Estate Flashcards
Non-community Property Interest
Income earned by spouses priorto marriage Property received as agiftby one spouse Propertyinheritedby one spouse
Interest earned on separate assetsheld 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
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)
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 year of death
Valuation of a Gift
- The value of a gift for gift tax purposes is its fair market value (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 the chart below:
Client’s subtituted basis $2,015,000 Gainbetween $2,015,000 and no gain or loss$1,515,000 _________________FMV date of gift $1,515,000 Loss
Deductible Gifts(not taxable gifts)also called exempt gifts orqualified transfer
- Gifts to a spouse, provided they are not a terminal interest
- Gifts to qualified charities Qualified payment in any amount madedirectlyto an educational institution for tuition Qualified payment in any amount madedirectlyto a medical care provider on behalf of any individual
- Gifts to American political parties
Summary of rules regardinggifts 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
Powers of Attorney
Traditional, non-durable power of attorney- Power ceases when the principal is no longer legally competentDurable power of attorney- Authority of agent continues when principal become incompetentSpringing durable power of attorney- Main strength is the agent has no authority over the principal’s assetsuntilincompetency.
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)
General Power- Holder may exercise the power in any manner he/she wishes
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
“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
Grantor Trust Rules(Tainted / Defective Trusts)Income Tax & Estate
- Trust may be defective / tainted for Income Tax and 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)
Elements of a Trust
In order for a trust to exist, there must beproperty(also known as principal, re, or corpus) There must be agrantor.This is any person who transfers property to and dictates the terms of a trust. There must be atrusteewho receivedlegal titleto 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 abeneficiarywho hasequitable titleto 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)
- 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
Crummey Trust
- Irrevocable trust with demand rights
- Demand right given to a minor through his/her guardian Beneficiary has temporary right to demand a withdrawal from the trust that is thelesserof the amount of the annual gift exclusion or the value of the gift transferred
Nonmarital “B” Trust(Family, Bypass, Credit Shelter, Unified Credit Shelter)
- Property transferred to the trust at the time of the decedent’s death
- Can be structured to provide a stream of income to surviving spouse or other individuals Decedent has postmortem control
QTIP “C” Trust(Current Income Trust)
- Provides surviving spouse with a stream of income for life, but decedent has postmortem control of trust property
- Property qualifies for marital deduction
- Mainly used for second marriages Key word for QTIP - LAME
Lifetime income for the 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 afutureinterest
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 to gift assetsand/or income to family members)
- Partnership / 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:
- 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
Postmortem 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
Portmortem 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.
