Estate

Question 1

Non-Community Property Interest

Answer 1

• 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

Question 2

Joint Tenancy with Rights of Survivorship (JTWROS)

Answer 2

• 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

Question 3

Tenancy by the Entirety

Answer 3

• 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

Question 4

Tenancy in Common

Answer 4

• 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

Question 5

Assets NOT Subject to Probate

Answer 5

• 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

Question 6

Assets Subject to Probate

Answer 6

• “Singly” owned assets
• Property held by Tenancy in Common
• Assets where the beneficiary is the “Estate of the Insured”
• Community Property (CP)

Question 7

Assets Included in the Gross Estate

Answer 7

• 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)

Question 8

Life Insurance Added to the Estate

Answer 8

• 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

Question 9

Valuation of a Gift

Answer 9

The value of a gift for gift tax purposes is its fair market value (FMV) at the date of gift.

Question 10

Basis of a Gift

Answer 10

• 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 below:

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

Question 11

Deductible Gifts (Not Taxable Gifts)

Also called Exempt Gifts or Qualified Transfer

Answer 11

• Gifts to a 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

Question 12

Summary of Rules Regarding Gifts and the Donor’s Estate

Answer 12

• 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

Question 13

Powers of Attorney

Answer 13

• 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.

Question 14

Power of Appointment (Trusts)

Answer 14

• 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

Question 15

Gift and Estate Tax Implications (General Power)

Answer 15

• 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

Question 16

“5 or 5” Power

Answer 16

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

Question 17

Grantor Trust Rules (Tainted / Defective Trusts)

Income Tax & Estate

Answer 17

• 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)

Question 18

Elements of a Trust

Answer 18

• 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.

Question 19

Simple

vs.

Complex Trusts

Answer 19

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

Question 20

Crummey Trust

Answer 20

• 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 the lesser of the amount of the Annual Gift Exclusion or the value of the gift transferred

Question 21

Non-Marital “B” Trust

(Family, Bypass, Credit Shelter, Unified Credit Shelter)

Answer 21

• 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 individual
• Decedent has post-mortem control

Question 22

QTIP “C” Trust (Current Income Trust)

Answer 22

• Provides surviving spouse with a 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 - L.A.M.E.:

• Lifetime income for the spouse
• Annual payments to spouse
• Mandatory payments to spouse
• Exclusively for spouse

Question 23

Qualified Domestic Trust (QDT / QDOT)

Answer 23

• 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

Question 24

Present Interest Gift Vehicles

Answer 24

• UGMA
• UTMA
• 2503(c) Trust
• Section 529 College Savings Plan

Gift to a 2503(b) Trust is a gift of a future Interest

Question 25

Charitable Contributions/Transfers

Answer 25

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

Question 26

Intrafamily Transfers

(Property owner needs income)

Answer 26

Remember: PIGS Need Income

Private Annuity

Installment Sale

Grantor Annuity Trusts (GRAT/GRUT)

Self Canceling Installment Note (SCIN)

Question 27

Intrafamily Transfers

(Property owner wants to gift assets and/or income to family members)

Answer 27

• Partnership / S-Corp
• Family Limited Partnership (FLP)
• Gift Leaseback
• Qualified Personal Residence Trust (QPRT)

Question 28

Disclaimer

Answer 28

• 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

Question 29

Post-mortem Planning Techniques

(Estate Liquidity)

Answer 29

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

Question 30

Port-mortem Planning Techniques

(Estate Tax Reduction)

Answer 30

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.