Estate Flashcards
What is subtracted to create the Adjusted Gross Estate?
“FAD TIC”
- Funeral expenses
- Administrative expenses
- Debts
- Taxes
- Income taxes
- Casualty losses
What property is excluded from the Gross Estate?
- Spousal Property
- 50% of Community Property
- LI Owned by others
- Life Estate (No retained interest, property leaves ownership at death)
JWROS Spouse v Non-spouse Gross Estate treatment
SPOUSE:
50% FMV of property at death included in deceased estate
NON SPOUSE:
FULL value of property included in deceased estate unless surviving tenant(s) can prove ownership/contribution
Private Foundation Keys
- Donor controlled
- Dist. to one or more charities or non-charity indv.
- YES 5% min./yr (from income or principle)
- 2% tax on net investment income
- 15% penalty if 5% not distributed
Supporting Organization Keys
- Good to support a single charity over time
- Good to support special program/area
- NO donor control
- No 2% tax, no required annual distributions
Donor Advised Fund Keys
(DAF)
- Funded by ONE donor
- Fund controlled by community foundation or public charity
- Donor makes distribution recs.
- Board can approve/reject
- No QCD additions
2503(c) Keys
“Children” = Minors
- Corpus can be any reasonable investment
- Must or may accumulate income
- Corpus/Income distribution by 21yo or sooner
- Gift of present interest
- TAX = trust rates
2503(b) Keys
“Bad Boy” = Adults/Children
- Corpus MUST be income producing
- Must dist. Income
- Corpus = future interest (use lifetime exemption)
- Income = present interest (use annual exemption)
- Income taxed to beneficiary at ordinary income
- May be subject to kiddie tax
Crummey Trust Keys
- Irrevocable
- Gift into trust at annual exclusion limits
- Gift of present interest
- Protects assets from creditors
OBRA Keys
“Payback Trust”
- For disabled indv. <65yo
- Irrevocable
- Individual assets go into the trust, still eligible for public assistance (Medicaid)
- When individual dies, state is paid back first for Medicaid PMTs
Separate Property in Community Property State
- Property rcv’d as a gift to one spouse
- Includes property purchased from gift
- Property inherited by one spouse
- Earned income prior to marriage
- Interest earned on an asset held solely by one spouse
Life Insurance Taxable Gift Formula
(Cash Value + Unused premium) - Annual exclusion = Taxable gift
Valuation Discounts for Business Interest
- Minority: No influence, shares less valuable
- Marketability: No market, hard to sell
- Blockage: Large amt. sold at once could depress stock value
- Key Person: Lost a key person, biz is worth less
Who pays GSTT:
1. Direct Skip
2. Taxable Termination
3. Taxable Distribution
- Donor pays
- Trustee pays
- Skip Person pays
AVD Keys
CAN’T USE IF NO ESTATE TAX DUE
- Election must reduce total value of the gross estate
- Must reduce federal taxable liability
- Can’t be used for assets that depreciate over time
- Annuity making pmts
- Assets sold before AVD must use FMV at date of sale
Inheritance Disclaimer Qualifications
- Irrevocable
- Submitted in writing
- Rcv’d by executor within 9mo. of right to receive or age 21 (whichever later)
- Must pass to an alternate beneficiary
- Disclaimer doesn’t get a say
Sec 303 Stock Redemption Keys
REDEEM STOCK FROM DECEASED ESTATE FOR CASH, NO ORD. DIVIDEND TAX
- Close-held CORP only
- Stock value > 35% AGE
- Redeem estate tax + admin exp. only
- Step-up FMV, cap gain taxes
Sec 6166 Keys
SPREAD OUT ESTATE TAX
- Close-held Sole prop., Partner, Corp
- Biz value > 35% AGE
- Can combine biz if own ≥ 20% ea.
- 10yr PMT, 4yr after death
Special Use Valuation 2032A Keys
DISCOUNT REAL ESTATE VALUE
- Close-held Corp/Farm
- ≥ 50% Gross Estate is prop. used in biz
- ≥ 25% Gross Estate is real estate
- Prop used 5 of 8 past years
- Prop used > 10yr after death
- MAX ESTATE REDUCTION: $1.39mil.
GSTT “Deceased Parent Rule”
If parent between donor and skip person, dies, skip person “moves up” one generation and not subject to GSTT
Net Gift Tax Formula
(Gift value x 40%)/1.4
= Federal Gift Tax
Tenancy by the Entirety Keys
(TBE)
ONLY FOR SPOUSES
- NO Probate
- Can’t be disclaimed
- Property transfer needs mutual consent
- Same as JTWROS for estate tax
- 50% property included in deceased estate
Tenancy in Common Keys
(TC)
- YES Probate
- Can be disclaimed
- Unequal ownership
- No survivor rights
- At death, respective stake in property included in owner’s estate
JTWROS Keys
- NO Probate/ NO Will
- Can be disclaimed
- All tenants have = ownership
- Property auto-passed to surviving tenants
- Spouse: 50% included in gross estate
- Non-spouse: 100% included in gross estate unless surviving tenant can prove contribution
Community Property Keys
- YES Will
- YES Probate
- Each spouse has 50% interest of all property acquired during marriage
- 100% step up on LTCG property owned 50-50 (NOT Ord. Inc. Property!)
Community Property Step-up
FULL, 100% Step-up on LTCG Property
- 50% of property must be included in deceased spouse estate
Assets Subject to Probate
- “Singly” Owned
- Prop. held Tenancy in Common
- Beneficiary is “Estate of the Insured”
- Community Property (50% subject to probate)
Will Substitutes that avoid probate
- JTWROS
- Tenancy by the entirety
- Payable on Death
- Transfer on Death
- Totten Trust
- Named beneficiary for IRA, LI, Annuity, Qual Plans
- Deeds of Title
- Revocable/Irrevocable trusts
Non-Probate Assets
ASSETS STILL ADDED TO GROSS ESTATE
- JTWROS
- Tenancy by the Entirety
- Life Insurance
- General Power of Appointment
- Gift Tax paid within 3yr of DOD
Probate Gross Estate Assets
- Singly owned
- Tenancy in Common
- Estate as beneficiary
- Community Property
NOT ADDED: GSTT paid within 3yr of DOD
How do you get from Gross Estate to Taxable Estate?
Gross Estate
(-) Funeral expense, admin. expense, taxes, debts, casualty loss
↓
Adjusted Gross Estate
(-) Marital deduction, Charitable deduction
↓
Taxable Estate
How do you get from Taxable Estate to Tentative Tax?
Taxable Estate
(+) Gifts over annual exclusion
↓
Tax Base
(-) Estate Deduction ($13.61mil.)
↓
Tentative Tax
How do you get from Tentative Tax to Net Estate Tax?
Tentative Tax
(-) Gift Tax Paid
↓
Net Estate Tax
When is Life Insurance included in an estate?
DB included in estate:
1. Owned by the deceased
2. Ownership transferred to deceased’s spouse within 3yr of DOD
3. Beneficiary is deceased’s estate
Cash Value + Unused Premium included in estate:
1. Deceased owned policy on spouse
What is the Adjusted Gross Estate?
Gross Estate (-)
- Funeral expense
- Admin expense
- Debts
- Gift tax, Income tax
- Casualty loss
What is the Taxable Estate?
Adjusted Gross Estate (-)
- Marital deduction
- Charitable deduction
- State-level death/inheritance tax
What are the alternate forms of a gift?
- Forgiveness of debt
- Below market loan
- Assignment of LI benefits
- Transfer of property to a trust
What gifts are fully deductible for Gift Tax purposes?
- Gift to U.S. Spouse
- Gift to qualified charity
- Direct payment to Edu. for tuition
- Direct payment to Medical provider for care
- Gift to U.S. political parties
When do you file a form 709?
- Gift >$18k to non-spouse
- Gift > $36k from JWROS
- Gift of future interest
- *Gift from Indv. account when using gift splitting
*One spouse files, one consents unless gift is over $36k, then both must file
What gifts qualify as present interest?
What does that allow?
- 2503(c)
- Direct gift
- Crummey Trust
- 529
- UTMA/UGMA
Allows use of annual exclusion & gift-splitting
What gifts don’t qualify as present interest?
- 2503(b)
- Remainder interest
- Trust w/ income accumulated for a period of years
Simple Trust Keys
2503(b), QTIP, QDT, Dynasty
- Income is distributed
- Income taxed to beneficiary
- Corpus distributed at termination
- NO charitable gifts
Complex Trust Keys
2503(c), “B” Trusts, QPRT, CLAT, GRAT, etc.
- Income must or may be accumulated
- Accumulated income = tax to trust
- Distributed income = tax to beneficiary
- Corpus distributed according to trust terms
- YES Charitable gifts
Ascertainable Standard
- Power limited by specific measure
- No general power of appointment if limited by need:
- Health
- Educations
- Maintenance
- Support
- Distributions not subject to estate/gift tax
Bypass Trust Keys
“B Trust”
- Gives decedent postmortem control
- Usually funded with estate exemption
- If surviving spouse has JUST “5 or 5” or HEMS, trust won’t be included in their estate
- Remaining assets pass tax free to beneficiary
Marital Trust Keys
“A Trust”
- Power of Appointment trust
- Qualifies for marital deduction
- Surviving spouse has full control
- Assets included in surviving spouse estate
QTIP Keys
“C Trust”
- First spouse has postmortem control
- Provides stream of income to surviving spouse
- Corpus passes to beneficiaries accord to first spouse wishes
- Assets included in surviving spouse estate
QDT/QDOT Keys
Transfers to Non-Citizen Spouse
- No estate tax marital deduction
- Jointly held property based on consideration
- Limited marital annual exclusion of $185,000
- Must pass into QDT
- Spouse must be resident alien
CRAT Keys
- NO Additions
- Fixed PMT ≥ 5%; Max 50%
- Remainder payable to any charity
- Must be ≥10% of initial cont.
- Term is 20yr max
CRUT Keys
- YES Additions
- Variable PMT ≥ 5%; Max. 50%
- Annually revalued
- Remainder payable to any charity
- Must be ≥10% of initial cont.
- Term is 20yr max
PIF Keys
- YES Additions - comingled funds
- Variable PMT/yr to Donor for life (no term)
- NO tax-free investments in fund
- Charity gets remainder at donor death
- Tax deduction for PV of remainder interest
Charitable Gift Annuity Keys
Donor transfers property to charity in exchange for life income stream
- Charitable deduction is the gift amount (-) lifetime annuity income
- NO Additions
- PMT is fixed
- NO min. 5%
CLAT/CLUT Keys
- Income stream to the charity
- Only works if established at death
- Estate tax deduction is PV of income to charity
- Remainder passes to beneficiaries
Intrafamily Transfers where property owner needs income
- Private Annuity
- Installment Sale
- GRAT/GRUT
- SCIN
Installment Sale Keys
DO NOT USE if property subject to recapture (Sec. 1245)
- Sale of Prop. @ FMV
- Spread/defer capital gain
- If seller dies before all PMT rcv’d. remaining PMT value included in estate
SCIN Keys
SAFE ANSWER IF ESTATE ISSUES
- No value is included in owner’s estate (Remaining PMT canceled at death)
- Premium applied to PMT = higher income stream, more taxes paid while living
- If seller dies before all PMT rcv’d., estate has CAP GAIN tax on remaining value
Private Annuity Keys
GENERALLY NO LONGER VIABLE STRATEGY
- No value included in owner’s estate
- Unsecured (Just a promise to pay)
- All gain from lifetime annuity PMTs is taxed in year it is established
GRAT/GRUT Keys
- Fixed PMT for term
- Irrevocable
- End of term, assets pass tax-free to Bene
- If Grantor dies early, property is brought back into estate
GRAT = Fixed PMT; GRUT= Fixed %, revalued annually
FLP Keys
Used to gift interest to LPs to reduce estate
- GP maintains control
- Transfers to LPs qualify for valuation discounts
- Capital must be materially income-producing (can’t come direct from GP)
Gift Leaseback Keys
DO NOT USE IF DONEE <24yo
- Used when gifting assets but only own business assets
- Gift fully depreciated asset, lease back from donee to continue use
- Can deduct lease PMT as business expense
QPRT Keys
- Irrevocable
- Transfer personal residence, retain interest for a term
- Max. 2 residences in trust, one must be primary
- Vacation home in trust must be lived in for GREATER 14 days or 10% of rented days
QPRT Taxation
- AT TRANSFER:
Remainder interest = taxable gift - END OF TERM:
Asset value = estate tax-free - Future interest (no annual exclusion, must use lifetime exemption)
Skip Person Definition
> 2 Generations from Donor
or
37.5yr younger than Donor if unrelated
Disclaimer Trust Keys
- Disclaimed property is irrevocably transferred to the trust
- Surviving spouse can have HEMS
- NO 5 or 5 PROVISION
Non-traditional Relationship Estate Planning Keys
- Will is usually wrong answer (can be contested)
- JTWROS can be dangerous (partner can transfer property)
- GRIT is usually beneficial
Non-probate Gross Estate Assets
- JTWROS
- TBE
- Life Insurance
- Gen. POA
- Gift Tax Paid within 3yr of DOD
Taxable Distribution
Trust assets distributed to Skip-person while Non-skip alive
- GST Taxed to Skip person (40%)
- Only amount over GSTT lifetime exclusion taxed
- No annual exclusion applied
Taxable Termination
Trust assets distribute to Skip-person after death of Non-skip/end of trust
- GST Taxed to trust (40%)
- Only amount over GSTT lifetime exclusion taxed
- No annual exclusion applied
When to recommend a QPRT?
- Residence > $1mil.
- Long life expectancy (≥ 10yrs min.)
- Donor is living in residence
- Large estate (over exclusion)
Dynasty Trust Keys
“B trust”
- Continues for lives in being at creation + 21yr 9mo.
- Conduit properties
Reverse QTIP Election
- Good answer for Q’s about grandkids
- Uses deceased spouse GSTT exemption
Five or Five
- Annual access to GREATER:
$5k or 5% Corpus - Amt included in Bene estate if they have a right to it:
- Could take it but didn’t
- Took it, didn’t spend it
- Remaining corpus not included in Bene estate - no right to it
Tax Application of GST over Gift Tax Exclusion
- TTL Amt. taxed 40% Gift tax
- TTL Amt. (-) Gift tax Amt.
- Remaining Amt. taxed 40% GST
Low Tax Bracket Gift Suitability
- Highly appreciated asset
- Income producing asset
Excellent Gifts
- Life Insurance: Valued at replacement cost, increases to DB tax free
- Fully depreciated property (Use gift lease-back)
Living Will
- Final right to refuse medical treatment
- Instructions should be followed by a physician
Loss Property Gift Technique
- Sell to take loss
- Gift proceeds
Special Needs Trust Keys
- Allow beneficiary to continue to receive public aid (Medicare, SSI, etc.)
- Trust can only provide supplemental needs
Transfer Trusts with 5% Minimum
- CRAT/CRUT
- Private Foundation
Transfer Trusts NO 5% Minimum
- CLAT/CLUT
- PIF
- Charitable Gift Annuity
NIMCRUT Keys
- Pays non-charity bene LESSOR:
Trust income
or
Set % - Future “Makeup” allowed if income below set %
- Makeup = payment above set %
- Can invest low income initially, and high income later to recover pmts
- Donor get charitable deduction for remainder, assets grow tax-deferred
Charitable Stock Bailout
Reduces estate size
- Business owner donates stock to charity before a sale to avoid capital gains tax
- Donor gets charitable deduction on FMV
- Charity sells stock tax-free back to company and uses proceeds
ILIT Keys
Provides liquidity for estate taxes, debts, etc.
- Irrevocable trust owns LI (out of Grantor estate)
- Grantor gifts premiums to trust using Crummey powers
- Trustee controls policy, dist. DB tax-free
Bargain Sale
Gift = FMV (-) Sale price
For basis:
Sale Price/FMV = Sale %
Sale % x Basis = Bargain sale basis
Gross Estate
↓
Net Tax
Gross Estate
(-)Funeral, Admin., Debt, Tax, Loss
↓
Adjusted Gross Estate
(-) Charitable/Martial Deduction
↓
Taxable Estate
(+)Gift over exclusion
↓
Tax Base
(-) Estate Deduction
↓
Tentative Tax
(-) Gift tax paid
↓
Net Tax
