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Estate Flashcards

1
Q

community property step up in basis

A

full step-up in basis, (ONLY (appreciated) long-term cap gain property, not ordinary income property) if at least 1/2 is includible in deceased’s gross estate

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2
Q

widower- home sale 121 exemption

A

$500,000 exemption allowed for 2 years following spouse’s death

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3
Q

step up in ordinary income property?

A 
NO- 
LTCG type (stock, real estate, home) would get step up in basis

*car wouldn’t go up in value!

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4
Q

inheritance (like inherited appreciated property)

A

always LTCG, so use LTCG rates

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5
Q

gifts of future interest (annual exclusion?)

A

NO annual exclusion!

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6
Q

Present interest rule- 4 exceptions

A
  1. UGMA/UTMA
  2. 2503(c)
  3. Crummey
  4. 529 plans

these qualify for annual exclusion

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7
Q

tainted/defective trusts-

don’t taint for both estate and income tax purposes!

A

tainting can be good for income tax purposes (if grantor’s income tax bracket is lower than trust rate), but client doesn’t want the irrevocable trust to be tainted for ESTATE tax purposes

tainted for estate if (double taxation):

  • more than 5% reversionary interest at death
  • beneficial enjoyment

grantor rules (makes trust defective (tainted) for income tax (grantor has to pay tax):

  • trust income distributed/accumulated for grantor or spouse
  • income used to discharge legal obligation of grantor
  • income used to pay premiums on life insurance of grantor or spouse
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8
Q

distributions for ascertainable standards- taxation

A

not subject to estate tax or gift tax

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9
Q

regular QTIP/ reverse QTIP

A

elect reverse, use GSTT exemption for grandkids instead of kids

grandkids–>reverse QTIP

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10
Q

Wealth replacement trust=ILIT

ex: a CRUT with a wealth replacement trust

A

ILIT-
example: CRUT with ILIT- money comes in, used to pay for ILIT, and children get the benefit

good to establish for children of parents with CRT. it replaces the wealth given to charity

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11
Q

for GRAT/GRUT- what’s the best asset to use

A

something likely to appreciate (not necessarily income producing)

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12
Q

QPRT (qualified personal residence trust)

A

transfer personal residence after a period of years

good for:

  • $1 million+ residence
  • long life expenctancy
  • donor continues to live there
  • large estate (like $11 mil single, $28 mil married)

irrevocable trust.

  • CAN be sold during initial term (but buy replacement within 2 years!)
  • personal residence subject to mortgage can be QPRT
  • during the initial term, the grantor typically pays the normal expenses of repair and maintaining the residence (incl. property taxes)
  • if settlor dies during the term, residence’s FMV included in gross estate
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13
Q

skip person (unrelated)

A

unrelated person 37.5 yr difference

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14
Q

liability for payment of the GST tax (direct skip, taxable termination, taxable distribution)

A

transfer is direct skip (annual exclusion applies): donor/estate pays GST

transfer is taxable termination (no 15k annual exclusion): trustee pays GST

transfer is taxable distribution (no annual exclusion): donee pays GST

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15
Q

AVD (alternate valuation date)

A

only when federal tax liability would be reduced (can’t be elected if there is no estate tax due!)

property disposed of between date of death and AVD is valued as of the date of distribution (if elected but distributed early)

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16
Q

GRIT

A

good for nontraditional family members (common law relationships, same sex relationships)

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17
Q

nontraditional:

children of another relationship/cohabitation/adoption

A

revocable trust or tenancy in common are best answers

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18
Q

will is usually wrong answer- why

A

can be contested

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19
Q

why JTWROS can be dangerous

A

one partner can sever, make withdrawals (and create taxable gift), asset reachable by creditors of both partners

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20
Q

grandparents and trusts

A

grandparents shouldn’t be trustee of 2503(c) trust or custodian of UGMA/UTMA (retained interest-beneficial enjoyment) because property is thrown back into grandparent’s estate

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21
Q

“gift of $15,000 can be discounted by 50%” (FLP valuation discount etc)– what does that mean?

A

$30,000 gift split can be $60,000

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22
Q

Form 706 and 709

A

Form 706 is estate tax

Form 709 is gift tax and GSTT

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23
Q

when is estate closed?

A

after all distributions are made and executor is discharged by the court. (not when all taxes are paid)

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24
Q

sprinkling or spray provision

discretionary provision

support trust

A

sprinkling/spray: power to distribute INCOME at the discretion of the trustee for the benefit of the bene

discretionary provision: provides the beneficiary with only as much trust INCOME or PRINCIPAL as the trustee alone sees fit to distribute

support trust: distributes only so much income and principal as the trustee deems necessary for the support or edu of beneficiary

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25
Q

3 year rule

A

transfers made within 3 years of death included in estate

ex: certain life insurance transfers (see rules), any gift TAX PAID [cash and property (real estate? like duplex) NOT subject to 3 yr rule!!!]

26
Q

corporate/partnership recapitalization (section 2701)- when is says “freeze”

A

recapitalization ($10 million corporation example):

  • all CEO’s stocks should be reissued as preferred (ex: $9 million valued)- pays him preferred dividends –> income!
  • $1 million of common stock is gifted to son and all appreciation occurs in son’s name
27
Q

FLP (family limited partnership)

A

typically used to shift income from parents to children/family members, but donor retains control over assets

basis for income tax is donor’s basis

28
Q

net gift technique - a freezing technique

(donee pays the gift tax- used when donor has liquidity problem and can’t afford to pay gift tax- discounted gift that benefits the donor and donee)

A
  • has to be after $11.4 million is exhausted
  • decedent’s gross estate includes the gift tax paid by donee on net gifts within 3 years of death

ex:
$1,515,000 gift after $11,400,000 has been exhausted

  • $1,500,000 x 40%= $600,000 (gift tax,trying to avoid)
  • $600,000/1.40= $428,571 is what the donee pays and added back to gross estate and gift tax credited to the estate
  • adjusted taxable gift for donor is $1,500,000-$428,571=$1,071,429
29
Q

Private/Family Foundations

Donor Advised Funds

A

Private foundation: created and controlled by wealthy person for charitable purposes- complete control- only restriction=5% must be distributed annually

Donor Advised Funds: held by community foundation/public charity, funded by individual donor…donor or appointed person can recommend eligible recipients

30
Q

simple trusts vs complex trusts

A

both can be irrevocable

simple: 2503b, QTIP, QDT, Dynasty, spray
complex: 2503c

31
Q

“taxes paid” that’s added back to Gross Estate

A

just Gift taxes paid, but not GSTT

32
Q

gift split-

form 709

A

they need to be married at the time of gift, not just by year end

33
Q

pour-over trust (will)

A

catch any assets that the client owns but are not yet controlled by the revocable trust at death

34
Q

what can be disclaimed?

A

tenancy by the entirety property cannot be disclaimed

JTWROS can be disclaimed (you would retain your half)

35
Q

qualified disclaimer is a thing.

disclaimer trust?

A

disclaimer trust-

where the spouse disclaims property yet receives a stream of income from the disclaimed bequest- a clause in the will

36
Q

divorce and gift tax liability

A

transfers of property (or interests) made under a written agreement bn spouses in settlement of marital property are for full consideration and are NOT GIFTS

37
Q

QDT- how to use

A

appropriate when the transferor is US citizen (rich US citizen spouse dies)

ex: $16.4 million estate
the non-citizen spouse would get $11.4 mil tax-free, so the other $5 mil can go into QDT trust to by-pass estate taxes until he dies

38
Q

IRD

A

included in gross income, but deduction normally permitted for estate and GSTT paid on that income

39
Q

testamentary trust

A

created by will- effective only when the will creating it is admitted to probate

can be either simple or complex trust

40
Q

Gift tax and GSTT example

A

$5,0150,000 gift from grandfather ($11.4 exemption used up)

Gift tax is $5 mil x 40%= $2 mil (reduces the taxable gift for GSTT purposes)

GSTT: ($3,015,000-$15,000) x 40%= $1,200,000

$3,200,000 due now for grandfather

41
Q

charitable gift of life insurance

A

life insurance is ordinary income type asset, so lesser of cash value or cost basis is the gift (further limited to 50% AGI)

42
Q

community property- what’s included

A

home, cars
life insurance policy
one spouse’s IRA
one spouse’s CD

43
Q

holographic will

nuncupative is oral will

A

accepted by courts

in testator’s handwriting and signed

44
Q

deduction from AGE (adjusted gross estate)

A
  1. marital, 2. charitable, 3. state death tax

marital unlimited if included in decedent’s gross estate and it passes to surviving spouse

charitable must be to qualified charity

45
Q

revocable trust vs durable power at/after death?

A

revocable trust continues after death;

durable power dies at death

46
Q

special needs trust (SNT)

A

allows private funding for disabled person while preserving that person’s gov’t benefits

47
Q

portability of unused exemption

A

husband dies with $8,400,000 ($3m unused of $11.4m) in bypass trust to wife. wife will have $11.4m + $3m=$14.4, exemption when she dies.

ex: Judith has total of $18m assets including her own and deceased husband. new husband Ralph has $2m assets and dies. combined exemption left is $22,800,000 ($11.4m+$11.4m-$2m)

48
Q

“estate trust”

A

marital trust that doesn’t provide the surviving spouse an income stream (usually holds non income producing assets)

49
Q

QTIP vs B (bypass) trust

A

QTIP/QDT (marital deduction) assets subject to estate tax at 2nd death (the QTIP trust bears burden of the tax, even thru reimbursement), B isn’t (B passes by $11.4m exemption). both provide stream of income to surviving spouse and passes assets to beneficiaries after 2nd death.

50
Q

2503(b) trust (bad boy) example

A

1) father puts $500,000 in 2503(b) generating $30,000 income for son

$500,000 is future interest and $30,000 is present interest gift income taxable to son and above $15,000 is taxable gift for father

2) father puts $100,000 in 2503(b) generating $15,000

$100,000 is future interest gift, $15,000 is present interest gift qualifying for $15k gift exclusion and income taxable to son

51
Q

NIMCRUT concept (net income with make-up unitrust)

A

$1,000,000 in 8% NIMCRUT (can take 8% of corpus):

Year 1: 4% income ($40,000) generated but don’t take
Year 2: 4% income ($44,000) generated but don’t take
Year 3: corpus is now $1,200,000 and 12% income ($144,000) generated and can be taken [8% of corpus is only $96,000, but $40,000 (year 1) and $8000 from year 2 is “made-up”, and the remaining $36,000 from year 2 can be taken next year]

52
Q

charitable lead trust good for?

A

wealthier, fed estate tax-avoiding clients…effective if client can afford to forego substantial income and own a significant amount of highly appreciating assets

53
Q

charitable gift annuity example

A

gifts $1m to a university. in exchange, gets charitable gift annuity worth $750k. $250k is the deductible charitable gift

54
Q

charitable bargain sale ex

A

sells FMV $500k with $100k basis to charity for $300k.
taxable gain?

($300k/$500k) x $100k= $60k (adjusted basis)

$300k(sale) - $60k (adj. basis)= $240k (taxable gain)

55
Q

life insurance inclusion in decedent’s estate

A

policy on your OWN LIFE:

  • death benefit included if you gift to spouse within 3 years of death, gifted but bene is your estate
  • not included if you sell to someone (no 3 yr rule)

policy on spouse:

  • replacement cost included (unused premium, interpolated terminal reserve plus unearned premium)
  • not included if you gift spouse’s policy to your kid (no 3 yr rule)

Included: own life, but bene is legally obligated to pay taxes of your estate
excluded but may be indirectly included: company you own 100% has key-person policy on you

56
Q

someone owns life insurance (on someone else) and dies…(interpolated terminal reserve)

A

Policy reserve was $40k in Nov ($5k premium paid), he dies in June (7 mon later) and the policy reserve is $46k next Nov (5 more months later)

$6k x (7/12) plus
$40k plus
$5k x (5/12) equals…value of policy included in his estate

57
Q

Estate and GST tax (and gift)

A

client died with $16,400,000 to grandchildren (parents alive)

$16,400,000-$11,400,000 (exemption for estate tax)=$5m is taxed @40%=>$2m estate tax

GST: $16,400,000-[$11.4m+$2m estate tax]=$3m is taxed @40% for GST=>$1.2m GST tax

*if $11,415,000 is gifted to grandchild, $15,000 annual exclusion plus $11.4m exemption can be used so $0 gift and $0 GST

58
Q

if 2032A election is available…

A

the estate will also qualify for 6166 election

303 is only for closely held CORPORATION

59
Q

discounts (business)

A

key person discount- for biz that lost a key employee

co-ownership discount- real estate ownership with another person

60
Q

might not be included in the gross estate at FMV?

A

life estates, remainder interests, reversionary interests, single (pure) life annuities (page E-9)

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