Estate Flashcards
Trust: 2503(c) Trust (Grantor)
Enables grantor to make a gift to a minor in the trust AND still obtain the annual gift tax exclusion. It’s a gift to a minor of a present interest
-Income - no requirement for current income distributions
But principal and interest must be available to the beneficiary
-Principal - must be distributed, along with current income, no later than ben age 21
- Exclusion = entire gift to the trust
Trust 2503b
Qualifying Minor’s Trust or
Mandatory Income Trust
Irrevocable
-Income must be distributed at least annually
-Principal can be w/h from beneficiary until death (need not be distributed even when reaches age of majority)
- Annual exclusion = actuarial value of income interest
Excluded from donor’s estate if donor is not the trustee
Excluded from beneficiary’s estate if income interest terminates at beneficiary’s death
3 year rule - IMPORTANT
appendix
Can get clawed back into gross estate
-Life estate
-Reversionary interest in property or trust corpus
-Right to revoke, alter or amend a transfer within 3 years of death
*A TRANSFER of a life insurance policy if owner =insured
But remember when a NEW policy purchase within the ILIT,
DB is removed from estate..not claws back in
*Any gift tax liability paid within three years of the decedent’s death.
For example, B makes a taxable gift of $1 million after using his $12,920,000 (2023) lifetime gift exemption, pays a gift tax of $400,000, and dies 2 years later. Although the $1 million gift is excluded from B’s gross estate, the $400,000 gift tax liability, which was paid, would be included in the gross estate.
Trusts 5 elements of trusts
GRANTOR: person who transfers property to and dictates terms off
= settlor, trustmaker, trustor
TRUSTEE: fiduciary, receives legal title
manages distribution and accum of princ and income
-65day rule. can make dist w/i 65 days of new tax year
-S645 election - can treat estate and trust as one for tax purposes
CORPUS. amount of principal
TERMS of TRUST - document outlines
BENEFICIARIES - remaindermen
Gift Tax: 529 superfunding for gift tax annual exclusion
Exception to 18k/year
529s can be superfunded 5 years forward for g/t (can fund as much as you want but for g/t 18000*5 = 90,000 per donor per beneficiary)
As annual exclusion increases, opp to fund ad’l amounts
Spousal Trusts. 5x5 power of appointment
SS can withdraw the greater of
$5,000 or
5% of the fair market value
In addition to the regular income payout benefit
Surviving spouse in a B trust can be given this power
Spousal Trust: A Trust aka Power of Appointment Trust
- Marital deduction
- SS has power of appointment
and therefore assets are included in SS estate
-SS has income AND ability to invade corpus
A = above ground. That is where power of appt is and where it’s taxed (to SS, 2nd to die)
AAA.
All income
at least
Annually
Appointment powers (General)
Probate: Adv and Disadv
Adv
Court supervised distribution of assets
Protects creditors
Bars future creditor claims on estate
Documents title and transfers
Disadv
Costly (attorney, court, executor)
Time (9 mos - 2 years)
Public
Estate Tax: Alternate Valuation Date
Form 706 feet under
Make w/i one year of estate tax filing deadline which is 9 mos after DOD
Irrevocable on form 706
Applies to ALL assets even if increase in value
EXCEPT
“depreciating” assets such as cars, patents, life estates, copyrights, remainder interests
“Collectible” cars would NOT be a dep asset. Use common sense
If AVD, then anything sold or dist w/i 6 months is valued at date of sale/dist but anything after is valued at AVD
Gift Tax. Annual gift exclusion
Taxable gift - amount over 18k/person
Annual exclusion applies to present interest only
LIFETIME GIFT EXEMPTION can be used to offset “taxable” gifts
Trusts. Ascertainable standard HEMS
Health, Education, Maintenance, Support
Added to trusts to give the trustee guidance on distributions
Asset transfers at Death
Per Stirpes
Per Capita
Per capita by generation
Per capita- by the head, equally amount survivors
per stirpes - by the trunk/roots
per cap by gen - 1st gen = % but next (grandkids) equal (per capita)
Spousal Trusts. B trusts (bypass trusts)
Does not qualify for marital deduction. Instead uses 13.610 lifetime limit/unified credit (watch wording doesn’t use “annual exclusion!)
$ Included in the decedent estate
Bypasses surviving spouse estate
Income interest is TIP
Surviving spouse can be given income for life (from trustee)
The general power of appointment is with the decedent. (Decedent sets the terms of the trust including the beneficiaries)
More detail
Property CAN APPRECIATE in the trust and passes to beneficiaries tax free
- First to die transfers an amount of lifetime exemption 13.61 into it
- Taxed to decedent’s estate when it’s moved into the trust
BUT
- Zero tax due because of using the unified credit !
SS is taxed on the income
Surviving spouse can be given
- a limited power of appointment with ascertainable standard (HEMS)
- a limited power of appointment to distribute assets to the beneficiaries
- a 5x5 power of appointment over trust corpus
Charitable Trusts. Basics
LEAD - as in the charity leads in receiving. -Beneficiary gets the remainder…so….
Tax deduction is the PV of income interest b/c that’s what the CHARITY is receiving
REMAINDER - as in the charity gets the remainder… so……the tax deduction is the PV of the remainder
Donor (or ben) receives income stream
Annuity (as in CRAT, GRAT)
A is for ANCHORED, stAys the sAme
Assets valued at creation only
NO additional assets allowed
Best when interest rates are lower as less goes to charity and MORE to REMAINDERMEN/BENEFICIARIES
UNITRUST (ans in CRUT, GRUT)
U is for Up and down
Income goes up and down
Revalued annually
Ad’l assets ARE allowed
Charitable trusts: Client suitability
CLAT/CRAT
risk averse
tax deduction
CLAT
fixed pmts to charity (ch income leads)
CRAT
Predictable fixed pmts for donor
CLUT/CRUT
mod to aggressive risk tolerance
Tax ded
income stream keeps pace with inflation
CRUT
Inflation hedge for donor
Charitiable Gift Annuities
Donor transfers $ or property to a charity and the charity pays the donor an annuity pmt
-Gift tax char ded = PV charity’s remainder interest
-Gift annuity pmts to SPOUSE - unlimited marital ded avail IF spouse receives all annuity pmts AND has general powers of appt over pmts after donor’s death
-Gift Annuity pmts to OTHERS - gift tax = PV of annuity pmts
Charitable Trusts:
CLAT and CLUT similarities
Charitable LEAD trusts
Assume grantor trusts???
Qualify for income tax, gift tax and estate tax deduction
Flexibility - intervivos or testamentary
Means to support charity and beneficiaries
DISADVANTAGES of Charitable Lead trusts
-Lead trusts are “nontaxexempt” entities = INCOME EARNED BY THE TRUST IS TAXED TO THE GRANTOR (if it’s a grantor trust)
- Trust principal invaded if income insufficient to make pmts to the charity = less to beneficiaries
-Income tax deduction only for grantor CLTs
Titling. Common law vs community property
COMMON LAW (assume unless told community)
Assets acquired by one member of a married couple are deemed to belong to that person UNLESS put in the names of both
COMMUNITY
assets acquired DURING a MARRIAGE are treated as belonging to both
In CP states, ALL property intestacy passes to SS
Estate planning objectives
Will “substitutes” address all of these when properly executed
tax reduction
tax avoidance
protection
support
control
philanthropy
care
privacy
Crummey Powers
- right to withdraw some or all of a grantor’s contribution to the trust.
Gift Tax. Direct transfers GIFT TAX EXEMPT and do not count toward annual exclusion
2 types of DIRECT TRANSFERS are GIFT TAX EXEMPT
1. Directly to ED inst for TUITION
2. Directly to MED provider for MED EXP
Spousal Trusts: Dislaimer trust
For spouses
A wait and see approach
If SS does not want/need, then limits estate taxes by
1. disclaim assets
2. by will the deceased spouse directs into disclaimer trust
therefore avoids estate taxes for SS
Risky for remarried couples with kids from prior marriages - see
Trusts. DNI Distributable net income of trust
Allocates taxable income between trust and beneficiaries
Benef taxed on lesser of:
DNI or amount required to be distributed
Excess is nontaxable (to ben) transfer of corpus
Gift/Estate. DSUE election
Deceased Spousal Unused Exclusion
Election form 709 Us gift tax return
Estate Tax Formula
MEMORIZE at least to TTT
form 706 feet under
Gross Estate
less Deductions (Exp, debts, taxes)
=Adjusted Gross Estate
less Charitable
less Marital deduction
=Taxable Estate
+ taxable gifts after 1976
= TTT (Total taxable transfers)
* tax rate
=TENTATIVE estate tax (TET)
less gift taxes paid on post 1976
=Gross estate tax
less applicable credit amount
less other credits
=Estate tax liability
Estate tax is tax on property transferred @ death
Estate: Charitable deduction
Pooled Income Funds
POOLED INCOME FUNDS
Donor gifts and receives annual pro-rata share of income from the charity’s COMINGLED funds, for life.
-Ad’l gifts can be made to the fund to increase the income stream
-Charity manages the fund which CANNOT invest in tax exempt securities
-Charity receives the remained when the donor’s income interest ends
-Donor’s income tax ded = PV of charity’s remainder interest
- Donor pays income taxes on income rec’d from the fund
Estate: Charitable deduction
Private foundation
PRIVATE FOUNDATION
-Separate legal entity.
-Expensive to set up and maintain
-NFP or tax exempt trust
-Fund must distribute 5% assets to charities each year
-Family members who make gifts may take income tax deduction limited to 30% cash, 20% LTCG property
Estate: Charitable vehicles
Charitable Lead Trusts
Charitable Remainder Trusts
Charitable gift annuities
Pooled income funds
Private foundation
Donor advised funds
A. Every client should have
Durable POA
Living Will
Will with guardianship for minors
and some
Revocable living trust and if so FUNDED
Estate. Family Limited Partnerships (FLPs)
What does it accomplish?
Transfer of business interests, estate tax reduction, creditor protection
GP are the senior family members
LP are the junior family members (gifted or purchase shares)
-GPs retain control :-)
-GPs have unlimited liability :-(
-Shifts income to LPs in lower tax brackets
-LPs have protection from creditors. limited liability
-Valuation discounts for
- lack of marketability discount
- minority interest discount
-Gifting - easy of gifting assets that are difficult to distribute. Transfers qualify for annual exclusion
Disadvantages:
-Income shifting could result in kiddie tax
- ad’l filing fees and info tax returns
- gifts do NOT receive basis step up
-retained partnerships interests continue to appreciate in senior family member’s estate
Gift Tax. Form 709 gift splitting
> 36k. Each spouse files
18 but <36. Donor only but other spouse gives consent on 709
<18 no gift tax return. no need to split as neither would need to file
IGNORE b/w US CITIZEN spouses b/c of UNLIMITED MARITAL DEDUCTION
Gifts. Future interest gifts
No annual exclusion but can use unified credit for future interest gifts
-Remainder interest in property
-Trusts that accumulates income (Exc 2503c which is treated as present interest)
-Nonincome producing property unless trustee can sell and buy nonincome producing property ? did I write this wrong
-Trust has sprinkle or spray provision
Gift splitting
Married donor - with consent of nondonor spouse, can elect to treat as if each spouse gave half
-If elect G/S - applies to ALL gifts in that CALENDAR YEAR
-Does NOT decrease unified ex or credit amount if < 36k/person
Gifted property with gains
What is the recipient’s basis?
At date of gift, if FMV > donor’s basis, then the donee uses the donor’s adjusted basis and holding period
If donor paid gift taxes, donee can add portion to adj basis
Appreciation / taxable gift = % of gift tax to add to basis
Appreciation = FMV - basis
taxable gift = FMV - annual exclusion
Gifted property with loss
@ date of gift if FMV less than donor’s basis
Basis higher than FMV
If Donee sells above basis - use donor basis and holding period
Donee sells between - no gain or loss
Donee sells @ less than FMV, use FMV @ date of gift AND gift date starts the holding period
- Go probate free with TLC
Trusts
Operation of LAW (JtWROS, TBE, TOD etc)
Contracts (life insurance, annuities, beneficiaries
Grantor Trust
GRUT
GRAT
QPRT
If grantor dies w/i terms FMV goes in the gross estate
Revocable trust in which all INCOME will be taxed to the GRANTOR
No 1041, no trust taxes
Taxed at highest ordinary rate of grantor
Taxed as a grantor trust if trust allows:
- grantor, a spouse even a 3rd party w/o a beneficial interest in the trust…
any rights or powers as specified in grantor trust rules (sep card)
Grantor trust rules
What makes a grantor trust a grantor trust?
per lecture
Grantor may revoke or modify
Grantor retains
- beneficial enjoyment
- administrative powers
- control
Income is or can be used to pay premiums on life insurance policy for grantor or spouse
Income is or can be distributed to the grantor for the support of the grantor’s children
Grantor trust rules also state that a trust becomes a grantor trust if the creator of the trust has a reversionary interest greater than 5% of trust assets at the time the transfer of assets to the trust is made
GRAT
Grantor Retained ANNUITY Trust
IRREVOCABLE
Grantor places assets and right to a fixed pmt of income ANNUITY for chosen period
In order to…
-Reduce value of grantor’s estate b/c appreciation of property goes to beneficiaries w/o ad’l gift tax at death
-Transfer $ in @ reduced or 0 gift tax value
FMV assets - PV annuity stream = remainder interest = gift
Corpus is protected from creditors
Disadv
If die b4 term - assets go into gross estate
NO ad’l assets can go in
Ben rec c/o basis
Income subj to creditor claims
No ad’l assets allowed
Corpus protected from creditors but NOT income
GRAT vs GRUT
Grantor receives
Taxable gift
Valuation frequency
Ad’l assets permitted
Inflation hedge
Suitability
see picture
GRUT
Grantor Retained UNITRUSTS
U is for up and down (pmts)
Assets valued annually. This amount determines income b/c it is a %
IRREVOCABLE
-Grantor places assets and right to a fixed pmt of % assets …for chosen period
-Can be used as inflation hedge
In order to…
-Reduce value of grantor’s estate b/c appreciation of property goes to beneficiaries w/o ad’l gift tax at death
-Transfer $ in @ reduced gift tax value (FMV - PV annuity)
If grantor outlives term, no estate tax but if dies before, pulled into gross estate
Ad’l assets ARE permitted
therefore valued annually
GSTT p 192
Skip person = the “skip TO person” - the one who is 2 or more generations below
GST is in ADDITION to the gift/estate tax
For unrelated the skip person is 37.5-62.5 years younger
A gift made to a skip person is both a gift AND a GST
Holographic will
H is for Handwritten will
ILIT’s 4 types
- NEW policy purchased by an ILIT
- FV of insurance is removed from the owner’s estate and not subject to 3-year rule - Existing policy transferred to an ILIT
-if the owner is not the insured, the owner must survive by at least 3 years to exclude the DB from the estate
3 Funded ILIT
Both a life insurance policy and income producing property are transferred into the ILIT
-grantor is taxed on trust income
-income used for trust to pay premiums
- ben do NOT have crummey powers
- Unfunded ILIT (Better than funded)
- includes only the grantor’s life insurance
- but each year, $ must go in to pay the premiums. And that cont to trust is a present interest gift
- beneficiaries have Crummey Powers - right to withdraw some or all of a grantor’s contribution to the trust. (Which would mean no income to pay the premium and thus forfeiting the policy)
-as a result, this turns a future interest gift into a present interest gift & eligible for annual exclusion
-withdrawal amount LESSER of
-annual exclusion
-annual contribution to the trust
-greater of 5k or 5% of any trf in
Income tax deduction to charitable trusts
Lead vs Remainder
Think about what the CHARITY receives
Remainder trusts
PV of remainder = FMV - PV income stream
Lead trusts
PV of income stream
Intra Family Transfers
Installment sales
sell business to family member or 3rd party and receive *SECURED income
- promissory note is secured and does not require a set sale price & *fixed term
-buyer does not need down pmt
- pmt amounts can vary, be skipped or spread out over several years
BUT at least ONE PMT must be made to owner after taxable year in which sale occurs
*PV of outstanding installment payments are included in the seller’s gross estate
His chart says “fixed term”
Intra family transfers
To remove business interests and future appreciation from the estate
Installment notes and SCINs have a fixed term and are secured
Property and SCINs is not in the gross estate
For installment notes and private annuities the present value of unpaid payments might be included. In private annuities if it’s a single life it’s not.
Privately are for the life of the seller and are not secured
Intra-family table
Intra-family transfers: Private annuity
receive fixed annuity stream of income for LIFE, transfer business asset out of estate
-Pmts from the sale structured as annuity and UNSECURED
-Single life annuity - remaining pmts NOT in gross estate
Jt and surv annuity - pmts continue for 2 lives. PV of survivor’s future annuity pmts included in seller’s estate (marital deduction available to offset tax)
IF BUYER DIES BEFORE SELLER, buyer’s estate must make pmts for LIFE of seller.
*If SELLER OUTLIVES life expectancy, buyer MUST continue to pay the seller
No collateral in private annuities
Intra-Family Transfers
Gift leasebacks
Removes asset from gross estate and receive income
Owner GIFTS property into IRREVOCABLE trust
Leases property back
Takes business deduction for lease pmts made
Trust distributes lease pmts to family benef
Family beneficiaries taxed at lower rates
Intra-family transfers
SCINs
Self-Cancelling Installment Notes
cancel at death, removed from estate
*fixed term, secured, removed from estate
-partially or fulling cancels note before it matures
3 ways
-can be canceled in the will and the unpaid balance is NOT included in sellers gross estate
-can cancel all at once - subject to CG and gift taxes (remember the annual exclusion)
-can cancel in increments of 18k/year/buyer to avoid or reduce taxable gifts
IRD Income Respect of Decedent
see appendix
IRAs
401ks
Deferred annuities
Income such as salaries, commissions
this income, which the decedent would have included in gross income if he or she had lived, does not escape taxation.
Keep in mind that IRD assets are not capital assets, and do NOT receive a step up or down in basis on the date of death.
ILIT. Basics
Irrevocable Life Insurance Trusts
provide dec estate with liquidity for pmt of all death taxes with
- existing life insurance
- insurance the trust intends to purchase w/o subjecting the proceeds themselves to depletion by estate taxes
Irrevocable Trusts
*Asset protection
Must be funded to exist
Property is property of the trst
*Grantor gives up control, ability to amend dominion (?) of property
avoid probate
not in estate b/c completed gift
Lifetimes gift/estate
&
Applicable credit amount
The 13.610 is ONE POOL of $ that applies to both lifetime gifts and transfers @ death
These transfers are NOT taxable gifts
- IRS approved CHARITIES
-US Citizen spouse (unlimited marital)
-DIRECT to MED provider
-DIRECT to ED Inst for TUITION
Remember portability of leftover lifetime excl to SS - must make DSUE election
Living trusts (inter-vivos)
-Established and funded during lifetimes and take effect immediately
-Avoids probate
- Title of property is held in the name of the trust
MARITAL DEDUCTION
-for whom is it unlimited/limited?
-What is the exclusion for LIFETIME gifts when not unlimited?
- does that exclusion apply for estate/death?
Unlimited EXCEPT for:
-TIP
-Transfers TO noncitizen spouse
Only 185k/year exclusion and this is only for LIFETIME giving
Doesn’t the 13.610 still apply?
-
Marital objective:
Dec spouse to receive marital deduction
A trust
QTIP
Estate trust
outright gift
Marital objective:
SS to access to trust income for HEMS
WITHOUT including the assets in their estate
Ascertainable standard
Marital objective:
SS to choose trust beneficiaries
A trust
Estate
Marital objective:
SS to determine amount of Dec estate to transfer into trust to use Dec unified credit
Disclaimer trust
Set up IRREV trust to fund ONLY IF SS chooses to disclaim
Marital objective:
SS to receive ALL income annually
A
QTIP
Marital objective:
SS to receive income IF needed
B
Estate trust
Marital Objectives
Minimize estate tax liability
Estate equalization
divide in 2 to lower tax, progressive estate tax rates
Mutual will
Will made in agreement with another person to dispose of certain property interests
Nuncupative will
cup as in ORALLY over a cup of coffee
Ownership titling (JtWROS, Tenancy in common, Tenancy by entirety, Com prop
how many owners, transferable?, automatic survivorship?, included in probate?, Included in gross estate?
Powers of attorney
Nondurable - ceases when principal no longer competent
vs
Durable - authority continues even when principal incompetent
Springing - starts when principal is incompetent - takes time to be declared but plus is that agent has not authority until this time
General - broad - lapses at incapacitation
Special - specific - until certain task completed
pre-QDOT status of transfers
Present interest gifts for MINORS
UGMA/UTMA - gift of present interest
529 plans - yep even though parent is “owner” and it’s counted as parent asset for fin aid!
2503 B trust with multiple Beneficiaries. income distributed to at least one beneficiary annually
2503c trust gets present interest treatment
one beneficiary, inc accum to age 21
Though accum vs dist, exception applies that allows gifts to it to qualify for the annual exclusion
Present interest in trusts
If property transferred into IRREVOCABLE trust, it is a COMPLETED GIFT
and
Beneficiary receives
income for life OR term certain
RESULT
Beneficiary has a present interest since they can receive income this year AND in subsequent years
THEREFORE the Donor can take annual exclusion for the PV of the beneficiary’s income interest
Provisions in a will can be invalidated due to…
- FRAUD
- Testator being subject to UNDUE INFLUENCE BY someone benefiting from the will
- MISTAKES in will clauses
- Will not PROPERLY executed/signed/witnessed according to STATE LAW
QDOT
Qualified Domestic Trusts
To qualify decedent’s estate for marital deduction.
Assures the IRS that assets will not leave US without being taxed!
QDOT must be setup as QTIP or Estate
Trustee must be
-US citizen, or
-US domestic corp, or
-US Bank if assets >$2 million
Trustee must approve all distributions of principal and withhold estate taxes from distributions that are not subject to HEMS
QDOT must retain sufficient assets to cover noncitizen’s estate taxes
Since no marital deduction is available for transfers to non US citizens, the QDOT qualifies transfers to a non US citizen for the marital deduction
QPRT
Qualified Personal Residence Trust
IRREVOCABLE grantor trust for houses
-Allows COUPLES to move high value asset out of estate and keep living there during the “trust term”
-Like GRAT and GRUT, if grantor outlives the term, FMV is NOT included in the gross estate
-Risk is that the grantor dies w/i term and FMV is pulled back into gross estate
-NO step up in basis if grantor survives (b/c it wasn’t in gross estate)
-Basis to beneficiary (if sold) = grantor’s basis plus any gift taxes paid
-If grantor survives term, move out or rent back! It’s NOT their home any more.
-Renting though is a way to get more $ out of the estate and to the beneficiaries.
-Must pay rent and sign agmnt or risk house being pulled back into estate
QTIP trusts also called a C trust
(highly tested)
Why?
Common scenario?
*Executor qualifies the TIP for the marital deduction (ie grantor receives marital ded)
*SS has income for life
*Corpus to children from PREVIOUS marriage (SS cannot change terms)
-SS does NOT have PoA BUT it IS included in SS estate - it’s a tradeoff so that decedent can use the marital deduction
WHY
Take care of current spouse but also ensures children from another marriage recieve corpus.
Common Scenario: Divorced and remarried with children from PREVIOUS marriage
May be concerned about SS ability to ability to manage the assets in future years and/or
Possibility that SS may change the plans for who gets the remaining assets
Qualified Disclaimer - 4 requirements!
Treated as if the property went directly from original transferor to the one who ultimately received the property
- Refusal must be IN WRITING
- Refusal must be rec’d within 9 MONTHS of the later of : date on which transferor made OR date reaches 21
- Intended donee cannot have accepted ANY INTEREST or BENEFITS
- Personal disclaiming cannot influence recipient. No undue influence!
Reciprocal will
Each person’s will designates all property to the other
Requirements for testamentary capacity
MEMORIZE
any person over 18 can make a will. but to be valid you need test capacity
1. Will creator/testator must know they are executing a will
2. Must be aware of what ASSETS they own
3. Must KNOW and REMEMBER their RELATIONSHIP with the beneficiaries
Residuary clause
Identifies the person(s) that will inherit any residue
Residue = everything that is left of the estate (after specific bequests?) after payment of funeral fees, executor fees, other fees, and after all claims are satisfied
Revocable trusts
FLEXIBILITY
-may be funded or not
- becomes IRREVOCABLE when
-grantor gives up right to amend/revoke/reclaim OR dies
- avoids probate
-but in gross estate (b/c grantor has control and can revise, not a completed gift)
Revocable vs Irrevocable
Can grantor terminate?
Is transfer of assets a completed gift?
Subject to estate tax?
REVOC IRREVOC
Grantor can terminate? yes no
Completed gift? no yes
Subject to estate tax? yes no
S 6166
Under IRC Section 6166, a personal representative may defer payment of estate taxes if the interest in a closely held business exceeds 35 percent of the decedent’s adjusted gross estate
Section 6166 is a useful tool when,
an estate is unable to pay tax without selling assets at a loss, and when the business or estate can earn a greater after-tax rate of return than it spends in interest for the deferral privilege.
S2032A
Under IRC Section 2032A, an executor may elect to value qualifying real property based on its actual special use rather than its highest and best use
The maximum reduction of the decedent’s gross estate under this provision in 2024 is $1,390,000.
See appendix
S303 Redepemption
Appendix - boil this down. I just copied and pasted for now to remember to cover
Section 303 Redemption
Section 303 of the Internal Revenue Code (IRC) allows the purchase of a portion of a decedent shareholder’s stock by the shareholder’s corporation to be treated as a sale or exchange rather than as a dividend.
Appropriate Uses of an IRC §303 Redemption:
When the decedent shareholder’s family wants to keep control of a closely-held or family corporation after decedent’s death. When the corporation stock is a major estate asset and there is a threat of a forced sale or liquidation of the business to pay death taxes and other estate administration costs. Where a tax-favored withdrawal of funds from the corporation at the death of the stockholder would be useful.
Requirements
The redeemed stock must be included in the decedent’s gross estate.
The value for federal estate tax purposes of all stock of the corporation that is included in determining the value of the decedent’s gross estate must be more than 35% of the excess of
The value of the gross estate over [(estate expense, indebtedness, and taxes) + (losses)].
Example
Gross estate = $1,250,000.
Admin. and funeral costs = $250,000
No other deductible expenses
To qualify for a Section 303 redemption, the value of the stock must exceed $350,000 {35% of ($1,250,000 - $250,000)}
Special needs trust can be funded by grantor with:
Cash, Assets, Life Insurance Premiums
IDK why the “premiums” but just know it
Special Needs Trusts
WHY?
- Preserve eligibility for gov’t benefits
- Pay for extra services not covered by gov’t programs
HOW DESIGNED?
- Pooled- managed by a NFP org
- 1st party - funded by the sp needs person like $ from injury settlement
- 3rd party - assets that never belonged to beneficiary
WHAT does it pay for?
- Basic - food, shelter, clothing
Note that medical is not a basic need but a supplemental need
- Extra/supplemental services: medical, supp attendant & custodial care, add’l therapies, respite care for family caregivers
- Pays for: phone, computer, TV, basic furnishings, travel & companion, education
Special needs trusts preserve these gov’t benefits:
SSDI - Social Security Disability Insurance
SSI - Supplemental Security Income
Medicaid
To qualify for SSI, they cannot have more than 943/mo in UNEARNED income
If they have income from another trust or elsewhere, it could affect the eligibility.
Spousal Transfer Summary
Estate equalization - divides into two parts to reduce tax b/c of progressive rates
A trust - Gen PoA SS, access to income & Corpus
B trust - utilize lifetime ex, SS income as needed, assets NOT in SS estate, 1st to die sets terms/beneficiaries of corpus
QTIP - marital deduction, SS income for life, Corpus to kids from former marriage
Disclaimer trust - IRREV trust funded if SS chooses to disclaim at 1st to die death
?Estate trust. Qualifies property for marital deduction. Use if SS has substantial wealth and does not need trust income OR corpus
Ascertainable standard - HEMS. Added to trusts
Spousal Transfer Trust (Summary Chart)
Spousal Transfers (order)
B = Before
A = After
Fund the B trust first (13.61)
Then fund the A (umlimited marital deduction)
Standby trust p 210 huh?
Grantor is trustee and beneficiary
Successor trustee steps into trustee role when/if grantor is incapacitated
3 parties
GRANTOR - creates by transferring legal title of property to trustee
TRUSTEE - manages the trust property for beneficiary
BENEFICIARY - has equitable title to trust propery
Step up basis
Only the value in the decedent’s estate gets step up
JTWROS spouse - 50/50 ownership
- Gross estate 50% FMV
- Step up - in spouses 50% of the property
-New basis: 50% purchase price + 50% FMV DOD of spouse
JTWROS nonspouse acc to $ original contribution
-Gross estate % cont*FMV
-Step up % Dec’s FMV
- New basis % pp self + % FMV dec’d
VS Community
100% step up
100% FMV can sell with zero gain or loss
Taxation of trusts
Income from grantor trust - grantor taxed
Retained income - trust taxed
Distributed income/nongrantor trust - beneficiaries taxed
Testamentary trusts
Created through a will
Funded after death
purposes:
reduce estate tax
professional investment management
estate in right hands
Spousal: TIP Terminable Interest Property
see appendix
When gifting TIP, the donor spouse can take an annual exclusion for the present interest gift. However, the marital deduction is not available.
Trust Accounting income
Income and expense used to determine amount of income beneficiary entitled to receive
Trust document usually specifies what accounting income is
Does NOT determine trust’s taxable income OR who will pay the tax
Trust overview (p200)
Trust is a legal entity that holds property and allows the grantor to coordinate the investment, use and distribution of property - often not only during life but after death
Trust taxable income? see p 212
after personal exemption?
Trusts - filing requirements
Must file 1041 if ANY of these:
-taxable income
-gross income >=600
-Beneficiary is a nonresident alien
Trusts for minors 2503 b vs c
(Know table)
2503b Bring Beneficiaries Bucks
2503 aCCmulate and Can Cease Current Cash
Trusts for minors
2503b vs c
Chart
Trusts Simple vs Complex
Dist of principal permitted?
Req to dist all income?
Inc exemption?
Ch ded permitted?
SIMPLE COMPLEX
Dist of principal NO YES
Req to dist YES NO
all income
Can accum income NO YES
Ch ded permitted NO YES
Inc exemption $300 $100
Trusts: Annuity vs Unitrusts
A is for Anchored, stAys the sAme
valued only at creation and NO ad’l assets allowed
U is for Up and down
revalued every year and ad’l assets ARE allowed
Spousal. Two exceptions to the
“no marital deduction for TIP property” rule
- Make a q-tip election on 706
- Life estate with general power of appointment to SS
Private annuity Q Bank question
Ethan age 70 has four healthy children he has a disease likely to result in lowering life expectancy gross the state is 3 million two and a half million of it is rental real estate investment IE a business
He wants to minimize the state and gift taxes and provide sufficient cash flow to himself for the rest of his life in order to pay for his health care what should he do?
Answer is a private annuity
He was between family members and in situations where the individual has a non-terminal medical condition that may reduce their life expectancy the early death would create a windfall for the four children a private annuity would allow the children to receive the property at a discounted price
Third-party Special needs trust
Most are this type
Taxed as a pass through entity Assets never belonged to the beneficiary
Taxable to beneficiary at their individual tax rates. Watch for Kiddie
If Undistributed income, it is taxed to the trust at the higher non-grantor trust rates. Don’t use 40% use the tables
Intra family leasebacks
This is just removing the business property like machinery and office equipment
Gift graphic is on front
Remember in a gift the property is put into an irrevocable trust
The lease payments to the trust then become income to the beneficiary taxed at their lower rate
Sale is below
Owner keeps the business
Just a transfer of business property
Mid expansion
Growth is peeking
Credit growth is strong
Profit growth peaks
Policy is neutral
Inventories and sales grow; equilibrium reached
Do grantot trusts file a 1041
No and the grantie is taxed at his/hers highest ordinary rate
