Estate Flashcards
1
Q
Non-Community Property Interest
A
- 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
2
Q
Community Property
A
- With assets held as CP each spouse owns a separate, undivided, equal interest in the property
- All property ecquired by spouses during marriage are presumed to be CP
- Property gets FULL step-up in basis (only LTCG property), if at least ½ of the whole property is includible in deceased spouse’s gross estate
- Note: Property enjoys a 100% step-up in basis, but only ½ is included for estate tax pruposes*
- ** watch out for Section 121 Exemption real property questions*
3
Q
Joint Tenancy with Rights of Survivorship (JTWROS)
A
- 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
4
Q
Tenancy by the Entirety
A
- 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
5
Q
Tenancy in Common
A
- 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
6
Q
Assets NOT Subject to Probate
(Will Substitute)
A
- JTWROS
- TBE
- TOD/POD
- Totten Trust
- Transfer by contract: Named beneficiaries for qualified/retirement plans, IRAs, Life insurance and annuities
- Deeds of title
- Trust: Revocable and/or Irrevocable
7
Q
Assets Subject to Probate
A
- “Singly” owned assets
- Property held by Tenancy in Common (TIC)
- Assets where the beneficiary is the “Estate of the Insured”
- Community Property (CP)
8
Q
Form 706
A
9
Q
Assets Included in the Gross Estate
A
- 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)
10
Q
Incidents of ownership
(definition and inclusions)
A
the right to:
- change beneficiaries
- assign
- terminate
- borrow against the cash reserves
- name beneficiaries (if you reassign and don’t change bene)
- hint: CATBN
*Premium paying is not an incident of ownership
11
Q
Life Insurance Added to the Estate
A
- 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
12
Q
Valuation of a Gift
A
The value of a gift for gift tax purposes is its fair market value (FMV) at the date of gift.
13
Q
Present Interest Gift Vehicles
A
- UGMA/UTMA
- 2503(c) Trust
- Section 529 College Savings Plan
- Crummey Trust
*Present interest gifts qualify for the $15,000 annual exclusions
14
Q
Future Interest Gift Vehicles
A
- 2503(b) trust
- remainder interest
- a trust in which income will be accumulated for a period of years
*gift of a future interst doesn’t qualify for the $15,000 annual exclusion
15
Q
Basis of a Gift
A
- 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/Dual/Double Basis
- Above Substitute Basis = Gain
- Between Basis and FMV = NO Gain or Loss
- Below FMV = Loss
16
Q
Deductible Gifts (Not Taxable Gifts)
Also called Exempt Gifts or Qualified Transfer
A
- 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
17
Q
Summary of Rules Regarding Gifts and the Donor’s Estate
A
- 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
18
Q
Powers of Attorney
A
- 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.
19
Q
Power of Appointment (Trusts)
A
- General Power: Holder may exercise the power in any manner he/she wishes
- Ascertainable Standard: Relating to health, education, maintenance, or support (HEMS)
- Special Power: Exercisable only with the consent of the creator of the power or a person having a Substantial Adverse Interest
Hint: GAS
20
Q
Gift and Estate Tax Implications (General Power)
A
-
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
21
Q
“5 or 5” Power
A
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
- Not exercised → 5 of 5 is included in estate*
- Exercise & spend → nothing is included*
- Exercise & save → nothing from trust is included, but unspent funds are*
22
Q
Grantor Trust Rules (Tainted / Defective Trusts)
Income Tax & Estate
A
- 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)
23
Q
Elements of a Trust
A
- 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.
24
Q
Simple
vs.
Complex Trusts
A
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
25
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 the lesser of the amount of the Annual Gift Exclusion or the value of the gift transferred
26
Non-Marital "B" Trust
(Family, Bypass, Credit Shelter, Unified Credit Shelter)
First spouse to die controls
* 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_
* Property transferred to the trust is **usually** an amount equal to the exemption
27
Marital Trust
| ("A" trust or "martial A" trust)
second spouse to die controls
* generally operates as a _power of appointment_ trust
* surviving spouse has _transfer control_ over the property
* property in this trust _qualifies for marital deduction_ in the gross estate of the decedent.
28
QTIP "C" Trust (Current Income Trust)
* 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
* main advantage is decedent has _postmortem control_
**Keyword for QTIP - L.A.M.E.:**
* **L**ifetime income for the spouse
* **A**nnual payments to spouse
* **M**andatory payments to spouse
* **E**xclusively for spouse
29
Qualified Domestic Trust (QDT / QDOT)
Similar to a QTIP, but it is for a _non-citizen_ Spouse
1. there is **no estate tax marital deduction**
2. the exemption amount is available if the spouse is a resident alient
3. Jointly-held property between spouse _is not_ considered ½-owned (ownership is based on consideration)
4. Gift between spouses is limited to $157,000. Called a "super" annual gift tax exclusion.
30
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
31
Intrafamily Transfers
| (Property owner needs income)
**Remember:** PIGS Need Income
Private Annuity
Installment Sale
Grantor Annuity Trusts (GRAT/GRUT)
Self Canceling Installment Note (SCIN)
32
Intrafamily Transfers
(Property owner wants to gift assets and/or income to family members)
* Partnership / S-Corp
* Family Limited Partnership (FLP)
* Gift Leaseback
* Qualified Personal Residence Trust (QPRT)
33
Disclaimer
| (requirements)
refusal by primary beneficiary to accept property
* the following requirements must be met:
* 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
34
Post-mortem Business Planning Techniques
(Estate **Liquidity**)
* Stock Redemption (Section 303)
* Installment Payment of Estate Taxes (Section 6166)
35
Port-mortem Business Planning Techniques
(Estate Tax **Reduction**)
Special Use Valuation (Section 2032A):
* Real estate used for farming or in closely held business
* _25% of the Gross Estate_ consists of personal or **real property used in the business**
* $1.18MM reduction in decent's gross estate
* Must be in Qualified Use: 5-out-of-8 year rule before death and 10 years after death.
36
Charitable Reaminder Annuity Trust
| (CRAT)
* **_no_** additions
* payments **_fixed_** (lifetime or term certain)
* payable to **_any_** charity
* **_10%_** ending value
* corpus must pay out a specified amount of income (_sum certain_) each least (at least 5%)
(remember NO FIX ANY 10)
37
Charitable remainder unitrust
| (CRUT)
* additions **_allowed_**
* payments **_variable_** (assets revalued annually)
* payable to **_any_** charity
* **_10%_** ending value
* corpus must pay out specified amount of income (_fixed percent_, at least 5%) each year of the reappraised corpus
(remember ALLOWED, VARIABLE, ANY, 10)
38
Pooled Income Fund
| (Mutual fund of a specific charity)
* additions **_allowed_**
* payments **_variable_** (based on fund income)
* payable to one **_specific_** charity (no municipals)
* charity controls and manages assets
* donor _cannot change_ which charity gets remainder
* no trust
(remember ALLOWED VARIABLE SPECIFIC)
39
Charitable Gift Annuity
| (overpaid annuity)
* **_no_** additions
* **_fixed_** lifetime income
* payable to one **_specific_** charity
* charitable deduction based on _gift in excess of annuity_
(remember NO, FIXED, SPECIFIC)
40
CLAT/CLUT
* **_no_** 5% required withdrawal
* established **_at death_**
* income or estate tax deduction
* charity receiveds income interest
* after a period of time paid to a non-charitable beneficiary
41
Private Foundation
| (family foundation)
* 30% income tax deduction
* payable to a charity **_or_** an individual
* can continue for an _indefinite time_ period
* required to distribute at _least 5% of its investment assets_ annually for charitable purposes
42
**I**nstallment Sale
| (P**I**GS need income)
* Sale of propety at FMV in exchange for income
* PV of remaining payments is _included_ in owner's estate
* propety is secured
* Gain is capital gain. DO NOT use if property is suject to recapture (1245)
43
**S**elf-cancelling installment note [SCIN]
| (PIG**S** need income)
* **_No_** value is included in the owners estate
* gain is capital gain
* assets can be _depreciated_
* interest can be _deducted_
* higher payout than installment/more income tax
44
**P**rivate Annuities
| (**P**IGS need income)
* **_No_** value is included in owner's estate
* Property is transferred (exchanged) for a promise
* Taxation to seller
* _all the gain_ which would have been recognized over the life of the annuity are _currently taxable_
45
**G**rantor Retained Annuity/Uni- Trust [GRAT/GRUT]
(PI**G**S need income)
* irrevocable trusts that allow the grantor to make gifts of property while retaining an income interest
* at the _end of a term_, corpus is distributed to a remainder person
* the value of the gift is discounted (due to the retained interest)
* owner _must outlive_ term or the asset is brought back into estate (like QPRT)
## Footnote
**Best Asset -- Likely to appreciate**
46
Partnership/S Corp [gifting shares]
(owner wants to gift assets/income to family)
* family member receives conduit income.
* ineffective if a child is under age 24 (kiddie tax)
* business entity _must be capital sensitive_ (manufacturing plant, warehouse, x-ray equipment)
* **not** service-related business, tax trap (financial planner, CPAs, attorneys, consultants.)
47
Family Limited Partnership [FLP]
(owner wants to gifty assets/income to family)
* gift interests to LP to _reduce the estate_
* qualifies for various *"valuation discounts"* allowing for a lower gift tax
* GP _maintains control_
48
Gift Leaseback
(owner wants tog gift assets/income to family)
* good for gift of _fully depreciated_ property (business) outright or in trust to lower-bracket family member
* Lease payments are a business deduction, income to family member
* _DO NOT_ use if childr is under age 24
49
Qualified Personal Residence Trust [QPRT]
(owner wants to gift assets/income to family)
* an irrevocable transfer of a personal residence
* at the _end of a term_, the residence is **eliminated from the grantor's estate**
* the value of the _gift is discount_
* owner _must outlive term_, or asset is brought back into estate (like GRAT/GRUT)
50
When would a QPRT be recommended?
* a large residence valued at $1MM+
* a reasonable life expectancy (at least 10 years)
* the donor continues to live in the residence
* a large estate (above exemption)
51
Three type of transfer to skip persons
1. **Direct skip** - only one with $15,000 annual exclusion
2. **Taxable termination** (indirect skip) No Annual exclusion
3. **Taxable distribution** no annual exclusion
52
Taxable termination
| (GSTT)
* No $15,000 annual exclusion
* _Termination of a non-skip_ person's interest in income or principal of a trust
* Skip persons become the only remaning trust beneficiaries
53
Taxable distribution
1. no $15,000 annual exclusion
2. any distribution of property out of a trust to a skip person
3. Taxable distribution occurs when trust has beneficiaries in 2+ generations and TTEE makes distribution to skip person
54
summary of liability for payment of the GST tax
1. if the transfer is a **_direct skip_**, the _transferor_ (donor or estate) pays GST
2. If the transfer is a taxable **_termination_**, the GST is paid by the _trustee_
3. If the transfer is taxable **_distribution_**, the GST is paid by the _transferee_
55
Outcomes that must occur before AVD method can be elected
* Using it must cause _a reduction_ in the total value of the gross estate
* The amount of **federal tax liability _must be reduced_** as a result of filing the election
Not applicable when:
* Assets pass to spouse using _unlimited marital deduction_
* Assets passing to others are _less than $11.58MM_
56
Disclaimer Trust (simple trust)
* spouse may disclaims property at decedent spouses death (testementary) yet receives stream of income from bequest
* property is _irrevocably_ transferred to trust
* spouse generally _cannot_ retain any power to invade corpus
* HEMS yes; 5 or 5 no
57
Stock Repemption (Section 303)
* Business _must_ be Corporation (C or S) (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
58
Installment payment of Estate Taxes (6166)
* If the estate qualifies can be paid in 10 equal installments beginning 4 years AD
* Property must be in a sole prop, partnership, or corporation
* Aggregation is allowed if more than 20% interest in each business
* Business must be active as of the DOD
* **_Value of business must exceed 35%_** of decedent's adjusted gross estate
* During 4 years AD (+10 years installment) can pay interest only on taxes due (non-deductible)
59
Dynasty Trust
* "B" trust that benefits mutliple future generations
* Free of estate, gift, and GST taxes
* Can last for lives in being + 21yrs & 9mo _or_ as long as local law allows
* Beneficiary interests are limited to life estates
* Taxable to current beneficiary
