Estate Flashcards
Non-Community Property Interest
- 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
Community Property
- 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*
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
(Will Substitute)
- 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
Assets Subject to Probate
- “Singly” owned assets
- Property held by Tenancy in Common (TIC)
- Assets where the beneficiary is the “Estate of the Insured”
- Community Property (CP)
Form 706
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)
Incidents of ownership
(definition and inclusions)
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
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 years 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.
Present Interest Gift Vehicles
- UGMA/UTMA
- 2503(c) Trust
- Section 529 College Savings Plan
- Crummey Trust
*Present interest gifts qualify for the $15,000 annual exclusions
Future Interest Gift Vehicles
- 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
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/Dual/Double Basis
- Above Substitute Basis = Gain
- Between Basis and FMV = NO Gain or Loss
- Below FMV = Loss
Deductible Gifts (Not Taxable Gifts)
Also called Exempt Gifts or Qualified Transfer
- 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
Summary of Rules Regarding Gifts 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 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.
Power of Appointment (Trusts)
- 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
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
- 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*
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 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.
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 the lesser of the amount of the Annual Gift Exclusion or the value of the gift transferred
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
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.
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.:
- Lifetime income for the spouse
- Annual payments to spouse
- Mandatory payments to spouse
- Exclusively for spouse
Qualified Domestic Trust (QDT / QDOT)
Similar to a QTIP, but it is for a non-citizen Spouse
- there is no estate tax marital deduction
- the exemption amount is available if the spouse is a resident alient
- Jointly-held property between spouse is not considered ½-owned (ownership is based on consideration)
- Gift between spouses is limited to $157,000. Called a “super” annual gift tax exclusion.
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 assets and/or income to family members)
- Partnership / S-Corp
- Family Limited Partnership (FLP)
- Gift Leaseback
- Qualified Personal Residence Trust (QPRT)
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
Post-mortem Business Planning Techniques
(Estate Liquidity)
- Stock Redemption (Section 303)
- Installment Payment of Estate Taxes (Section 6166)
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.
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)
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)
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)
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)
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
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
Installment Sale
(PIGS 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)
Self-cancelling installment note [SCIN]
(PIGS 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
Private Annuities
(PIGS 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
Grantor Retained Annuity/Uni- Trust [GRAT/GRUT]
(PIGS 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)
Best Asset – Likely to appreciate
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.)
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
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
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)
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)
Three type of transfer to skip persons
- Direct skip - only one with $15,000 annual exclusion
- Taxable termination (indirect skip) No Annual exclusion
- Taxable distribution no annual exclusion
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
Taxable distribution
- no $15,000 annual exclusion
- any distribution of property out of a trust to a skip person
- Taxable distribution occurs when trust has beneficiaries in 2+ generations and TTEE makes distribution to skip person
summary of liability for payment of the GST tax
- if the transfer is a direct skip, the transferor (donor or estate) pays GST
- If the transfer is a taxable termination, the GST is paid by the trustee
- If the transfer is taxable distribution, the GST is paid by the transferee
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
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
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
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)
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
