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 a 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 terms of the will
- NOT subject to probate
- Can be disclaimed
- Half step up in basis
Tenancy by the Entirety
- Ownership can only be held by a husband and wife
- Transfer of property can only occur with the mutual consent of both parties
- In most states, property is protected from the claims of each spouse’s separate creditors, but NOT protected from the claims of both spouse’s joint creditors
Tenancy in Common
- Two or more owners each own an undivided interest in the property
- Any 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
Assets NOT Subject to Probate
- Property conveyed by Deeds of Title (IRA)
- Property held by Joint Tenancy with Rights of Survivorship
- Government Savings Bond - co-ownership
- Revocable Living Trusts
- Payable on Death Accounts (PODs)
- Totten Trust
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)
Calculating Net Estate Tax
Gross Estate
– Funeral exp., admin exp, debts, taxes, and casualty losses =
Adjusted Gross Estate
– Maritable and charitable deductions (unlimited) =
Taxable Estate
++ Adjusted taxable gifts =
Tax Base
– 13,610,000
xx 40% =
Tentative Tax
–Gift taxes paid =
Net Estate Tax
Assets Included in the Gross Estate
- Singly Owned Assets
- Tenancy in Common
- Beneficiary is the Estate
- Community Property
- JTWROS/Entirety
- Life Insurance
- General Powers
- 3-year gross-up on gift taxes paid (but NOT GST taxes paid)
Life Insurance Added to the Estate
- Proceeds are paid to the Executor of the Decedent’s Estate
- Decedent at Death possesses an Incident of Ownership in the policy
- Decedent transferred a policy with an Incident of Ownership within 3 years of death
Life Insurance Incident of Ownership
determines if included in estate
- Only UL or UVL adds CV
Decedent is Insured
1. You own the policy… DB is included in estate
2. Spouse is owner of policy
* Gifted w/in 3 yrs … in your estate
* Gifted and never changed the bene (your estate)… in your estate
Someone else is Insured
1. You own the policy and you die… Replacement cost is in your estate
* term - unused premium
* whole life - terminal reserve + unearned premium
Valuation of a Gift
FMV at the date of gift.
Basis of a Gift
- If FMV on the date of gift is greater than the donor’s Adjusted Basis, use the donor’s Adjusted Basis.
- If FMV of the gift is less than the donor’s basis, use Client’s Substituted Basis/Dual/Double Basis:
- Above Original Basis - Gain
- Between Original Basis and Gift FMV - NO Gain or Loss
- Below Gift FMV - Loss
Deductible Gifts (Not Taxable Gifts)
Also called Exempt Gifts or Qualified Transfer
- Gifts to a US spouse, provided they are not a Terminal Interest
- Gifts to qualified charities
- Qualified payment in any amount made directly to an educational institution for tuition
- Qualified payment in any amount made directly to a medical care provider on behalf of any individual
- Gifts to American political parties
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 Exclusion.
Taxable Gifts are added to the Taxable Estate
Gift Taxes paid (or payable) are generally allowed as credit against the Tentative Tax
Gift Taxes paid on any gifts within three years of death are added to the Gross Estate
Present Interest Gift Vehicles
Present Interest is when donee can enjoy it now
* UGMA
* UTMA
* 2503(c) Trust
* Section 529 College Savings Plan
* Gift to a 2503(b) Trust is a gift of a future Interest
Gets 18k exclusion if not present interest gift no 18k exclusion must use exemption
Taxable Life Insurance Gift
If done during lifetime…
gift = cash value + unused premium
CV aka interporlated terminal reserve
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 continues when principal become incompetent
- Springing Durable Power of Attorney: Main strength is the agent has no authority over the principal’s assets until incompetency.
No power to execute or revoke a will; or execute a living will
Living Will
aka advanced medical directive
discontinues life sustaining procedures
ILIT
Unfunded
* Common
* Put in life policy on grantor
* yearly gift to pay premium
* No tax
Funded
* rare
* One lump sum gift aka the investment
* Income from investment pays premium… taxable to grantor
Grantor Trust Rules (Tainted / Defective Trusts)
Income Tax & Estate
Defective / Tainted for Income Tax purposes if the Grantor retains:
* Power to control beneficial enjoyment
* A Reversionary Interest exceeding 5% (Retained Interest)
Defective / Tainted for Estate Tax purposes if the Grantor retains:
* A Right to Income or the Right to Use/Enjoy Trust property (Beneficial Enjoyment)
* A Reversionary Interest exceeding 5% (Retained Interest)
Tainting can lead to double taxation… income and estate tax
Elements of a Trust
- In order for a Trust to exist, there must be Property (also known as Principal, RE, or Corpus)
- There must be a Grantor. This is any person who transfers Property to and dictates the terms of a Trust.
- There must be a Trustee who received legal title to the Property placed in the Trust, and who generally manages and distributes income according to the terms of a formal written agreement (Trust Instrument).
- There must be a Beneficiary who has Equitable Title to the property.
- The Grantor and Trustee must be legally competent.
Simple
vs.
Complex Trusts
Simple Trusts (2503(b), Marital, QTIP) are considered merely a “conduit” for forwarding income to the Beneficiaries (Pass-Through)
* Gotta pay the income out… bene gets taxed
* DNI = max taxable amount paid to benes of a trust
* Corpus distributed at termination
* No charitable gifts
Complex Trusts (2503(c)), are separate Tax Entities and taxed as such if it meets two requirements:
* It is irrevocable, and the Grantor has not retained any control
* Income is accumulated… taxed to trust
* corpus distributed per trust terms
* Charitable gifts allowed
Crummey Trust
- Irrevocable Trust with Demand Rights
- Demand Right given to a minor through his/her guardian
- Right to Demand a withdrawal from the Trust that is the lesser of the amount of the Annual Gift Exclusion or the value of the gift transferred
Power of Appointment (Trusts)
- Special Power: Exercisable only with the consent of the creator of the power or a person having a Substantial Adverse Interest
-
Ascertainable Standard: Relating to health, education, maintenance, or support (HEMS)
- maintenance = support… not limited to necessities of life
- not subj. to estate or gift tax
- General Power: Holder may exercise the power in any manner he/she wishes
“5 or 5” Power
Property subject to a General Power will be included in a donee decedent’s Estate (or considered a “Taxable Gift”) only to the extent that the property exceeds the greater of:
* $5,000, or
* 5% of the total value of the fund subject to the power as measured at the Time of Lapse
only available after crummey right is settled
Gift and Estate Tax Implications (General Power)
Gift Tax Implications (General Power)
* Exercised, Released, or Lapsed → Taxed
* Lapsed with a “5 or 5” power →Not Taxed
Estate Tax Implications (General Power)
* Exercised, Released, or lapsed →Taxed
* Exercised, Released, or Lapsed with a “5 or 5” power → Greater of the “5 or 5” is taxed
Marital Trust
- Aka “A Trust”
- Assets pass by marital deduction… no tax
- Second spouse dies… subj. to estate tax
- Assets pass to second spouse’s bene
Remeber: A - Above Ground so SS has control
Qualified Terminal Interest
- Aka “C Trust or current income interest trust”
- Assets pass by marital deduction… no tax
- Second spouse dies… subj. to estate tax
- Assets pass to trust benes
- Can Have HEMS or 5 or 5 provision
- Must be US citizen
Remember: C - Below B so below the ground so dec’d has control
Keyword for QTIP - L.A.M.E.:
- Lifetime income for the spouse
- Annual payments to spouse
- Mandatory payments to spouse
- Exclusively for spouse
B Trust
- Aka “Bypass trust.non-marital”
- Assets pass by estate exemption
- Second spouse dies… no estate tax
- Assets pass to trust benes
- Can Have HEMS or 5 or 5 provision
Remember: B - Below the ground so dec’d has control
Reverse QTIP
Qtip where after the death of 2nd spouse goes to grand children
doesn’t use GSTT exemption
Qualified Domestic Trust (QDT / QDOT)
- No Unlimited Marital Deduction bc spouse not US citizen
- 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
Simple trust
UGMA v. UTMA
UGMA
* G for gifts so cash, or stocks only no real property
* Normally distributed at 18
* can beincluded in custodian’s estate
UTMA
* T for Transfer, Testamentary, Trump (RE)
* Normally distributed at 18
* can beincluded in custodian’s estate
Counts as present interest gift
2503(c) Trust
- c stands for children and current so present gift
- Kids get money at age of majority aka 21
- can be inlcuded in grantor/tte’s estate
- funded with any asset
- Costs to set up and maintains
2503(b) trust
- b stands for bad boy
- Can’t touch the corpus and only gets the income because they are bad boys
- Income is a gift of present interest
- corpus for is a gift of future interest
- best for adult children bc if minor the kiddie tax
Dynasty
- Lasts for 21 yrs and 9 monts or as long as local laws allow
- Beneficiary interest are limited to life estates
- Gets kicked down each generation until time is up and then distributed
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
Remember:
* CR - cash receives
* CL - cash leaves
If private foundation doesn’t dist. at least 5% there wil be excise tax
Charitable Remainder Annuity Trust (CRAT)
v.
Charitable Remainder Unitrust (CRUT)
Charitable Remainder Annuity Trust (CRAT)
* Min. 5% dist. rule
* No additions
* fixed payments based on initial transfer to trust
* remainder payable to any charilty 10% ending value
Charitable Remainder Unitrust (CRUT)
* Min. 5% dist. rule
* No additions
* fixed payments based on initial transfer to trust
* remainder payable to any charilty 10% ending value
Wealth Replacement Trust
- Donors want to give to charity but also give some money to kids
- Is an ILIT
Intrafamily Transfers
(Property owner needs income)
Remember: PIGS Need Income
* Private Annuity
* Installment Sale
* Grantor Annuity Trusts (GRAT/GRUT)
* Self Canceling Installment Note (SCIN)
Installment Sale
- Not a good answer if you have an estate issue
- PV of remaining pmts included in owner’s estate
- Property is secured
- Gain is capital gain… don’t use if subject to recapture (145 depreciation)
Self Cancelling Installment Note (SCIN)
- Good answer if you have an estate issue
- No value included in owner’s estate
- Gain is capital gain
- Assets can be depreciated
- Interest can be deducted
- Higher payout than installment
Private Annuity
Sale of property in eschange for periodic pmts
* No value included in owner’s estate
* Property is exchanged for a promise
* Taxed in the year the annuity is established
Grantor Retained Annuity Trust (GRAT/GRUT)
Irrevocable trust that allows grantor to gifts property while keeping income
* Best assets to gift are ones to appreciate
* At end corpus is distributed to remainder person
* Value of gift is discounted
* Owner must outlive term or the asset is brought back into the estate at date of death value
Intrafamily Transfers
(Property owner wants to gift assets and/or income to family members)
- Partnership / S-Corp
- Family Limited Partnership (FLP)
- Gift Leaseback
- Qualified Personal Residence Trust (QPRT)
Family Limited Partnership
Gift interest to limited partners to reduce the estate
* Qualifies for various valuation discounts allowing for a lower gift tax
* General partner maintains control
* Income’ cant come from personal services
Gift Lease-back
Gift of fully depreciated property
* Lease payments are a business deduction, income to family member
* Do not use if child is under age 24
Qualified Personal Residence Trust
Works similarly to GRAT/GRUT
* At end of term the residence is eliminated from grantor’s estate
* Value of gift is discounted
* Grantor must outlive term or the asset is brought back into the estate
* Max 2 properties but one must be primary home
Generation-skipping Transfer Tax (GSTT)
- Is the 2nd estate tax
- tax rate 40%
- Lifetime exemption: $13,610,000
- $18k annual exclusion/donee
- For skip persons
Shortcut: taxable estate amount x .24
Skip Person
- Usually grandchildren (2 generations down)
- If child dies, the grandchildren move up one generation… no longer skip person
- Unrelated person younger by 37.5 years old or more
GSTT Transfers
Direct skip:
* 18k exclusion
* transferor pays the GSTT
Taxable termination:
* Non-skip person gets the income… remaining goes to skip person
* GST is paid by TTE
* No 18k exclusion
Taxable distribution:
* Distribution of property from a trust to a skip person
* Usually has 2 or more generations (kid + grandkid)
* TTE is paid by transferee
* No 18k exclusion
Transferor can elect out of automatic exemption
Alternate Valuation Date
- Alternate value date: 6m after death
- Can only be used if both are met
- Causes a reduction in total value of gross estate
- Federal tax liability must be reduced bc of filing
Elective Share
Spouses who have not inherited the state minimum % has the right to demand a share of dec’d estate
Disclaimer
- In order to Disclaim Property, the following requirements must be met:
- Disclaimer must be an Irrevocable Refusal to accept the interest
- Refusal must be in writing
- Refusal must be received within 9 months
- Intended donee cannot have accepted any interest in the benefits
- As a result of refusal, the interest will pass, without the disclaiming person’s direction, to someone else
Simple trust
Post-mortem Planning Techniques
(Estate Liquidity)
Stock Redemption (Section 303):
* Business must be Incorporated (Closely Held)
* Value of business must exceed 35% of the decedent’s Adjusted Gross Estate
* Redemption cannot exceed the sum of the 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
* Safe answer
Port-mortem Planning Techniques
(Estate Tax Reduction)
Special Use Valuation (Section 2032A):
* 25% of the Gross Estate consists of real property
* Must be in Qualified Use: 5-out-of-8 year rule before death and 10 years after death.
