Estate Flashcards
When is Property/Income NOT Community Property?
- Property inherited or received as a gift by one spouse
- Income earned by spouses prior to marriage
- Interest earned on separate assets held by one spouse as sole owner
Joint Tenancy with Rights of Survivorship (JTWROS)
Upon death of each tenant, property immediately passes to surviving joint tenants in equal/proportional shares
* Property can be held by husband and wife, parent and child or children, siblings, and business partners
* Control, ownership, and enjoyment shared equally by all joint tenants (50/50 even if paid different $ for Spouses; Proportional Basis/Split for OTHER joint tenants 60/40, 70/30)
* Property NOT controlled by term of the will or can be target by estate creditors)
* NOT subject to probate (Living Spouse gets STEPPED up Basis for DEAD SPOUSE HALF; OTHER joint tenants get STEPPED up Basis for proportional split)
Tenancy by the Entirety
Owned Jointly with Rights of Survivorship - NO PROBATE - 50% Included in Gross Estate (Separate Entity from Husband AND Wife)
* Ownership can only be held by MARRIED husband and wife (both own property FULLY!)
* Purchase, transfer, collateral of property can ONLY occur with mutual consent of both parties
* In most states, property protected from claims of each spouse’s separate creditors, but NOT protected from claims of both spouse’s joint creditors
Tenancy in Common
Undivided interest in the whole property (each tenant has right to possess 100% of property)
* Two or more owners each own an undivided interest in the property
* Income is distributed according to each owner’s respective share in the property
* Owners are free to transfer their respective share of the property to other individuals
* Ownership stake goes through probate upon death – More Expensive! (Not automatically passed to descendants)
Estate Tax (Calculations and Line Items)
Key Terms
-Decedent
-Beneficiary
-Gross Estate
-Will
Decedent: Person who Dies
Beneficiary: Person who receives Decedent’s Property
Gross Estate: All Property owned by Individual
Will: Document details on how Estate is Transferred
Calculation:
* FMV of Gross Estate (line 1)
* Less: Expenses, Losses, and Deductions (line 2) → Funeral, administrative, claims, unpaid mortgages, unpaid gift taxes, unpaid income tax, property tax before death, pledges to charity (happen after)
* Taxable Estate
* Add: Post 1976 Taxable Gifts (Line 4)
* Estate Tax Basis
* Tentative Tax Liability
* Less: Credit for Gift Tax Paid on Post 1976 Gift
* Less; Unified Tax Credit
* Less: Other Tax Credit
* Estate Tax Due (If Positive) - Progressive Tax (1M+ at 40%)
Marital Deduction
Assets pass between US spouses without Federal Gift or Estate Taxes (Include in Gross Estate and Deduct)
Assets NOT subject to Probate
- Property held by Joint Tenancy with Rights of Survivorship (JTWROS)
- Property conveyed by Deeds of Title (IRA) → Conveys Ownership from one Person to Another
- Revocable Living Trust → Transfer Item ownership to Trust
- Totten Trust (Bank Accounts with Named Beneficiary) & Payable on Death Accounts (PODs) → Informal Revocable Trust Account; Creditors can file claim; Does not work for Real Estate; Trustee (Owns Account assigns Beneficiaries)
- Government Savings Bond Co-Ownership (EE Bonds and I Bonds)
Assets Subject to Probate
- “Singly” owned assets
- Property held by Tenancy in Common
- Assets where the beneficiary is the “Estate of the Insured”
- Community Property (CP)
Assets included in the Gross Estate
FMV of ALL property owned at date of death (or alternative date)
* Revocable Trusts →NO REVOKE OR Life Estate Retained (use fully) for 3 Years before death
* Life Insurance (LI policy on someone else, REPLACEMENT Value included in gross estate)
* “Singly” owned assets
* Property held by Joint Tenancy with Rights of Survivorship (JTWROS)
* Property held by Tenancy in Common (Includable using ownership %)
* Community Property (CP)
* Assets where the beneficiary is the “Estate of the Insured”
* General Powers
* 3-year gross-up on gift taxes paid (but NOT GST taxes paid)
When is Life Insurance Added to the Estate?
- Proceeds paid to Decedent’s Estate
- Decedent at death possesses an incident of ownership in the policy
- Decedent transferred a policy with incident of ownership within 3 years of death
Valuation of a Gift
Value of a gift for gift tax purposes is its Fair Market Value (FMV) at date of gift
Basis of Gift
General Rule: If FMV on date of gift > donor’s adjusted basis → Use Donor’s Adjusted Basis (plus % gift tax)
If FMV on date of gift < donor’s adjusted basis, donee’s basis DEPENDS ON gain/loss when selling:
* Selling Price < FMV on gift date → Use FMV on gift date as Basis (LOSS)
* Selling Price > donor’s adjusted basis →Use Donor’s Adjusted Basis as Basis (GAIN)
* Selling Price > FMV on gift date AND Selling Price < donor’s adjusted basis → NO GAIN OR LOSS
Holding Period of Gift
If Donor’s adjusted basis carried over → Holding Period of Donor carries over
If FMV on date of gift determines Donee’s Basis → Holder Period start day after property gifted
No Gain or Loss → No Holding Period
Deductible Gift & Gift Tax Exclusion → Not Taxable Gift (Exempt Gifts or Qualified Transfer)
Seperate from $18,000 (2024) to each individual (Joint gift with spouse → $36,000 (2024))
Unlimited Tax-Free Gifts:
* Gifts to spouse, provided they are not a terminal interest
* Gifts to qualified charities
* Gifts to American political parties
* Qualified payment in any amount made directly to an educational institution for tuition (Not Room and Board)
* Qualified payment in any amount made directly to a medical care
Summary of Rules Regarding Gifts and the Donor’s Estate
-Gift/Estate Tax Lifetime Exemption
-What is taxable gift?
-What happens to previous gift taxes paid?
Gift/Estate Tax Exemption is 13.61 million (2024) for your LIFETIME → Double limit if married
* Gifts above 18k (2024) not paid but file form 709
* Gift Taxes paid (or payable) are generally allowed as credit against tentative tax
* Gift Taxes paid on any gifts within 3 years of death are added to the gross Estate
Powers of Attorney (POA)
Document that names person to act/make decisions on your behalf (agent)
General POA: Authority to make a broad array of decisions. Includes financial, legal, or business matters. This type of power of attorney lapses at disability or incapacitation.
Special POA: Handle specific set of duties
Traditional, Non-Durable POA Power ceases when the principal is no longer legally competent
Durable POA: Authority continues when principal become incompetent (effective immediately)
Springing Durable POA: Main strength is the agent has no authority over the principal’s assets until incompetency
Power of Appointment (Trusts)
Ability to override or make changes to Trust in the Future
* Special Power: Appointee direct assets to specific group based on trust (HEMS INCLUDED)
* Ascertainable Standard: Relating to health, education, maintenance, or support (HEMS)
* General Power: Holder may exercise the power in any manner he/she wishes (Property held with General Power of Appointment will be included in Gross Estate NO MATTER WHAT)
Gift and Estate Tax Implications if General Powers are exercised, released, or lapse
Gift Tax Implications (General Power)
* Exercised, Released, or Lapsed → Taxed
* Lapsed with “5 or 5” power → NOT Taxed
Estate Tax Implications (General Power)
* Exercised, Released, or Lapsed → Taxed
* Exercised, Released, or Lapsed with “5 or 5” power → Greater of the “5 or 5” is taxed
“5 or 5” Power
Property subject to General Power will be included in a donee decedent’s estate (or considered “taxable gift”) only to the extent the property exceeds the greater of
* $5000 or
* 5% of total value of fund subject to power as measured at time of lapse
Grantor Trust Rules (Tainted/Defective Trusts) – Income Tax & Estate
Trust may be Defective/Tainted for income Tax and Estate purposes if Grantor retains:
* Right to income or Right to use/enjoy Trust property (Beneficial Enjoyment)
* A Reversionary Interest exceeding 5% (Retained Interest)
Elements of a Trust
-Property
-Grantor
-Trustee
-Beneficiary
- For trust to exist, there must be property (also known as Principal, RE, or Corpus)
- There must be a Grantor → person who transfers property to and dictates the terms of a Trust
- There must be a Trustee → Fiduciary Duty to Beneficiary! Person who received legal title to property placed in trust and who generally manages and distributes income according to terms of formal written agreement (Trust Instrument)
- There must be a Beneficiary → has equitable Title to the property
- Grantor and Trustee must be legally competent
Simple vs. Complex Trusts
Simple Trust: (2503(b), Marital, QTIP) are considered merely a “conduit” for forwarding income to the beneficiaries (Pass-Through)
* Must distribute all income in the current year (cannot accumulate income)
* Cannot distribute corpus
* Cannot pay money to charity
Complex Trusts: 2503(c) are separate Tax Entities and taxes as such if it meets two requirements:
* It is irrevocable and the Grantor has not retained any control
* May accumulate or distribute income
* May retain or distribute corpus
* Can pay money to charity
Crummey Trust
Pass Wealth without estate, gift tax, or Generation Skipping Transfer Tax (GSTT)
* Allow donors to give gifts in trusts of “present interest” (Completed gift removed from donor estate)
* Grantor paying income taxes enables assets in trust to grow tax-free
* Irrevocable Trust, Inter vivos (established while grantor & beneficiary alive) with Demand Rights
* Temporary Demand right given to minor through his/her guardian to withdraw from the trust the lesser of Annual Gift Tax exclusion or 5K/5% (30 day window for withdraw)
Non-Marital “B” Trust (Family, Bypass, Credit Shelter, Unified Credit Shelter)
Maximize the Estate Tax Exemption of the first spouse to die → 13.61MM (2024)
* Property (ONLY deceased property and half community property) transferred to Trust at decedent death in the amount of the full Estate Tax Exemption (Appreciation “sheltered” from estate tax)
* Remaining amounts go to Marital Trust (No tax due because of Unlimited Marital Deduction)
* Can be structured to provide stream of income to surviving spouse or other individual
* Irrevocable; Ensure assets go to final beneficiaries gift and estate tax free after spouse death
QTIP “C” Trust (Current Income Trust)
Provides surviving spouse with stream of income for life (at least annually), but deceased spouse controls transfer after spouse death (Transfer Tax Due at this time)
* Property qualifies for Marital Deduction
* Mainly used for second marriages
KEYWORD for QTIP: LAME
* Lifetime Income for Spouse
* Annual payments to Spouse
* Mandatory payments to Spouse
* Exclusively for Spouse
Qualified Domestic Trust (QDT/QDOT)
Married Couples where one is not a US citizen (To preserve Marital Deduction)
* Surviving spouse (non-US citizen) must be ONLY beneficiary and At least One US Trustee
* No income or estate tax if non-US citizen spouse receive all INCOME
* Jointly held property between spouses is not considered one-half owned
* Limited gift between spouses of only 185K to non-US citizen spouse per year
Present Interest Gift Vehicles (UGMA, UTMA, 2503(b), 2503(c), 529 Plan)
Earning taxed at minor’s tax rate for UGMA (< 18) and UTMA (21 or 25); Allow Testamentary Transfers!
* UGMA → Uniform Gift to Minors Act (Owner/Manager of stocks, bonds account)
* UTMA → Uniform Transfer to Minors Action (Owner/Manager real estate, mutual funds, other)
2503(b) and 2503(c) holds trust for minor until age 21
* 2503(b) trust is a gift of FUTURE INTEREST →SIMPLE TRUST (only income must be distributed)
* 2503(c) trust is gift of PRESENT INTEREST (18K exclusion included)→ COMPLEX Trust
Section 529 College Savings Plan → Post Tax $ grow tax-free (distributions tax free for school)
Charitable Contributions/Transfers (Income to Donor/Income to Charity until Death)
Benefits: Reduce estate, avoid capital gains (tax-exempt entity selling), present income tax deduction (up to X% AGI –> Carried forward 5 years)
Income to donor until donor’s death
* Charitable Remainder Annuity Trust (CRAT) —> 5% (Put $X and get $X/year(s); Remainder charity)
* Charitable Remainder UniTrust (CRUT) → 5% (Put $X and get X%/year(s); Remainder charity)
* Charitable Gift Annuity (CGA) → NO 5% Required (NO TRUST;Simple contract between donor and charity to pay income for life in exchange for irrevocable transfer of assets)
* Pooled Income Fund → NO 5% Required (Combines multiple donor $; Fund pays donor share of fund’s income (NO CONTROL)
Income to the Charity
* Charitable Lead Trust (CLAT/CLUT) → NO 5% Required (Provide $X for X/year(s); Transfer to Heirs)
* Private Foundation → 5% → Can give money to individuals – CLIENT MANAGES GOALS/INVOLVEMENT
Intrafamily Transfers (Property Owner Needs Income)
REMEMBER → PIGS Need Income
* Private Annuity (Transfer assets in exchange for regular payments for life; UNSECURED; Once seller’s basis returned, all remaining payments are taxed as ORDINARY INCOME.)
* Installment Sale (Sell Business to Family for income. Payments: Tax-Free Capital Return, Capital Gains, Interest at Ordinary Income)
* Grantor Annuity Trusts (GRAT/GRUT) → Assets to beneficiary while retaining control + Annuity (Must Outlive to Not be included in Estate)
* Self Canceling Installment Note (SCIN) → Promise note to pay that cancels in the event that the seller dies before the note’s maturity date (Sell Business to Family and create income stream)
Intrafamily Transfers (Business/Property Owner wants gift assets and/or income to family)
- Loans Limit
-Partnerships / S-Corp
-Family Limited Partnership
-Gift Leaseback
-Qualified Personal Residence Trust (QPRT)
Intra-family interest-free or below-market loans are exempt from gift and income taxes if below 10K
-Partnerships / S-Corp
-Family Limited Partnership (FLP) → Legal structure allows family members to pass on BUSINESS / WEALTH
* Minority Interest Discount → Reduce value of partial ownership,
* Lack of Marketability Discount → Reduction of Value of Company Share not Publicly Traded
-Gift Leaseback→ Gift asset to family member or trust, and then leasing it back for continued use
-Qualified Personal Residence Trust (QPRT)—> Irrevocable; Remove Personal Home from Estate by allowing grantor continued use during predetermined duration; Passes to Beneficiary; GRANTOR MUST OUTLIVE TERM to avoid going into estate!
Disclaimer
In order to Disclaim property (refuse to accept inheritance), the following requirements must be met:
* Refusal must be in writing
* Refusal must be received within 9 months
* Disclaimer must be an irrevocable refusal to accept the interest
* Intended donee cannot have accepted any interest in the benefits
* As a result of refusal, the interest will pass, without disclaiming person’s direction, to someone else
Post-Mortem Planning Techniques (Estate Liquidity - Section 303 & Section 6166)
Stock Redemption (Section 303): Allows a company to repurchase stock with little or no capital gain tax since the stock is stepped up to its fair market value when the owner passes away.
* Business must be incorporated (Closely held)
* Value of business must exceed 35% of decedent’s adjusted gross estate
* Redemption cannot exceed the sum of estate taxes plus administrative expenses
Installment Payment of Estate Taxes (Section 6166): Allows a time extension for payment of estate tax where an estate consists largely of interest in closely held business (not just incorporated businesses).
* Value of business must exceed 35% of decedent’s adjusted gross estate
* During the first 4 years (of 14 years) can pay interest only on taxes due.
Post-Mortem Planning Techniques (Estate Tax Reduction - Section 2032 & 2032A)
Section 2032: Allows for an alternate valuation date, 6 months from the date of death (for all property sold ANYTIME AFTER)
* Sold within 6 months of death, must use VALUE SOLD
* Intangible and Depreciable assests must use FMV at death
Special Use Valuation (Section 2032A): Allows for an alternate valuation date, 6 months from the date of Death AND 1.39MM reduction of decedent’s gross estate.
* Applicable to farms and closely held businesses
* 25% of gross estate consists of qualified farm or closely held business,
* Property and Business must be 50%+ of decedent’s gross estate, property
* Must pass to qualified heir, on death must have Qualified USE
* Must be in Qualified Use: 5-out-of-8 rule before death and 10 years after death
A Will Administrator
Executor
Appointed by the probate court if no executor was named, or the named executor is unable/does not want to serve.
Assets Eligible for Step-Up in Basis at Death
- Joint Property (with spouse/non-spouse)
- Community Property
- Qualified Revocable Trust
- POD/TOD
- Assets transferred by Will (Through Probate)
Assets NOT Eligible for Step-Up in Basis at Death
- Income in Respect of Decedent (IRD) → IRAs, Qualified Plans, Annuities
- Gifts BEFORE death
- Irrevocable Trusts of decedents
