institution.
If paid to the child who then pays it to the school, then it would be a taxable gift.
Best assets to gift
Muni to kids
Growth to young
Bonds to old
Depreciating assets to high wealth
How many beneficiaries can a trust name
Trust can name multiple beneficiaries
QTIP Assets for the spouse
Assets need to be income producing, so the spouse is granted a power to demand that all of the trust assets be income producing.
Can also be a house retained life estate.
Minimize Estate Tax Questions
Max the bypass trust to the full exemption and then move on
Type of Assets to buy for kid (kiddie tax)
Look at time frame and when they will need the bond to make sure that the duration matches up more or less
Think about kiddie tax and rate of return
Question for income needed in the future for a kid who spends too much
UTMA and UGMA are no, 2503(b) trusts would pay out immediately
Irrevocable trust with crummey provisions could be solid if the child goes with it to pay out income to him as he needs
Gifts qualifying for annual exclusion
Irrevocable trust - Future interest (does not qualify)
Irrevocable trust with Crummey provision - Present interest if right is waived (qualifies)
2503(b) trust - future interest (does not qualify)
UTMA / 529 - Present interest (qualifies)
Property Transfers when owner needs income
Installment Sale
Self Cancelling Installment Note (SCIN)
Private Annuity
Grantor Retained Annuity Trusts (GRATs/GRUTs)
Grantor Retained Trusts (GRIT) - No Family Members
Property Transfers when owner wants to gift assets or income to family
Partnership / S Corp Share Gifting
Family Limited Partnerships (FLPs)
Gift Leaseback
Qualified Personal Residence Trust (QPRTs)
Installment Sale
Spreads out taxable gain from property sale
Seller removes an appreciating asset from their estate but if they die during the payments then the present value of the remaining payments is included in their estate.
If installment is forgiven in sellers will, debt is considered paid to the estate and estate reports gain.
If installment sale is cancelled or payment is forgiven, seller must recognize the gain.
If property is sold within 2 years of purchase by related party then all gain is taxable to seller.
If there is any depreciation, all the 1245 recapture is recognized at the beginning (HUGE disadvantage).
Self Cancelling Installment Note (SCIN)
Provision in this note where balance of any payments due at date of seller’s death are cancelled. Best when seller wants to have payments that will stop at their death.
SCIN lets buyer depreciate assets on purchase price and deduct interest.
SCIN is removed from the estate at death.
Buyer pays a premium on the note to make up for the note being cancelled at death. That is more income to seller.
Private Annuity
Selling an asset for a unsecured promise for a life annuity. Not through an insurance company.
Property is completely excluded at death.
No taxable gift as long as value of property transferred equals the discounted value of annuity.
All the gain in the asset is recognized at the very start of the annuity (VERY bad). This can only really be used for low gain assets or person has enough losses to offset income.
S Corp Share Gifting
Great way to transfer equity in a closely held family business.
Gifts can be made to younger family members in the annual exclusion.
If gift is to kid under 24, kiddie tax rule applies.
Business has to be capital sensitive business, NOT service related.
If turning 24 this year with S Corp income
If you are turning 24 this year then you will not have kiddie tax.
Family Limited Partnership (FLPs)
Partnership that is owned by family members. If it has a real business purpose it is taxed like a partnership. FLP is a way to shift income.
FLP requirements:
- income and tax benefits need to be distributed according to ownership
- general partners can be paid a salary
- capital must be materially producing factor and cannot be personal services
FLP benefit is the ability to transfer ownership but retain control. General partner maintains managerial control and decides on everything.
FLP Discounts in Valuation
Lack of Control - Not enough control in the business
Marketability - Not many buyers
Can be up to 50%
Contribution of Property
One disadvantage in gifting assets is that property and family members lose the step-up in basis at death of parent. Interests given by the parents retain the parent’s income tax basis. Character of gain or loss is determined at partnership level.
Limited Asset Protection
General partners are liable to business creditors.
FLPs provide limited degree of asset protection to partners since assets of FLP usually cannot be attached to satisfy personal debts of partners.
Service Related Partnerships or S Corps
If they are service related then shifting income to kids would be assignment of income and would not work.
Ancillary Probate
Partnership is considered personal property, so real estate owned by the partnership avoids ancillary probate.
Gift-Leaseback
This is best with depreciated property.
Parent gives fully depreciated property to a lower tax bracket family member and then leases the property back from them. Business can claim a deduction for the expense.
Ability to deduct payments depends on having a legit business reason and charging a reasonable payment with a written lease.
This will trigger kiddie tax if kid is under 24.
If giving assets to a minor
It will incur kiddie tax so you want to be careful what you transfer. You do not want to gift and then lease because that will trigger kiddie tax.
You want to establish a FLP with equipment and slowly gift interests to his son over time using an annual exclusion so there is a lower change of triggering kiddie tax.
If kid is over 23 then gift-leaseback.
Bargain Sale
Bargain sale is a combo of gift and sale.
FMV - Sell Price = Gift (annual exclusion applies)
Sell Price - Basis = Gain for seller
NO basis adjustment here, that is ONLY for charitable bargain sales.
GRATs
Irrevocable trust where grantor transfers property (appreciating or income producing) in exchange for right to fixed annuity for a number of years (NOT LIFE).
When term ends, balance is transferred tax-free to beneficiaries. If grantor does not outlive the term, all property is brought back into their estate.
Gift to the trust is a gift of future interest, no exclusion. Present value of the remainder interest to the beneficiary is a gift.
GRUTs
Irrevocable trust with a right to receive a fixed percentage each year of the net FMV of the trust assets which are determined annually.
BEST assets to have in a GRAT or GRUT are appreciating assets, not necessarily income producing.
GRAT is usually more convenient that a GRUT just because it is simpler.
GRIT
This is an irrevocable trust where grantor retains a right to income for a period of years (does not mean they will actually take any income). GRIT is not as effective because the value of the property transferred into the trust is reduced by the retained interest (which is zero). That means that the entire amount put into the trust is a taxable gift.
May be effective with a non-related party or QPRT. Good answer for common-law relationships.
QPRT
Irrevocable trust where a grantor transfers their personal residence retaining an interest for personal occupancy for a period of years, after which the residence transfers to beneficiaries outright or in trust.
Present value of remainder interest is a taxable gift of future interest.
Up to 2 residences may be transferred into QPRT but if two are transferred, one has to be your primary residence. Other may be rented.
QPRT is best when:
- Residence is large (over $1M)
- Life expectancy is reasonable
- Donor still lives in it
- Estate is large (over exemption amount)
If you die before the term is over, date of death FMV is included in donor’s estate as if the QPRT was never established. Taxable gift is voided.
Grantor cannot consistently pay the mortgage, they can only pay it up to 6 months. If residence is sold, proceeds need to be used to buy new residence in 2 years (or paid out to grantor) or proceeds can be held in trust and need to operate like a GRAT.
When to do a QPRT is a large estate
If you have very large homes (over $1M) and large estate, great way to chip down your estate is put your residences into a QPRT.
GRATs, GRUTs, QPRTs
NOT good if the client may die because the assets will stay in the estate.
GSTT
Tax is assessed when wealth is transferred to each generation.
Skip Persons
Skip Person is anyone who:
- Related person who is 2 generations lower than the grantor (not sisters kid) (usually is grandkids or grandnephew)
- Unrelated person who is 37.5 years YOUNGER than grantor
If the parent of the person is dead, then they move up one generation. So if grandkids parents are dead, then they are 1 generation lower than grandparents.
Exemptions and Exclusions from GSTT
$13,610,000 is exempt from GSTT. $18,000 annual exclusion is available for lifetime generation-skipping DIRECT skip gifts. Spouse can gift split.
Taxation of GSTT
Flat tax of 40%
Gift tax paid within 3 years is brought back into gross estate.
GSTT paid within 3 years in NOT brought back into gross estate.
Transfers to Skip Persons
Direct Skips: Transfers directly to skip persons. Transferor pays for the GSTT due. Annual exclusion is allowed. Present interest gift.
Taxable Termination: When skip and nonskip person are in a trust and the nonskip person either dies or is removed and the income is distributed to the skip person. Trustee pays for the GSTT due. No annual exclusion. Future interest.
Taxable Distribution: When skip person is in a trust and there is a distribution of property to the skip person. Skip person pays the GSTT due. No annual exclusion. Future interest.
Gift Tax and GSTT Due
Estate of $18,610,000 that is transferred to a skip person
Exclusion is $13,610,000 so that leaves $5,000,000
$5,000,000 * 40% = $2,000,000 Gift tax due
($5,000,000 - $2,000,000) * 40% = $1,200,000 GSTT due
These are two separate taxes that are applied.
Present interest vs future interest gift
Present interest is available for annual exclusion
Future interest is not available for annual exclusion
Distributions at death are not available for annual exclusion
Fiduciaries
Executors, Trustees, Guardians, are all people that occupy a position of special trust in relation to another person. Usually involves holding legal title to property that must be handled for the sole benefit of another person.
Court will appoint a executor/personal representative to act as fiduciary to represent and manage the probate estate.
Trust names the trustee and established duties.
Guardians for minor and conservator for adults. Annual reports must be submitted to the court. May also need special approval for certain expenses to sell the ward’s assets.
Duties of Fiduciaries
Duties:
- Loyalty to beneficiaries
- Not self-deal
- Preserve property and make it productive
- Be impartial toward all beneficiaries
Breaches:
- Trustee sells assets to himself below FMV (self-dealing)
- Executor leaves large amount of cash in checking account, not making it productive
Beneficiaries have the right to take civil and criminal actions against fiduciary for breach of fiduciary duty
Credit for GST taxes paid
No credit is available like for GST taxes because they are separately applied taxes.
Income in respect of a decedent (IRD)
IRD is income (including capital gains) that a decedent had a right to but didn’t actually receive.
Salary payments, IRA payments, S Corp income, etc.
Normal business deductions are allowed.
IRD Tax Treatment
IRD must be included in the gross income of the recipient (often the estate).
The estate is allowed an income tax deduction for the estate taxes attributable to the fee collected.
Find that by finding the gift tax before and after the IRD and that amount of tax payable is a deduction for income tax purposes.
Alternate Valuation Date (AVD)
Executor of a decedent’s estate may file an election to have the assets valued 6 months after the decedent’s death. Must meet the following:
- Electing AVD must reduce gross estate
- Must reduce estate tax liability
- Must be applied to all properties
- Cannot be elected to depreciating properties (annuities)
Executor cannot choose the AVD in these three scenarios:
- Assets going to spouse
- Assets going to charities
- Assets passing to kids under the exemption
If AVD is chosen, then the basis steps up according to the AVD price
Property that is sold before AVD
Revalued at the date of sale
Wasting Assets for AVD
AVD does not apply to assets that decrease in value normally
Capital Gains on Inherited Property
ALWAYS LTCG
Basis if FMV on DOD
Disclaimer
Unqualified refusal by a potential beneficiary to accept benefits.
If a qualified disclaimer then it is regarded as no transfer made by the disclaimer in regards to gift, estate, or GST tax.
To be qualified a disclaimer must:
- Be irrevocable
- In writing
- Must be received within 9 months of either turning 21 or date on which the transfer creating the interest was made
- Not have any benefit
- Go to someone other than you
Best to use when you have a large estate yourself and don’t want to add more assets to that.
Disclaimer Trust
This is an irrevocable, testamentary trust. Usually included in the will.
This is a way to disclaim the property but receive a stream of income from the property.
If there is no other beneficiary, then the spouse disclaiming the property could have the property go to a disclaimer trust that pays income to the surviving spouse.
Can retain a life estate but cannot have any power to invade corpus (unless it is a ascertainable standard.
- Cannot be a contingent beneficiary or else it will pass to them. Need no other beneficiary and no TE property.
Postmortem Election for Estate Liquidity
Section 303 Stock Liquidation
Section 6166 Installment Payments
Section 303 Stock Liquidation
Allows a corporation to make a distribution of a portion of the decedent’s stock that will not be taxed as a dividend.
This election provides cash to the estate up to the amount of estate tax or expenses incurred.
To qualify:
- Business needs to be a closely held corporation
- Value of decedent’s stock must be more than 35% of his Adjusted Gross Estate
- Can only take an amount equal to the expenses and taxes owed.
Section 6166 Installment Method
If estate qualifies, this lets the estate tax attributable to the closely held business interest to be paid in 10 equal installments starting 4 years after the decedent’s death.
Special 2% rate applies to portion of estate tax on closely held business where payments are deferred. Max amount of tax to be deferred at 2% interest is $1,850,000.
45% interest and 2% interest cannot be used to deduct against estate tax. 45% underpayment rate pertains to tax due above $1,850,000.
Requirements:
- Must be a closely held business that is more than 35% of you adjusted gross estate. (Corp, partnership, all kinds)
- can aggregate other closely held businesses that you are more than 20% owner
- Amount of federal estate tax or GSTT which can be deferred is only that amount of value attributable to the value of closely held trade or business. The balance must be paid at regular payment date.
Closely Held Business Definition
Interest can be in a sole proprietorship, partnership, or Corp but must be actively carried on and requires a management function.
Special Use Valuation 2032A
Valuation method for eligible real estate used with a closely held business or farm. If elected, this can result in a max reduction of $1,390,000 from the decedent’s gross estate on the value of the real property used.
To qualify:
- Property must be for qualified use and used for 5 out of last 8 years
- Needs to be used for next 10 years by qualifying heir
- 50% of gross estate must be personal property use for qualified use (net of liens)
- Real property must be 25% of gross estate
- Max amount of reduction is $1,390,000
Whenever a 2032A election is available, it also qualifies for a 6166 election.
Estate Planning for Special Circumstances
Need independent planners for each divorced partner, conflict of error and error and omission may occur if not.
Three planning considerations:
- unmarried partners will not be entitled to certain advantages provided by state law like elective share
- Surviving unmarried partner will not get unlimited deduction
- If partners do not have children in common, guardianship may be a problem
Best Transfer Strategies for Unmarried Partners
Best:
- Revocable Trust
- Tenants in Common
Worst:
- Will (can be contested by spouse or disgruntled family members)
- No will (court decided on disposition of assets)
- JTWROS - too much exposure that transferee can close out or spend the account also subject to both creditors
JTRWOS Bad things
One of the partner can sever the tenancy
Non contributing partners can make withdrawals
Withdrawal can be a taxable gift
Asset could spend without others knowledge
Asset can be attached by creditor of other
Non-traditional partners can use a GRIT for estate planning
Charitable transfers to receive life certain OR term certain up to 20 years?
CRUT or CRAT
NOT pooled income fund or gift annuity
Best beneficiary designation for life insurance
Best to have the spouse as the primary
Best to have a trust as contingent
Not good to have minor kids as contingent beneficiaries
Resident Alien Estate Tax Exemption
Same as US citizen of $13,610,000
If receiving spouse is US citizen then they can claim the marital deduction
If receiving spouse is not US citizen then they need a QDOT to defer estate taxes
Exemption is available for resident aliens but marital deduction is not available for resident aliens
No lifetime exemption for non-resident aliens
CRAT and CRUT Importance
Best when you want a stream of income, want a income tax deduction, and want multiple charities to benefit.
May be in your estate but most will be deducted with charitable deduction and possible marital if spouse is beneficiary.
Charitable Transfers when you need income
CRATs
CRUTs
Pooled income funds
Charitable annuity
Charitable transfers when you want to transfer property and don’t need income
CLAT
Private foundations
Supporting organizations
Testamentary Trusts
Trust itself is not subject to probate
Can be created and funded before death
Usually funded after death by the will
Assets go through probate and then into the testamentary trust
Limitations on noncitizen spouses
- no marital estate deduction
- exemption amount remains available
- jointly held property is not one-half owned (ownership based on consideration)
- tax free gift limit of $185,000
To qualify for the marital deduction, property must pass through a QDOT. Intent is to ensure collection of estate taxes on marital deduction property intended for benefit of a foreign spouse who may have looser ties with the US.
Terminal Interest Rule
Terminal interest is one that ends on the event of something. Exceptions:
- spouse receives a life estate income (housing counts), payable annually, plus a general power of appointment
- executor elects QTIP
- executor elects QDOT
Getting a life interest counts for marital deduction.
Which type of asset to select for a kids UTMA account that is used for college (kid is 11)
Best answer is growth stocks - 7 years until college starts
Don’t want anything that will produce income because of kiddie tax
Avoid very similar answers. There was STRIPS and corporate bonds, both would pay income and possibly have kiddie tax. Both are very similar so avoid.
Want the growth and limited income.
Getting an income producing piece of property out of business and estate to family but maintain control
If using in your practice and wanting to split with kids then FLPs are great and so are gift leasebacks
If you do not want to lose control, then do FLPs.
If want to continue depreciating the asset, choose FLPs.
With a gift leaseback you lose control of the asset. Kids get income but you lose control.
With FLPs you maintain control, share income, and can keep depreciating.
With gifting business assets, you basically lose control in every situation except FLPs.
Divorce decree for client requires them to have life insurance
Have to keep that for the client then
Wanting to give income annually to a kid to support them
If between a 2503(b) trust and a Crummey trust, usually take the crummey because the donor gets the annual exclusion if the right is passed on by the beneficiary.
2503(b) trust works but it is a future interest gift and will be a taxable gift.
When wanting to fund a child’s education fund
If they are getting paid it makes sense to contribute to their 529 instead of UTMA because of kiddie tax. Always great because earnings are tax deferred and donor retains control.
See if the numbers they give you make sense.
Kids getting paid by corporations vs self employed parent
Corporation:
- FICA tax on earnings
- Tax is withheld on earnings
SE:
- Income tax would be withheld (no FICA tax because they are a kid under 18 employed by a parent
Obtaining Insurance
People can get coverage through group policies or private policies with no pre-existing insurance exclusion per the Affordable Care Act
Which trusts can include an ascertainable standard for spouses
QTIP trusts and Disclaimer trusts allow the spouse to take HEMS distributions
Marital A Trusts DO NOT allow the spouse to take HEMS distributions (because the spouse can access the corpus themselves)
If income is not mandatory to spouse then probably not available for ascertainable standard
Gift tax and GSTT exclusion
Mandatory for gift tax (not elective)
Elective for GSTT
Is 100/300/50 adequate for a professional?
NO
Tax for a minor working with their parent
No SS tax for a kid under 18 working for their SE parent
Life insurance death benefits
Technically get a step up at death
Are 529’s included in your estate?
No they are included in the beneficiaries estate.
Gift Tax and GSTT
Gifting anything to anything applies a gift tax
Gifting to a skip person triggers GSTT
Can use gift tax exclusion without using GSTT but still have GSTT available for future use, in that case there would be gift tax but up to the exemption amount of GSTT so in that way the two exemptions are separate
These are separately applied taxes with no credit for GST tax paid and nothing added back to estate tax calc from GST
Is life insurance owned by a person on someone else usually included in their probate estate?
Yes, the policy needs a contingent owner to not be included in their probate estate. Contingent owners are uncommon.
Mr. and Mrs. Perez have the following assets in a community property state:
$1M Home
$500k term life on Mr. Perez with Mrs. as beneficiary
$400k Mr. Perez IRA
$100k CD for Mrs. Perez (Mr. Perez is beneficiary)
$50k Tesla and $40k BMW
All of this is community property and therefore all of it is half owned by each
Amount in Mr. Perez’s gross estate: $1,045,000
Probate estate for Mr. Peres: $545,000
What is property acquired when you are living in a community property state with earned income during marriage?
It is community property.
If you were in a non-community property state buying property it would be quasi community property.
Is property that is titled with a beneficiary still half owned as community property?
Yes
Take a $400k IRA with wife as beneficiary
In common law state: $400k in husband gross estate and goes to wife
In community property state: $200k in husband gross estate and all of it goes to the wife
Dr. Swift holds this stuff in her name and lives in a community property state with her husband:
$500k inheritance
Swift Medicine sole proprietorship opened during marriage worth $250k
100% vested HR-10 plan funded during marriage (husband beneficiary) $500k
Stock account (earnings from marriage) $500k
Term on Dr. Swift (husband beneficiary) $1M
Whole life on husband (Dr. swift owner and beneficiary) $250k DB and $50k CV
Following is community property:
$500k house
$200k personal property
What is the value of her probate and gross estate?
Probate = $1,250,000 (half of community property estate (250+500+50+500+200)/2 + 500
Gross = $2,000,000 (half of community property estate (250+500+500+1000+50+500+200)/2 + 500
Inheritance is not community property
Everything else is community property because it was bought or acquired or appreciated during marriage with income earned during marriage.
Community property and other titling
JTWROS or Sole ownership is a method of holding title.
Community property is a characterization of the property that is held in the account.
So if a husband and wife both individually own cars that they both during marriage and each car is titled with sole ownership, technically both of those cars are equally owned by both because it was bought during marriage.
Since it is community property it would go through probate and get to the other spouse automatically.
John has $5,430 in an IRA, $338,300 of jointly held property with his wife, and $400k, $90k, and $157,119 of life insurance, what is his gross estate?
$821,699
Which of the following are general powers?
- Exercise for health, education, maintenance, or well being
- Exercise for ascertainable standard
- Exercise for all medical expenses
- Exercise in favor of holder
Exercise for health, education, maintenance, and well being along with exercise in favor of holder are general powers.
If just for health or ascertainable standard then it is not a general power.
Diane had a 5 or 5 power and exercised her power. Relating to the trust what amount is in her gross estate?
$0 because she already exercised her 5 or 5 power.
Will a lapse of a general power of appointment subject the holder to a gift tax liability?
YES
Mrs. Black gifts her daughter stock worth $218k. What is the amount of the taxable gift?
$200k
Mr. R bought stock for $1.7M and it jumped to $2M. By the time he gifted it to his son the stock came back to $1.7M and he paid $400k in gift tax. What is the sons basis?
$1.7M
If it had stayed at $2M the basis would be:
2-1.7 = $300k (amount of appreciation) * 40% = $120k of gift tax paid
$120k+$1.7M = $1,820,000
Mrs. Bower wants to gift assets to her kids and grandkids. What is the most appropriate gift of the following:
- Low basis, high dividend
- High basis, high dividend
- Low basis, high growth
Best would be high basis because they could sell it and not recognize income.
Max you can gift without causing a federal gift tax?
$13,628,000
Ethel and Fred Warner own a condo together in a community property state but the condo is registered solely in Ethel’s name. What happens if Ethel dies?
Half will be in Ethel’s estate and pass through her will and half is already owned by Fred so he will keep that half.
Which types of POA let the attorney in fact make gifts to the principal’s spouse in amounts not exceeding $18k?
Durable, springing, and nondurable
What are red flags that a senior citizen is being abused in terms of financial fraud?
Requesting more money, taking on a higher risk tolerance, caretaker asking for distributions for themselves.
What are the purposes of an inter-vivos trust?
- Avoid ancillary probate
- Be primary beneficiary of a pension plan
- Avoid will contests
- Reduce estate taxes
- Protect assets from creditors
Inter-vivos trusts can only do the first three:
- Avoid ancillary probate
- Be primary beneficiary of a pension plan
- Avoid will contests
It cannot reduce estate taxes or protect assets from creditors.
Main benefits of an UTMA over a 2503(c) trust
Cost and simplicity. Earnings are also taxed to the child in an UTMA rather than trust rates like a 2503(c)
What trust to use to fund education?
- 2503(c)
- 2503(b)
- Crummey Trust
2503(c) would be best in this case.
Which of these trusts would be effective for education funding?
- 2503(b)
- 2503(c)
- UTMA
- Crummey Trust
All but the UTMA could be appropriate, maybe not ideal but could work.
UTMA is not a trust.
Which trusts would pass estate tax free to Mr. Davis’s remainder beneficiaries or children?
- QTIP
- Bypass
- 2503(c)
Just the bypass (using exemption) and 2503(c) (annual exclusion)
The QTIP could be subject to estate tax in the wife’s estate.
Supportable answer for dynasty trust language
“as long as state law allows”
In dynasty trusts, transferors usually can create valid interests for their great grandchildren only if they outlive their children or specify the measuring lives as persons alive at the transferor’s death, is that true?
YES
Can a dynasty trust violate the rule against perpetuities by stating the number of years like 150?
YES
Are UTMA contributions capped at $18k?
NO
Any more than that will cause a gift tax
Can a trust name more than one beneficiary?
YES
Can the spouse of a QTIP ask the trustee to reposition the assets to create income?
Yes
Which account works better for getting income to your kid in the future, 2503(b) or Crummey trust?
Crummey is better, as long as they pass on the $18k you get to direct that amount for them and it qualifies for the annual exclusion.
When selecting investment options in an education account
Select something with a timeframe that matches the investment horizon
Sue gifts $80k stock that she bought four years ago for $25k to a local university. What is the MAX charitable deduction she can get for this? $80k AGI
Since the question does not specify in that year, then the max would be 30% of AGI so $24k with a $56k carryover to next years.
Which charitable transfers lets you take distributions for either life OR 20 years?
CRUTs and CRATs
Alice is making a net gift to her daughter in the amount of $518,000, what is the amount of tax paid by the daughter?
$518,000 - $18,000 = $500,000
$500k*40% = $200k/1.4 = $142,857
The daughter will pay less gift tax than Alice would’ve and if Alice dies within three years of this the gift tax paid will be included in her gross estate, she will also get a credit for the gift tax paid by her daugher.
Do QDOT assets go to where the first spouse wanted them to go?
YES
John and Mary both have IRAs with each other as the primary beneficiary and their children as the secondary beneficiary. What should they change their beneficiary titling to?
Spouse remains as first and testamentary trust as secondary beneficiary.
Who pays a higher price for premium for the SCIN?
The buyer pays for the higher price.
Will kiddie tax rules apply to someone who is 24?
NO it is only under 24
Vern wants to fund for college for his 16 year old daughter and has an S Corp from his architect business, S Corp from his printing shop. What is the best option?
- Gift his architect S Corp shares
- Gift his printing shop S Corp shares
- Find another source
Find another source. He cannot gift the architect S Corp (service business) and if he gifts the print business it might be subject to kiddie tax.
Dr. Boo owns a profitable clinic that has medical equipment. What should he gift to his son who is 18 if he would like to?
- Gift leaseback
- Sell it
- Create a FLP and slowly gift interests to his son
Create a FLP and slowly gift interests to his son while he is still in kiddie tax range.
If his son were 23 or older then you could do a gift leaseback.
What should you do if you have two large homes and want to reduce estate taxes?
Place them into a QPRT to reduce your estate tax exposure.
Can the residence of a QPRT be sold during the initial term of the trust?
No. If it is sold then the proceeds need to be used to buy a new home within 2 years, held as a GRAT, or distributed back to the grantor.
Trust can receive additions of cash to pay up to 6 months of mortgage payments.
Sherman died 2 months ago with a stock that he bought a while ago for $200k. It is now $70k and inherited by his wife who sold it on the AVD for $80k. What is the gain?
$10k LTCG.
Because there was no estate tax due the AVD could not be chosen so the date of death is its new FMV.
If the AVD is chosen can assets be valued at dates other than the 6-month mark?
YES, when they were sold
Abby’s inherited stock from her mother at $10/share and later sold it for $10/share. What is the gain?
NO gain because the basis is the FMV.
Can TE be disclaimed with a disclaimer trust?
NO
Whitley has a closely held corporation farm with land worth $13M and has an estate worth $28M. What can he qualify for?
- Net gift
- 303
- 6166
- 2032A
Only 303 and 6166. Not 2032A because it is less than 50% of his gross estate.
Special use valuation can be elected for which assets?
Real assets, farm, residential development but not necessarily a closely held business unless it had real assets.
Will property owned as tenancy in common be included in the decedent’s probate estate?
YES
Can a testamentary trust be created before death?
Yes
Is a testamentary trust subject to probate?
No, it is created with then funded with assets that just went through probate.
Freds daughter is 11 and he would like to set up an UTMA for her. What should he choose?
- STRIPS
- Growth stocks
- High yield corporate bonds
Best answer would be growth stocks. Reasons is that they would not produce a lot of income and she has time to let the investments grow.
Dr. Peterson has laser equipment he uses in his medical practice. He leases it to his PSC and wants to split that income with his kids. He does not want to lose contract terms and wants to continue claiming depreciation, what should he do?
FLP would be a perfect way to gradually shift income to his kids while still maintaining control.
If a husband has a court ordered life insurance policy on his ex-wife can he remove that?
No
Can people with pre-existing conditions still get medical insurance?
Yes
Will income taxes be withheld on a kids earnings?
Will FICA taxes be withheld?
Income taxes are yes if they make money.
FICA taxes are yes if it is a Corp, no if self employed.
Should you roll your UTMA into a 529 or just fund a new 529?
Fund a new 529
What should a parent do if they want to give a stream of income to be paid out to their kid with the corpus being sent to their grandkids after death?
Irrevocable trust with Crummey provision is the best bet here. That gives a present interest gift and lets you control the trust.
What trusts can have a HEMS part?
Disclaimer trusts
QTIPs
Annual Exclusion
$18k on present interest
Don’t forget it!!
After he dies, Harry would like to allow Tina to live in his house for the rest of her life but doesn’t want to establish a QTIP. What should he do? He signed a prenup with her and wants his assets to go to his kids.
- Without a QTIP, he cannot create a terminal interest for Tina.
- Instruct the executor of his estate to make an election that will allow Tina to live in the residence for the rest of her life.
- Retitle the property to JTWROS
- Retitle to TIC
He should instruct the executor to make an election to allow her to live in his residence.
A residence can apply as terminable interest property even when the lifetime right is not transferred through a trust. This will give Tina free lifetime occupancy. By titling it a different way she would own it.
What should Harry who is 70 do with HL industries, his company?
- Gift it to his son
- Gift it to various family
- Gift it to various family with FLP
- Have HL do an buy-sell agreement
- Let his son buy the stock at his death
Let his son buy the stock at his death. His son would like to control the stock and by doing an installment sale, his son will get a step-up.
Harry might not want to get rid of the stock just now.
Greg and Millie sold their FL home for $1M and want to buy a $3.5M home in CA. What should you do?
- review their cash flow
- title property as JT
- title property as community property
You should review their cash flow, this is a big purchase.
What property gets a step up in basis?
LTCG property
Is TE allowed in community property states?
NO
Your client is a widow and wants to retitle her property because she does not want it anymore. What should you tell her?
See and attorney
Kim is divorcing Kanye, can she take all the funds out of the JT accounts?
Yes
You are working for two brothers with a JT account. One tells you to liquidate it all and send him a check for the entire amount. What do you do?
Liquidate the account but contact the other brother.
A check needs to be sent to both.
When to file 706?
When you file for elective portability or you have estate tax due.
Are gifts made 2 years before decedents death included in their gross estate?
NO
The gift tax paid might be but the gifts are out.
What should grandma Jeffrey do if she has low basis stock and is 89?
Keep till death.
What does not count as a deductible gift for contributions directly made to schools?
Room and board does not count.
What does a grantor trust mean?
Means it is tainted.
Grantor trusts
Specifically the grantor is the trustee and can direct this crap.
Beneficial enjoyment
Right to income or right to use or enjoy trust property.
Does beneficiary have to be competent?
No but grantor and trustee do.
Can a crummey trust be with a simple or complex trust?
BOTH
What is general power of appointment?
Outright ownership
Can C, B, and ILITs have 5 or 5’s or HEMS?
YES
A trust cannot because general power
When to do reverse QTIP
GST
Resident alien spouse
Still get full exemption
Ownership in JT property based on consideration
Is 529 included in grantors estate?
No
Do dynasty trusts work like simple trusts?
Yes
Mr and Mrs able want to set up a dynasty trust, how much can they contribute without gift tax?
Both use up their exemptions.
First question with charitable transfers or infra family transfers?
Do I need income or not??
Are private foundations 30% charities?
Yes
Can disclaimer trusts have 5 or 5 powers?
No but they can have HEMS
What happens when you disclaim JT property?
If going to a disclaimer trust, the 1/2 you disclaimed goes to the trust, the other half that you own stays with you
Premarital agreement
Most states allow the spouse to claim their elective share of their deceased spouses assets if they do not get enough.
With a premarital is to limit or eliminate the spousal elective share prior to marriage to keep property acquired prior to marriage separate.
- needs to be in writing
- need to disclose both net worths
- must be willingly executed by both parties
Who is postmortem planning for?
Dead people
Can section 303 be S Corp?
Yes
How much of 303 can you take?
Enough for estate and administration expenses
303
6166
2032A
Stock redemption
Installment payment
Special use valuation
Postmortem planning estate amount
For 303 and 6166 it has to been AGE
For 2032A it is gross estate less liens
Two things to consider with no married people.
No spousal elective share
Guardianship may be undermined
You are the account rep for an irrevocable trust. Mrs. Cain set up the trust for her daughter Jane’s son, Thomas and has Robert as the trustee (Mrs. Cain’s son). She does not trust Jane which is why the trust was set up for Thomas. Jane called requesting a distribution to support Thomas, Robert will not approve. What should you do?
- Deny the request
- Get a written approval from Robert
- Call up the attorney who drew the trust
- Consult your broker-dealer attorney
You should call up the attorney who drew the trust. The attorney is a support person since he drew up the trust so you should consult him.
Mr. X died while married to his second wife, Beth. As part of his estate, Beth was given the right to live in his house for her life. Can the property be treated as QTIP property?
- No, there is no QTIP trust
- Yes, as long as the executor elected to treat property as QTIP property
Yes, as long as the executor elects it. QTIP property does not need to be held in a trust. It is the only exception to that.
Can a simple trust have HEMS or 5 by 5?
Yes!!
Michelle Vargas is married to a Mexican citizen and she is a US citizen. She died in 2024 leaving him $16,610,000 of stock. She has a QDT, what are the best choices for him?
- pay tax of $1.2M
- no tax is due
- executor can elect QDT
- executor can elect QTIP
Either pay the tax or elect QDT
Rich approaches you for an estate plan. He has millions in JT with his wife and wants his wife to be elective for the elective share from his assets. He also wants to leave about $5M to his kids and the remainder of his assets to his girlfriend, what should you do?
- do as requested
- inform his children
- inform his wife
- inform his attorney
Do the plan. He is the client and unless he gives you a release, you can’t inform anyone. He has not broken the law.
Toby owns a policy with a face value of $500k on his father’s life. Toby dies on June 30th of the year. The policy reserve was $40k on November 30th of this year and will grow to $46k by next November 30th. Toby made an annual payment of $5k on November 30th of last year, what is the value of the policy that will be included in his estate if the IRR is 5%?
- $43,264
- $45,583
- $45,503
- $500k
How many months has it been since last premium? November 30th - June 30th so 7 months.
(7/12) * $6,000 = $3,500
($6k is difference in cash valued)
Months remaining 5
(5/12) * $5,000 = $2,083
($5k is premium)
$40,000+3,500+2,083= $45,583
What eliminates TE
Death
Both agreeing
Joint creditors
What time frame is inherited property?
Always LTCG
