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Estate Flashcards

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1
Q

Heirs

A

People who inherit under state intestacy laws

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2
Q

Legatees

A

People who inherirt under a valid will.

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3
Q

Abatement

A

Reduction of the estate

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4
Q

Ademption

A

Extinguishment of a right (e.g. someone bequeaths something they don’t have and the donee does not receive it)

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5
Q

Donor

A

Person who makes a gift

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6
Q

Donee

A

Person who receives a gift

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7
Q

Effective transfers

A

Transfers that meet the decedent’s goals and wishes.

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8
Q

Efficient transfers

A
  • Maximize amount received by beneficiaries. Minimize transfer costs.
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9
Q

Liquidity at death

A
  • one goal of estate planning is liquidity to pay for - funeral, taxes, living costs, medical.
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10
Q

Unauthorized practice of law

A
  • certain activities reserved for licensed attornies - drafting legal documents, etc.
  • Refer client to licensed atty
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11
Q

Wills

A
  • Legal document that provides the testator to control the distribution of property at the time of death
  • Avoids state intestacy laws.
  • May be revoked or amended at any time as long as testator has legal capacity.
  • effective only upon death of testator
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12
Q

Intestacy

A
  • legal distribution scheme provided by state legislature
  • the state of dying with no will, an invalid will (if it has writing on it), or an incomplete will (that does not dispose of all property)
  • A decedent with a will is “testate”
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13
Q

Advantages of properly prepared will

A
  • allow for full unlimited marital deduction
  • cannot leave to charity of intestate
  • provides for disinheritance
  • can minimize estate tax
    *
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14
Q

Holographic wills

A
  • written in testator’s handwriting
  • signed and dated by testator
  • no witnesses required
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15
Q

Noncupative will

A
  • oral declaration in front of sufficient witnesses
  • not valid in all states
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16
Q

Statutory wills

A
  • drawn by a licenses atty and comply with laws in domicilary state of residence
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17
Q

Mutual wills/Sweetheart wills

A
  • identical wills leaving all assets to other person
  • not binding on surviving party to keep will the same after death of first spouse.
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18
Q

Joint will

A
  • Will of 2 people
  • Bind 2nd to die person based on join decisions of couple.
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19
Q

Legal capacity to make will

A
  • Sound mind
  • must be able to understand what is being done by writing of will
  • must be able to recognize and recollect assets.
  • “sound mind” is more liberal than other requirements for capacity.
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20
Q

Introductory clause

A
  • name, state of residence, etc.
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21
Q

Declaration clause

A
  • this is my last will and testatement
  • revocation of previous wills.
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22
Q

Bequest clause

A
  • directs specific property to legatees.
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23
Q

Residuary clause

A
  • distributed remainder of estate.
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24
Q

Executor/executrix clause

A
  • identifies executor and successor executor
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25
Q

Guardianship clause

A
  • identifies guardian of assets or minors
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26
Q

Clause directing payments of debts and taxes

A
  • can direct paid from estate or others
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27
Q

Attestation clause

A
  • provision signed by the witnesses as authentication of testator’s will
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28
Q

Self-proving clause

A
  • declaration signed by notary that he/she witnessed the witnesses and testator signing the will (witnesses so not have to be found)
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29
Q

Simultaneous death clause

A

presumption regarding which individual died first in the event that both individuals die at once.

Presumes one person died first.

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30
Q

Survivorship clause

A
  • Requires any beneficiary to survive the decedent for a specified period of time before inheriting.
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31
Q

Disclaimer clause

A
  • remainder heirs may disclaim
  • rules to make an effective disclaimer
    • must be in writing
    • must be delivered to executor within 9 months
    • disclaiming party can’t have derived benefits from disclaimed assets.
    • person disclaiming can’t direct disposition of disclaimed assets
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32
Q

Contingent legatee clause

A
  • determined who receives inheritance if first heir is deceased.
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33
Q

Per Stripes

A
  • By the roots - successor bene is the decendent of first. Inheritance is split generationally.
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34
Q

Per capita

A
  • all beneficiaries get equal amounts regardless of generation.
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35
Q

No contest clause

A
  • a clause that causes a beneficiary to lose an amount of inheritance if he/she contests the will.
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36
Q

Codicils

A
  • Separate document to will that supplements will
  • can modify will content instead of creating new will
  • testator must be competent
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37
Q

Side instruction letter

A
  • gives intructions to executor about funeral and burial wishes and specific tangible possesions
  • doesn’t have legal standing
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38
Q

Forced heirship

A
  • requires that a certain portion of inheritance must go to children (only LA)
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39
Q

Marital Portion

A
  • requires a certain portion of estate to be left to surviving spouse (state specific)
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40
Q

felonious homicide statute

A
  • a person can’t benefit if they murder someone
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41
Q

Divorce statutes

A
  • invalidates provision in will that leaves assets to former spouse
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42
Q

Anti-lapse statute

A

if heir pre-deceased decedent, per stirpes is presumed. Assets flow to heirs.

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43
Q

Power of Attorney

A
  • Legal document that gives a person the right to act on behalf of another
  • General power of attorney - authorizes agent to act on behalf in any area
  • Limited power of attorney - gives agent right to do something specific
  • A power or appointment may be included in a Power of Attorney.
  • Ends at death
  • May be revoked at any time
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44
Q

Power of Appointment

A
  • Permits an agent to appoint assets.
  • May or may not be included in a general power of attorney.
  • General Power of Appointment
    • gives agent full unrestricted control of all assets. Usually limited to trusts or wills and usually only between spouses.
    • If agent dies before principal, assets are included in AGENT’s estate (for tax purposes). Principal retains ownership.
  • Limited Power of Appointment
    • gives agent restricted control of specific assets.
    • will not include assets in agent’s estate.
  • May be revoked at any time
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45
Q

Durable Power of Attorney

A
  • Remains in effect even if principal is incapacitated.
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46
Q

Springing Power of Attorney

A
  • springs into existence upon an event.
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47
Q

Durable Power of Attorney for healthcare

A
  • usually separate P of A
  • does not expire at disability or incapacity
  • can be springing
  • always revocable by principal
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48
Q

Living wills/advance medical directive

A
  • Expresses individuals last wishes regarding the sustainment of life under specific circumstances
  • may be statutory exception for pregnancy
  • some states have registry in which to file
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49
Q

Real Property

A
  • Buildings and land
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50
Q

Tangible Personal Property (personalty)

A
  • objects
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51
Q

Intangible Personal Property

A
  • stocks, bonds, patents, etc.
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52
Q

Fee simple

A
  • outright ownership
  • transfers at death via probate or intestacy laws
  • no automatic right of survivorship
  • 100% of value is included in gross estate and probate estate
  • sometimes called Fee Simple Absolute
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53
Q

Tenants in common

A
  • 2 or more related or unrelated people who own a property
  • can be seen as 2 or more fee simples
  • not necessarily equal interests
  • each tenant’s interest can be severed without other tenants consent.
  • at death, FMV transfers thru estate- no automatic right of survivorship proportionate to original interest in the property.
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54
Q

JTWROS

A
  • Joint tenancy with rights of survivorship
  • does not go through probate: interest of decedent is included in gross estate proportionally except for spouses (always 50%)
  • held by 2 or more related or unrelated parties
  • each tenant owns an EQUAL right in the whole:
    • regardless of proportional consideration
    • if disproportionate initial interest, add’l interest may be considered gift
  • income and expenses shared equally
  • implied right of survivorship
  • interest can be severed without other owners consent
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55
Q

Tenancy by the entirety

A
  • Same as JTWROS but only for spouses
  • except neither tenant can sever without consent of other
  • no probate
  • deemed 50% contribution bc of marital relationship
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56
Q

Community Property States

A
  • Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconson
  • TWIN CLAN W
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57
Q

Community Property

A
  • arises out of marital relationship
  • includes: earnings, assets aquired during the marriage, property deemed community by agreement
  • excludes: property aquired before the marriage, inheritances and gifts, property deemed separate by agreement.
  • the fruits (interest, rents) of separate property can be community or separate.
  • if property is commingled, may become community property
  • no automatic right of survivorship; goes through probate and will.
  • full value steps up upon death of first spouse (even if 2nd spouse doesn’t inherit it)
  • no need for gift-splitting; entire amount can be gifted
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58
Q

Life Estate

A
  • Interest in a property for life
  • includable in gross estate
  • income interest with no right to transfer at death.
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59
Q

Interest for term

A
  • party has interest in property for a specific amount of time
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60
Q

Legal vs. equitable ownership

A
  • Legal title - held by executor or trustees who might not have an economic benefit
  • Equitable ownership - often split in a trust
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61
Q

Probate

A
  • Exam hates probate - always try to avoid it.
  • The legal procedure of proving the validity of the will.
  • Supervises orderly distribution of decedents assets
  • Protects creditors by ensuring that debts are paid
  • changes title of assets
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62
Q

Legatee

A

Person who inherits personal property under a will

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63
Q

Devisee

A

Person who inherits real property under a will

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64
Q

Heir

A

Person who inherits under intestacy laws.

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65
Q

Ancillary Probate

A

Probate in a state where the decedent is not domiliced.

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66
Q

Nontraditional relationships

A
  • Same-sex couples and other nontraditional relationships should always make use of trusts and avoid probate.
  • Transfer thru: lifetime gifts, named bene of a contract, JTWROS, trusts
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67
Q

Probate process

A
  • executor procudes will
  • takes will to probate court
  • someone petitions to open estate.
  • executor or administrator appointed by probate court through letters testimentary or letters of administration
  • A surety bond may have to be posted based on the value of the assets
  • Executor/administrator manages and distributes estate to legatees, heirs and creditors
  • If there are not enough assets in probate to pay debt/estate tax, money can come from assets that didnt go through probate
  • If there are not enough assets to satisfy bequests, abatement.
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68
Q

Property that passes through probate

A
  • fee simple property
  • tenancy in common property
  • community property
  • invalid beneficiary designations to contracts suchs as IRA’s, etc.
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69
Q

Property that passes outside of probate

A
  • funded trusts
  • assets with assigned bene
  • titling with survivorship features
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70
Q

Gift and Estate Exclusion amount

A
  • $5,430,000
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71
Q

Donor

A
  • Party that makes the gift
  • must be competent
  • must have intent to make a voluntary transfer
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72
Q

Donee

A
  • party that receives the gift
  • must be competent to receive the gift
  • must take delivery
  • must accept property
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73
Q

Characteristics of gift

A
  • must be voluntary
  • must involve a transfer of property
  • it is without full consideration (didn’t pay FMV for asset)
  • whenever an exchange of property occurs where each party does not receive full consideration for property of services.
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74
Q

Direct gift

A

payment of cash or transfer of property from one person to another person

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75
Q

Indirect gift

A
  • transfer that’s made on behalf of the donor and gives the donee some type of gain (e.g. donor pays the bill for someone else; title bank account jointy; below-market loans)
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76
Q

Below-market loans

A
  • The amount the lender imputes is a gift
  • Under 10K, no imputed interest
  • 10,000 - 100K the lesser of:
    • borrower’s net investment income
    • interest computed using AFR less the interest calculated using stated rate of loan
    • if borrower’s Net investment income is less than $1,000, no imputed interest
  • greater than 100K - interest computed using AFR less the interest calculated using state rate of loan.
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77
Q

Completed gifts

A
  • donor has released control of the asset and donee can use asset in any way.
  • renunciation of retained or reversionary interest
  • taxable
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78
Q

Incomplete gifts

A
  • may be a retained or reversionary interest
  • not taxable for gift tax purposes
  • e.g joint bank account with no withdrawals
  • e.g. life insurance where bene can be changed
  • e.g. life estate in real estate
  • e.g. revocable trust
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79
Q

Reversionary interest

A
  • an interest that has been transferred by a transferor and subsequently reverts back to transferor
  • e.g. a trust that is used by a child and then the child predeceases.
  • e.g. a trust that is used by a child for 10 years and then reverts to parent.
  • create incomplete gift
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80
Q

Net gifts

A
  • normally the donor is responsible for gift tax
  • a net gift is made on the condition that the donee pays the gift tax
  • the donor will have income tax to the extent that the amount the donee paid in gift tax exceeds the orginal basis in the property.
  • gift tax calculation: amount of gift * (gift tax rate/(1 + gift tax rate)
  • e.g. 100K * (.40/1.40)
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81
Q

Valuation of gift

A
  • FMV at date of gift
  • hard to value items must be appraised
  • Bonds - PV of future payments
  • discounts may be allowed for lack of marketability, lack of liquidity or lack of control
  • stocks are valued at average of high and low prices of the day
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82
Q

Annual exclusion

A
  • Gift up to 14K/year tax free
  • gift must be of a present interest - no annual exclution for gifts in trust (future interest)
  • for US citizen spouses, $147,000
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83
Q

Split gifts

A
  • gifts deemed to have been made by spouses
  • annual exclusion can be doubled if gift is split
  • requires a gift tax return to be filed if gifted from a single account
  • if elect to split for one gift in a year, all gifts for that year are split.
  • only count for the amt of time in the year during which couple is married
  • no gift-splitting necessary for community property
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84
Q

Gifts of present interest

A
  • only present interest gifts can use annual exclusions
  • exception is 2503b or 2503c trusts - they are trusts that statutorily give a gift of present interest even thought they are trusts.
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85
Q

Future interest gifts

A
  • a gift that is limited in some way to a future date/time
  • the donee’s interest is contingent upon something happening at a future date/time
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86
Q

Crummey provision

A
  • a provision that allows a trust beneficiay to withdraw some or all of the trust contributions for a specified point of time.
  • creates a present interest and allows for annual exclusion
  • Should be kept under the greater of 5K of 5% of trust assets.
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87
Q

5/5 Lapse Rule - crummey provision

A
  • rule that states that a taxable gift occurs when the power to withdraw in excess of the greater of $5,000 or 5% of trust assets is lapsed by the powerholder.
  • all lapses are considered gifts back to the trust and therefore other beneficiaries.
  • this only comes into being when there is more than one beneficiary.
  • under 5K pr 5% is not considered a taxable gift when there is a lapse/multiple benes.
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88
Q

Qualified transfers

A
  • Payment made by a donor to a 3rd party for the benefit of someone else to pay for:
    • qualified educational expenses - only when paid directly to educational institutions
    • qualified medical expense - only when paid directly to medical provider (not for elective procedures)
  • not considered a gift
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89
Q

Unlimited marital gift tax exclusion

A
  • Gifts between US citizen spouses are unlimited
  • Gifts to non-US citizen spouses are excluded up to $147,000 (super annual exclusion)
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90
Q

Unlimited charitable gift tax exclusion

A
  • Can make unlimited non-taxable gifts to charitable organizations
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91
Q

Payments for legal support

A
  • Payments for legal support are not gifts (child support)
  • Legal support does not necessarily end at age 18.
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92
Q

Payments to a divorcing spouse

A
  • not gifts
  • they are equitable distributions
  • nontaxable events
  • are property settlements
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93
Q

Business transfers

A
  • not considered gifts; assumed to be compensation
  • de minimus gifts are exception to this. But still not taxable. Include:
    • limited employee discounts (less than 20% for services or at cost for products)
    • employee parking/transport (discriminatory; monthly maximums)
    • limited child care
    • employer-provided group health insurance
    • gifts valued at less than $25
94
Q

Form 709

A
  • Gift tax return
  • due April 15 the year following the gift
  • can be extended
  • must be filed by anyone who makes a gift except:
    • gifts limited to annual exclusion
    • qualified transfers
    • transfers to US-citizen spouses or non under $147K
    • gifts to charity
  • must be filed in the case of split-gifts outside of community property states even if below the exclusion.
95
Q

Statute of limitations for gift tax return

A
  • IRS has 3 years to question return AFTER it’s been filed
  • If failure to file, no statute of limitations
  • If fraud, no statute of limitations
96
Q

Calculate gift tax owed

A
  • Add all lifetime taxable gifts
  • calculate tax on all gifts
  • apply annual credit to that amount.
  • Once credit is exhausted, pay annual tax due (40% of all taxable gifts) - Add up all taxable gifts each year because credit changes annually. Then calculate amount of tax owed on total and apply previous tax paid and apply annual credit.
  • Can also be calculated using exclusion amount instead of credit amount.
97
Q

Basis and holding period of gifts

A
  • generally carry-over basis for donee unless:
    • loss property
    • gift tax paid on GAIN property. (calculate amount of gift tax paid on appreciation)
  • holding period always follows basis
98
Q

Gifts of loss property

A
  • If basis is higher than FMV
  • Double-basis rules apply
  • When donee sells:
    • at a gain, carry-over basis and holding period
    • at a loss, basis is FMV at date of gift and holding period is from date of gift
    • if between, no gain or loss
  • Holding period always follows basis
99
Q

Basis/holding period for gifts where gift tax has been paid

A
  • only applies to GAIN property
  • apply gift tax paid which was applicable to the appreciation of the property(don’t have to double-pay on this amount)
  • increases the basis by the percentage of gift tax paid on appreciated amount.
  • Donors basis + [appreciation/(FMV-Annual exclusion)]*Gift tax paid] = Donee’s basis
100
Q

Gifting strategies

A
  • use direct gifts - efficient and effective
  • gifts of appreciating property - reduces future estate of donor
  • gifts to spouses - used to equalize estates
  • gift to minors - might need trusts or custodial accounts.
101
Q

Single party strategies

A
  • don’t give cash
  • give highly appreciating asset - allows donee to benefit from appreciation
  • unless donor is close to death, should be superior to receiving step-up basis.
102
Q

Multi-party gift strategies

A
  • never give loss property; sell instead for loss
  • give property with highest appreciation potential to youngest person
  • give highly appreciated property to charity
  • give income producing property to donee with lowest marginal tax rate. (e.g. gifts to parents)
103
Q

General gift strategies

A
  • use qualified transfers for educational/medical
  • use annual exclusion
  • make unlimited gifts to spouse
  • use up life-time gift tax exclusion
  • any gift tax paid prior to 3 years before death will reduce gross estate (3-year look-back rule applies)
104
Q

Estate tax return

A
  • form 706
  • Gross estate
  • Less deductions
  • Adjusted Gross estate
  • less charitable and marital deductions
  • less state death tax deduction
  • equals taxable estate
  • plus previous post-1976 taxable gifts
  • equals tentative tax base
  • tentative tax plus allowable credits
  • credits: tax paid on prior taxes
105
Q

Section 2033 - Property owned at death

A
  • all property in which decedent had an interest at death
  • includes:
    • rental income accrued before death
    • life insurance policy on someone else with cash surrender value
    • awards for pain and suffering (after decedent dies - decedent felt the pain) - Not wrongful death (that belongs to family)
  • life insurance on life of someone other than decedent
106
Q

Curtsey and Dower

A
  • Dower - originally the right of the wife to receive a life estate at the husband’s death if one or more child was born. 1/3 to 1/2 of land.
  • Curtsey - the right of a husband to wife’s property
107
Q

3-year lookback

A
  • Any gift-tax paid on gifts in the prior 3 years must be included in estate
  • Any gifts of the following types made in the last 3 years must be included in estate:
    • transfer with life estate
    • transfer taking effect at death
    • revocable transfer
    • transfer of life insurance on the life of the decedent
108
Q

Transfers with a retained interest

A
  • included in gross estate
  • property transfered where the decedent retained at interest:
    • express or implied
    • retained interest for life
    • retained interest for period not ascertainable until death of decedent
    • reserved for a period that does not end before death
109
Q

transfers at death

A
  • includable in gross estate if:
    • possession or enjoyment requires the bene to survive the decedent
    • decedent has reversionary interest (reversionary interest must be greater than 5% for inclusion)
110
Q

Revocable transfers

A
  • includable in gross estate if:
    • decedent can alter, amend, revoke or terminate transfer
  • not includable if:
    • if power can only exercised with consent of all parties
    • transfered for full consideration
    • power solely held by another person (trust is revocable but another person can decide to revoke)
111
Q

Annuities

A
  • straight-life annuities - not included in GE; interest terminates at death
  • Survivor annuities - if spouse, unlimited marital deduction; if non-spouse, present value of interest included in GE
112
Q

Jointly owned property

A
  • JTWROS:
    • spousal: 1/2 included in estate of 1st to die
    • non-spouse: based on contribution - if not proven 100% will be included in estate of first to die
  • Tenancy by the entirety - goes by contribution rule for inclusion in GE
113
Q

Powers of appointment

A
  • if holds general power of appointment over another’s assets, included in GE
  • no includable if limited power
114
Q

Life insurance proceeds

A
  • proceeds of life insurance payable to executor with a requirement that proceeds must be used to settle the gross estate, taxes, administration, etc. (loan to the estate to pay taxes and then paid back to bene not included)
  • included if decedent retained ownership interest in the policy - rights to change bene, surrender or cancel, etc. Usually seen in group term life (spouse should own policy on other spouse)
115
Q

Propterty from QTIP trust

A
  • QTIP property is always included in GE of 2nd to die spouse.
116
Q

Transfer for less than FMV

A
  • Donor recognizes capital gain to the extent that proceeds exceeds basis.
  • Donor has gift tax applicability for FMV less consideration.
117
Q

Private annuity

A
  • full consideration transfer
  • transfer between 2 private parties (usually relatives)
  • an unsecured promise from a buyer to make payments over life of the seller
  • upon death, buyer keeps money
  • generally used when seller is in poor health - can’t be terminally ill. but if live for greater than 18 months considered not terminally ill.
  • No inclusion in gross estate of seller nor gift tax.
  • Risk is that seller will outlive the term
  • Used with a highly appreciating asset
  • tax basis is sum of annuity payments actually paid.
118
Q

Self Canceling Installment Note (SCIN)

A
  • full consideration transfer - no inclusion in GE, no gift tax
  • an installment sale with payments of principal and interest
  • term is determined by seller
  • buyers tax basis is the full value of the property (total of all payments) no matter when seller dies or how many payments are actually made.
  • A SCIN premium is built into the interest rate because note is canceled at seller’s death
  • collateralized - seller can take back asset if payments are not paid.
  • The interest can be deductible if business interest
  • used when seller is in poor health
119
Q

Grantor Retained Annuity Trust (GRAT)

A
  • Grantor puts asset into trust, which pays a fixed annuity to the grantor for a defined term.
  • Gift tax is paid at inception. Valued at FMV - annuity payments
  • interest and dividends are taxable to the grantor when received.
  • if grantor dies after term, not included in gross estate.
  • Asset will pass to bene as a remainder gift.
  • Best property to use is that which will appreciate more than the IRS rate (7520 rate)
  • If grantor dies during the term of the GRAT, the entire value goes back in the gross estate.
120
Q

Grantor Retained UniTrust

A
  • similar to a GRAT but pays a fixed percentage of assets per year.
  • assets must be revalued each year
  • can be expensive for valuation
121
Q

Qualified Personal Residence Trust

A
  • usually vacation property
  • grantor receives use of the house which counts as the annuity payment.
  • amount subject to gift = PV of the remainder interest (calculated like GRAT)
  • if grantor outlives the term, then must pay FMV rent to benes.
  • asset passes to family members at end of term.
122
Q

Tangible Personal Property Trust

A
  • A form of GRAT that holds tangible property like artwork, coin collections, etc.
  • grantor gets to use asset during life and these are the annuity payments
  • gift made at inception is the FMV - value of use over the term.
123
Q

Family Limited Partnerships

A
  • A partnership is created to transfer assets to the next generation over time.
  • designed to take advantage of annual exclusion
  • 1% general partner keeps 1% interest and all power over decisions, etc.
  • limited partners receive amounts of stock equal to annual exclusion every year until full transfer
  • takes advantage of valuation discounts for small family-held businesses that are not marketable.
  • Limited partners cannot make business decisions, etc.
124
Q

Closely Held Business Valuation Discounts

A
  • Minority discount
  • lack of marketability discount
  • blockage discount - person who owns the majority of shares dies; shares need to be sold; drives price of shares down.
  • key person discount - when key person dies, company loses value.
125
Q

Valuation of financial securities at death

A
  • Average of daily high and low for date of death.
  • Accrued interest or dividends included in value
  • If the stock is not traded on a daily basis, days closest to date of death (before and after) are averaged and divided by number of days to get average.
    • value on the last trading day before death times the number of days after death until the next trading day (inclusive) plus the value of the first trading day after death times the number of trading days between the trading day preceding death and death (inlcusive) divided by the number of days.
    • date of death doesn’t count and non-trading days (weekends/holidays) don’t count. Day that stock is traded on either side does count.
126
Q

Valuation of life insurance at death

A
  • death proceeds: value of life insurance on own life that owned by decedent at death is included in gross estate
  • life insurance policy decedent owns on someone else’s life:
    • if paid up, valuation is the replacement cost of the same single premium contract for the same amount for the same age insured.
    • if decedent is still paying premiums, the valuation of the asset is the cash surrender value (interpolated terminal reserve) plus unearned premium (amount of premium that has been paid on time that hasn’t occured yet)
127
Q

Alternate Valuation Date

A
  • 6 months after date of death
  • executor can revalue the assets based on value on that day.
  • the election must lower the gross estate and the estate tax due.
  • form 706 value - value that goes to heirs
  • the election applies to all assets in gross estae except for assets that must valued at date of death:
    • wasting assets: annuities, mortgages, patents
    • assets disposed of between death and AVD are valued at disposal value.
128
Q

Deductions from Gross Estate

A
  • Administrative: collection of assets, costs of distribution of property, postage, etc., attorney fees, appraisals, etc.
  • Burial: reasonable expenses for funeral, etc.
  • Casualty losses
  • Debts - debts the decedent was obligated to pay as of date of death including gift taxes due.
  • Medical - last medical expenses can be either on 706 or 1040.
129
Q

Marital deduction

A
  • amount that is left to spouse is deducted from gross estate.
130
Q

Charitable Deduction

A
  • amount bequeathed to charity is deducted from Gross Estate
131
Q

Gift/Estate tax credit

A
  • $2,117,800 is the credit for tax on $5,430,000 of assets.
132
Q

Foreign Estate Tax Credit

A
  • Estate tax paid to another country is credited to taxable estate.
133
Q

Estate Tax Liability

A
  • Estate tax must be paid by estate before distribution of all assets.
  • the executor may be personally liabile
134
Q

Estate Tax Return Deadline

A
  • 9 months from date of death
  • up to 6 months extension available but must pay taxes by 9 months.
  • Penalties:
    • 5% per month failure to file up to 25%
    • .5% per month failure to pay up to 25%
    • failure to file is reduced by failure to pay
    • partial month counts as full month
135
Q

Basis for heirs

A
  • 706 value is the basis for heirs - FMV at date of death or alternate valuation date except:
    • gifts that revert back to the original owner that were transfered 1 year before death or less. (decedent transfered a gift and then gift was given back in order to get step-up basis)
    • JTWROS - 50% step up
    • community property - 100% step up
    • IRD assets - no change in basis
  • holding period is always long term
136
Q

Pain and Suffering Award

A
  • Decedent asset that goes in gross estate and probate.
137
Q

Grantor

A
  • Creator and funder of the trust
138
Q

Income beneficiaries

A
  • those who receive income from the trust for life or term
  • Hold beneficial title to the trust
139
Q

Trustee

A
  • manages the trust and carries out the provisions in the trust document.
  • holds legal title to the trust
  • must act in the interest of beneficiaries
  • duty of loyalty and care
140
Q

Remainder beneficiaries

A
  • receive what’s left of the trust after the term.
  • holds legal title to the trust
141
Q

Beneficial title

A
  • title held by beneficiaries
142
Q

Spendthrift clause

A
  • bene can’t assign, pledge or promise trust assets to anyone and if does, promise is void
143
Q

Creditor protection in trusts

A
  • spendthrift clause
  • trustee can make distributions on a discretionary basis
  • most states don’t allow grantor to create spendthrifts trusts for self to protect from creditors.
144
Q

Split interests in property

A
  • putting property in a trust allows all benes to benefit from the property either monetarily or through the actual property
  • e.g. family farm, vacation home
145
Q

Trust tax avoidance

A
  • transfer prior to appreciation
  • avoids transfer tax to future generations
  • reduce gross estate (pay for trust taxes using money outside of the trust)
146
Q

Rule against perpetuities

A
  • trust must vest at some point (trust assets must be disseminated)
  • some states have adopted a 90 year limit for a trust
  • some states say that trust must terminate within 21 years of a person (bene or not)
  • some states have abolished rule but include rule that trustee can sell property - (so real estate is not held in trust (out of marketplace) forever.)
147
Q

Taxation of trusts

A
  • distributions of income are taxed to individual and deductible for trust (k-1)
  • accumulations of income within the trust are taxed at trust level.
  • tax for over $12,300 of income at 39.6%
  • trusts are taxed on net income - distributions are only taxed to the extent of income. This passes through to benes. Return of capital if no net income
148
Q

Simple trust

A
  • all income is distributed to beneficiaries. Mandated distributions
149
Q

Complex trusts

A
  • Permit accumulation of income and also distribution of income.
150
Q

Revocable trust

A
  • no present interest for benes
  • incomplete gift
  • income taxed to grantor when distributed
  • avoids probate
151
Q

Irrevocable trusts

A
  • create present interest for bene.
  • completed gift
  • income taxed to either trust or bene (usually) when distributed.
152
Q

Trust gross estate inclusion

A
  • grantor maintains interest in the trust
  • grantor releases interest in the trust in last 3 years (proactively - not just term ends)
  • trust funding created a gift tax to be paid in 3 years before death.
153
Q

inter vivos trust

A

trust created during life

154
Q

testamentary trust

A
  • created upon death
155
Q

standby trust

A
  • are unfunded or minimally funded and become funded if a triggering event occurs
156
Q

pourover trust

A
  • trust receives assets from another source - the will or another trust.
157
Q

Grantor trust

A
  • inter vivos trust for the grantor
  • grantor pays trust income taxes
158
Q

Inter Vivos Revocable Trust

A
  • avoids probate
  • will contests are discouraged
  • not effective in reducing transfer taxes
159
Q

Inter Vivos Irrevocable Trust

A
  • discourages will contest
  • gift of present interest (especially using Crummey provision 5-5 provision)
  • distributions of income are gifts of present interest
  • completed gift - gift tax paid at creation or added to exclusion.
160
Q

Irrevocable Life Insurance Trusts

A
  • ILITs
  • usually Crummey provision to use annual exclusion to pay premium.
  • life insurance is held in trust so it is not included in GE upon death.
  • avoid having the trust be required to pay proceeds to the estate to pay taxes or it will be included in GE - but trust can loan $ to the estate to pay taxes or purchase assets of the estate.
  • not included in GE if no incidence of ownership.
161
Q

Bypass trusts

A
  • credit shelters or b-trusts
  • usually testamentary trust
  • Intended to use entire federal credit - full 5.43 goes into bypass trust - rest of estate goes to spouse as unlimited deduction.
  • usually provides income stream and limited principal distribution (not full access or else general power of appointment)
  • is not included in 2nd to die spouse’s estate.
  • usually used for HEMS (health, education, maintenance and support)
  • usually 5 and 5 rule
162
Q

Power of appointment trusts

A
  • marital deduction trust
  • acts as if assets were given to spouse using unlimited deduction.
  • taxed at surviving spouse’s death.
  • gives surviving spouse general power of appointment.
  • may be used to avoid GSTT
163
Q

QTIP

A
  • Qualified Terminal Interest Property Trust
  • marital deduction trust
  • first spouse to die sets parameters for the trust
  • taxed at the surviving spouse’s death
164
Q

Dynasty Trust

A
  • last a long period of time
  • used to transfer property through many generations
165
Q

2503b trusts

A
  • Trust for minors
  • holds assets for minors who can’t own property
  • statutorily designed to use the annual exclusion.
  • don’t have to use Crummey Power
  • 2503b = bad boy trust. irrevocable trust - assets are held for minor’s lifetime but receives income annually. Must be distributed annually. Remainder trust
    *
166
Q

2503c Trust

A
  • trust for minors
  • accumulation trust.
  • designed to use annual exclusion.
  • Assets accumulate (including income) until age 21 then are property of minor.
  • Annual exclusion available for contribution.
167
Q

Totten Trusts

A
  • TOD or POD bank accounts
  • not actually a trust
168
Q

Blind trusts

A
  • When there is conflict of interest and assets can’t be self-managed.
    *
169
Q

Charitable gifts - gift tax return

A
  • not filed unless it is a split gift between a charitable and non-charitable donee
170
Q

Charitable Gifts with split interest

A
  • charitable trusts - some money goes to charity and some to other bene.
  • PIFs
  • CRAT’s
  • CRUT’s
171
Q

Pooled Income Funds

A
  • Trust set up and maintained by charity
  • Provide income for life for the donor
  • Remainder goes to charity
  • Good for small gifts
172
Q

Charitable Remainder Annuity Trust

A
  • less flexible than CRUT
  • Must pay an annual annuity of 5% or more of the initial FMV
  • Annuity is for life or a period of not more than 20 years
  • donor can change charitable bene
  • remainder interest for the charity must be 10% or more of the FMV
  • No contributions may be made after inception
  • Charitable deduction is Remainder interest
  • Can require invasion of the corpus to pay annual income
173
Q

Charitable Remainder Unitrust (CRUT)

A
  • more flexible than CRAT
  • Preferred vehicle
  • Value of assets in trust is revalued annually (can be expensive) - inflation sensitive
  • Donor can contribute after the initial contribution
  • Must pay at least 5% annually of FMV as revalued
  • Can provide catch-up provision in years where trust doesn’t earn 5% in a year. Allows to distribute less than required if catch-up in future year.
  • Remainder interest for charity must be at least 10% of initial value of assets contributed. Charitable donation at contribution
174
Q

CRT Charitable Remainder Trust calculation of gift/remainder interest

A
  • CRAT - Multiple the annuity by IRS table to get the income interest. Deduct the income interest from the FMV to get the remainder interest.
  • CRUT - Complex calculation
    *
175
Q

Non-trust split interest charitable gifts

A
  • Donate property but retain the right to use it
  • Similar to QPRT
  • Can be personal residence or farm
176
Q

Charitable Lead Trust (CLT)

A
  • Charity receives the income; the remainder is left to noncharitable beneficiary
  • Used by high-net-worth individuals who do not need current income
  • Uses appreciating assets
  • Must be a grantor trust to get the charitable income tax deduction. Income that goes to charity is tax-deductible annually (subject to AGI limitations)
  • Taxable gift is discounted by the amount of the annuity.
177
Q

Testamentary Giving to Charity

A
  • No income tax deduction
  • Unlimited estate tax deduction if:
    • Is included in will
    • amount must be certain and included in the gross estate of the donor
  • Some assets are more valuable at death than during life
    • during life, limited deduction of adjusted basis
    • at death, step to FMV - deduction for estate of FMV rather than AB
    • or can leave to heir who gets step-up basis and then donates for income tax deduction.
178
Q

Tangible Personal Property Donated to Charity

A
  • Unrelated use by charity limits deduction to adjusted basis
  • Related use by charity, deduction can by FMV
  • Can create contract with charity to use for related use.
179
Q

City/State governments

A

Qualify as charitable organization

180
Q

Right to purchase sports tickets

A
  • 80% of donation used for the right to purchase sports tickets is deductible as charitable deduction.
181
Q

Unlimited Marital Deduction

A
  • defers payment of estate taxes to second to die spouse
  • treats spouses as one economic entity
  • parties must be married at date of death (or gift)
  • must be US citizens
  • must be net value of amount inherited (after administrative, taxes, funeral and other fees are paid if spouse is remainder bene)
182
Q

Qualification for marital deduction

A
  • assets must have been included in the gross estate (e.g. life insurance not included in ge not eligible for unlimited marital deduction)
  • property must be transfered to surviving spouse - cannot go into a trust for someone else.
  • terminable interest:
    • asset must be includable in surviving spouse’s estate
    • surviving spouse’s interest cannot terminate at a future date. (e.g. in case of life estate)
183
Q

Terminable Interest Rule exceptions

A
  • Terminable interest exists if:
  • 6-month survivor contingency - if spouse will only get the asset if survives for more than 6 months still counts as terminable interest
  • a terminable interest occurs if spouse receives general power of appointment over the assets even if doesn’t excersize right over them
  • Asset is in QTIP Trust - remainder may go to someone else, but spouse receives income
  • Charitable Remainder Trust - where spouse is the only non-charitable bene (both charity and spouse get unlimited deduction)
184
Q

Spousal general powers of appointment trust

A
  • Spouse has a right to appoint the trust property
  • unlimited marital deduction applies
  • taxed at 2nd to die spouse’s death
  • why to do:
    • may have a co-trustee
    • “A trust” - way of preserving decedent’s GSTT
185
Q

Qualified Terminable Interest Property Trusts (QTIP’s)

A
  • also a “C Trust”
  • Allows the decedent to control where the assets ultimately go while using unlimited marital deduction
  • Spouse must be entitled to all trust income for life and the income must be paid at least annually.
  • Spouse must be able to compel the trustee to turn any property in the trust into income-producing property.
  • Surviving spouse gets taxed at death.
  • First to die spouse chooses ultimate disposition
  • Remainder of the trust pays pro rata share of any estate tax included on surviving spouse’s estate.
  • Executor must file an election on 706
186
Q

Plannning for non-US citizen spouse

A
  • Unlimited marital deduction not available (because money might ultimately be taxed by another country)
  • Remedy:
    • non-US citizen becomes US citizen before due date of the return and maintains residency following death
    • QDOT
187
Q

Qualified Domestic Trust (QDOT)

A
  • An unlimited marital trust for non-US citizen spouse
  • At least one US citizen trustee
  • Must prohibit distribution unless US trustee has right to withold taxes
  • Trustee must keep sufficient assets to pay taxes
  • Executor must elect marital deduction
188
Q

Second-to-die policy

A
  • Used to pay estate and provide liquidity at 2nd spouse to die’s death
  • Covers 2 people and pays only when 2nd person dies.
  • Can be used if one spouse is uninsurable.
189
Q

Income taxation of life insurance

A
  • generally no income taxation on life insurance
  • if transfered for value (bought from someone) then tax proceeds to the extent that they exceed purchase price
  • Except if transfered to:
    • the insured
    • partner of the insured
    • partnership or corp where insured is partner or officer
    • or if is a gifted policy (not purchased)
190
Q

Income taxation of settlement options

A
  • lump sum payout -tax on earnings between the time of death and the policy pay-out
  • an annuity - taxed on portion that represents excess of death benefit - earnings on the annuity
191
Q

Income taxations of policy dividends

A
  • Policy dividends happen if insurance company has fewer payouts. Treated as a return of basis and not taxed.
192
Q

Surrender of policy taxation

A
  • Any amount in excess of basis is taxable.
193
Q

Income tax consequences of life insurance loans

A
  • generally not taxed
  • unless let policy lapse before loan payoff. Outstanding loan balance in excess of basis, taxed.
  • If MEC, causes LIFO treatment of loans
194
Q

Policy exchanges (section 1035)

A
  • LI to LI, MEC, or Annuity not taxed
  • Annuity for LI is a taxable event.
195
Q

Accelerated death benefit

A
  • viatical settlements are income tax free: owner must be chronically or terminally ill
  • chronically ill - can’t do 2 of 6 ADL’s: toileting, bathing, dressing, continence, eating, transferring. Must be spent on medical expenses
  • terminally ill - expected to live no longer than 24 months. can be used for anything without taxation.
196
Q

Gift tax treatment of life insurance

A
  • change of bene not subject to gift tax
  • gift of a policy
    • if paid up: gift tax value is the replacement cost of the policy.
    • if premiums are currently being paid: gift tax value is the sum of the policy’s interpolated terminal reserve - cash surrender value - plus unearned premiums
197
Q

Gift tax treatment of premiums

A
  • cash transfer for premiums, regular gift tax rules
  • if create ILIT, gift of future interest. Must include Crummey power to make it eligible for gt exclusion.
198
Q

Gift of life insurance to charity

A
  • tax deduction equal to the lesser of the adjusted basis or FMV
  • AGI limitation = 50%.30% depending /basis or FMV
199
Q

Estate tax treatment of life insurance

A
  • includable if GE if owner is the insured
  • if owner holds on someone else’s life and it has value, included in owners GE
200
Q

Liquidity sources at death

A
  • Sale of assets - not ideal if forced sale
  • ILIT - good for liquidity
  • IRD - not ideal because income tax in addition to estate tax; if distribution is to the estate, taxed at the estate rate. Better to take the distributions during life to fund LI.
  • Corporate redemption - Closely held businesses
  • Distribute assets instead of cash
  • Can use loans to pay estate taxes - not ideal - estate can deduct interest if must borrow to avoid fire-sale.
201
Q

Corporate redemption

A
  • Shareholder can redeem shares use the dividends paid out to pay the estate taxes, tax free.
  • 30% of the gross estate must be made up of the closely held business assets (can be made up of multiple businesses.)
202
Q

Joint or separate final return (for surviving spouse)

A
  • Spouse may file as qualified widow(er) for 2 years following death if not remarried and has children in home.
  • In the 3rd year, may file as HOH (if has child in house) or Single.
203
Q

Unpaid medical expenses

A
  • can be deducted either on the estate tax return or on the final tax return.
  • if there is an estate tax due, usually do estate tax return.
204
Q

Estate income tax form (1041)

A
  • Interest and dividends earned between date of death and distribution.
  • Can select tax year - calendar year or fiscal year
  • expense elections - sometimes should go on 706 and sometimes on 1041 - if taxable estate, should usually be 1041
205
Q

Expense elections on 1041 or 706

A
  • Executor fees can be deducted on either 706 or 1041.
  • Executor fees are taxable to the individual who receives them - if 1 bene who is also executor, waive that fee.
  • If professional executor, SE tax
206
Q

Savings Bonds in an estate

A
  • Pre-tax asset and are therefore IRD assets
  • no step-up basis
  • estate has to pay tax on income or distribute the income to the bene’s and then bene’s pay the tax.
  • if bequeathed to charity, no tax.
207
Q

Gift tax issues upon death

A
  • suriviving spouse can elect to split gifts for the year of death.
  • surviving spouse may not remarry in year to keep gift splitting.
  • executor can elect to split gifts for decedent.
208
Q

Installment payments of estate tax

A
  • Section 6166/6161
  • Occurs when bulk of estate is a closely held business.
  • First 4 years are interest only and then 10 amortized payments
  • Value of business must be 35% of Adjusted Gross Estate
  • sole proprietor, partnership 20% interest, corporation 20% interest
  • entity must have been engaged in business at time of death.
209
Q

Special use valuation

A
  • Real estate
  • FMV implies putting the property at highest and best use.
  • unless use special use valuation - section 2032
    • US citizen spouse
    • property must be used for farming or business actively managed by decedent for 5 out of 8 years before death.
    • must be 50% of GE
    • must be 25% of AGE
    • must be passing to qualifying heirs who will actively participate for 10 years or is recaptured
    • executor must make election - reduces value by $1.1M
210
Q

Disclaimers

A
  • Must be in writing
  • Must be within 9 months
  • Disclaimant cannot specify the party to whom the property is transferred
  • Disclaimant can’t benefit from property being disclaimed
211
Q

QTIP Election

A
  • Executor or administrator must make the QTIP election.
  • 15 months to make election
  • controlled by the first person to die - surviving spouse’s estate is taxed
212
Q

Generation-skipping transfer tax

A
  • can apply to either gifts or bequests
  • potential additional excise tax that is imposed on the transfer of property to a donee who is 2 or more generations below the donor.
  • Flat tax that is equal to the maximum estate tax rate at the time.
  • Only taxed on 1 skip. Can skip down multiple generations with the same tax.
213
Q

Skip person

A
  • spouse is never a skip-person
  • lineal descendants, 2 or more generations younger than transferor (grandchildren or greater)
  • unrelated and non-lineal descendants more than 37.5 years younger than transferor
  • trust - if interest in trust is held solely by skip people and/or distributions can only be made to skip people.
    *
214
Q

Predeceased ancestor rule

A
  • If a child predeceases transferor, that child’s descendents move up a generation.
215
Q

Direct Skip

A
  • outright gift to a skip person - taxed once regardless of number of generations skipped.
  • GSTT imposed on only amount received by transferee
  • If transferor is making skipped gift, the GSTT tax plus the FMV of value of gift becomes the taxable gift.
  • the transferor is generally liable for gift tax
  • if trust is a transferor in a direct skip, trustee owes the GSTT.
216
Q

Taxable termination

A
  • In any termination of a trust interest, trustee is liable for GSTT unless:
    • trust is subject to gift or estate tax
    • a non-skip person receives the asset or interest in the property
    • the distribution will never go to a skip person
  • Net amount to skip person is subject GSTT - FMV less expenses, indebtedness, taxes, etc.
217
Q

Taxable Distribution

A
  • Any distribution from the trust to a skip person that is not a termination or a direct gift.
  • the taxable amount equals the amount received by the recipient reduced by expenses associated with payment of the GSTT
  • transferee will be liable for GSTT
218
Q

GSTT Effective Date

A
  • Transfers post October 1986
219
Q

GSTT Exclusions

A
  • Qualified transfers (medical or education direct payment)
  • Annual exclusion (14K)
  • Annual exlusion in trust:
    • must be Crummey trust
    • the assets can only be for use in bene’s lifetime
    • the trust can’t terminate before bene’s death and must be included in bene’s GE.
      *
220
Q

Split Gifts (GSTT)

A
  • Gift splitting also applies to transfers subject to GSTT
  • If make split gift election for regular gifts, also applies to GSTT gifts
221
Q

GSTT Exemption

A
  • $5,430,000 exemption for GSTT
  • can be applied inter vivos or testamentarily
  • on transferor or executor can elect to use exemption and it is irrevocable
  • the transferor may elect out of the exemption
  • exemption automatically allocated at death
    • first allocated to direct skips
    • then allocated pro rata to trusts.
222
Q

GSTT tax return

A
  • Made during life: part of gift tax return (709)
  • Made at death: part of estate tax return (706)
223
Q

GSTT effect of disclaimers

A
  • May not be used to avoid GSTT
224
Q

Reverse QTIP

A
  • Can use a QTIP election for estate tax purposes but not for GSTT purposes
225
Q

Dynasty trusts

A
  • does not vest interest in trust property for any particular family member
  • because of RAP - usually only created in DE, AS, and SD.
  • trust pays income tax to the extent that not distributed to benes.
  • usually designate 2 trustees
  • name 2 or more trust protectors - have authority to remove trustee.
  • grantor should never be trustee or trust protector.
  • trustee is generally empowered to purchase assets for bene’s personal use.
  • trustee is empowered to terminate trust
  • can have a general power of appointment over some amount of assets in the trust (usually less than $5.43M)
226
Q

Estate Freeze

A

the property transferred would be appreciating in value and any future gain would occur in the transferee’s estate

227
Q

Estate Tax Base

A

All gifts over annual exclusion are added back to determine how much qualifies for the credit.

228
Q

Property Passing through operation of law

A

Everything except that which passes through will

No probate

Titling; named beneficiaries; trusts; etc.

229
Q

Will substitute

A

A Will substitute avoids public scrutiny, testamentary control, and cannot be overridden by bequests. An example might be a contractual agreement as a life insurance beneficiary

230
Q
A

CFP (8 decks)

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