Estate Flashcards
Non-Community Property Interest
- Income earned by spouses prior to marriage
- Property received as a gift by one spouse
- Property inherited by one spouse
- Interest earned on separate assets held by one spouse as sole owner
Joint Tenancy with Rights of Survivorship (JTWROS)
- 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
- Upon death of each tenant, property immediately passes to surviving joint tenants in equal shares
- Property NOT controlled by term of the will
- NOT subject to probate
Tenancy by the Entirety
- Ownership can only be held by husband and wife
- Transfer 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
- 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 hare of the property to other individuals
- Ownership stake goes through probate upon death
Assets NOT subject to Probate
- Property conveyed by Deeds of Title (IRA)
- Revocable Living Trust
- Totten Trust
- Property held by Joint Tenancy with Rights of Survivorship (JTWROS)
- Payable on Death Accounts (PODs)
- Government Savings Bond Co-Ownership
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
- “Singly” owned assets
- Property held by Tenancy in Common
- Assets where the beneficiary is the “Estate of the Insured”
- Community Property (CP)
- Property held by Joint Tenancy with Rights of Survivorship (JTWROS)
- Life Insurance
- General Powers
- 3-year gross-up on gift taxes paid (but NOT GST taxes paid)
Life Insurance Added to the Estate
- Proceeds paid to Executor of 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
If FMV on date of gift > donor’s adjusted basis → Use Donor’s Adjusted Basis
If FMV on date of gift < donor’s adjusted basis → Use BELOW
* Client’s Substituted Basis/Dual/Double Basis > Original Basis → GAIN
* Client’s Substituted Basis/Dual/Double Basis < Original Basis → LOSS
* Client’s Substituted Basis/Dual/Double Basis between Original Basis and Gift FMV → NO GAIN OR LOSS
Deductible Gift → Not Taxable Gift (Exempt Gifts or Qualified Transfer)
- 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
- Qualified payment in any amount made directly to a medical care
Summary of Rules Regarding Gifts and the Donor’s Estate
- Generally, gifts given are simply “Taxable Gifts” to the extent such gifts exceed the Annual Exclusions
- Taxable Gifts are Added to Taxable Estate
- 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
Traditional, Non-Durable Power of Attorney: Power ceases when the principal is no longer legally competent
Durable Power of Attorney: Authority of agent continue when principal become incompetent
Springing Durable Power of Attorney: Main strength is the agent has no authority over the principal’s assets until incompetency
Power of Appointment (Trusts)
Special Power: Exercisable only with the consent of creator of power or person have substantial Adverse Inherit
Ascertainable Standard: Relating to health, education, maintenance, or support (HEMS)
General Power: Holder may exercise the power in any manner he/she wishes
Gift and Estate Tax Implications (General Powers)
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
- 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 → 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)
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
* Income is accumulated
Crummey Trust
- Irrevocable Trust with Demand Rights
- Demand right given to minor through his/her guardian
- Beneficiary has Temporary Right to Demand a withdrawal from the Trust that is the less of the amount of the Annual Gift Exclusion or value of gift transferred
Non-Marital “B” Trust (Family, Bypass, Credit Shelter, Unified Credit Shelter)
- Property transferred to Trust at time of decedent’s death
- Can be structured to provide stream of income to surviving spouse or other individual
- Decedent has post-mortem control
QTIP “C” Trust (Current Income Trust)
- Provides surviving spouse with stream of income for life, but decedent has post-mortem control of trust property
- 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)
- No unlimited marital Deduction
- However, no Estate Tax due
- Jointly held property between spouses is not considered one-half owned
- Limited gift between spouses of only 100K (Indexed) per year
Present Interest Gift Vehicles
- UGMA
- UTMA
- 2503(c) Trust
- Section 529 College Savings Plan
- Gift to a 2503(b) trust is a gift of FUTURE INTEREST
Charitable Contributions/Transfers
Income to donor until donor’s death
* Charitable Remainder Annuity Trust (CRAT) —> 5%
* Charitable Remainder UniTrust (CRUT) → 5%
* Pooled Income Fund → NO 5% Required
* Charitable Gift Annuity → NO 5% Required
Income to the Charity
* Charitable Lead Trust (CLAT/CLUT) → NO 5% Required
* Private Foundation → 5% → Can give money to individuals
Intrafamily Transfers (Property Owner Needs Income)
REMEMBER → PIGS Need Income
* Private Annuity
* Installment Sale
* Grantor Annuity Trusts (GRAT/GRUT)
* Self Canceling Installment Note (SCIN)
Intrafamily Transfers (Property Owner wants gift assets and/or income to family)
- Partnerships / S-Corp
- Family Limited Partnership (FLP)
- Gift Leaseback
- Qualified Personal Residence Trust (QPRT)
Disclaimer
In order to Disclaim property, 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)
Stock Redemption (Section 303)
* 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)
* 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)
Special Use Valuation (Section 2032A)
* 25% of gross estate consists of real property
* Must be in Qualified Use: 5-out-of-8 rule before death and 10 years after death
