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CFP EXAM FLASHCARDS > Estate > Flashcards

Estate Flashcards

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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
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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*
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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
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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
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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
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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
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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)
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8
Q

Form 706

A
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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)
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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

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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
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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.

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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

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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

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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
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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
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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
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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.
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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

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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
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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*
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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)
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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.
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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:

  1. It is irrevocable, and the Grantor has not retained any control
  2. Income is accumulated
25
Q

Crummey Trust

A
  • 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
Q

Non-Marital “B” Trust

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

A

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
Q

Marital Trust

(“A” trust or “martial A” trust)

A

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
Q

QTIP “C” Trust (Current Income Trust)

A
  • 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
29
Q

Qualified Domestic Trust (QDT / QDOT)

A

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
Q

Charitable Contributions/Transfers

A

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
Q

Intrafamily Transfers

(Property owner needs income)

A

Remember: PIGS Need Income

Private Annuity

Installment Sale

Grantor Annuity Trusts (GRAT/GRUT)

Self Canceling Installment Note (SCIN)

32
Q

Intrafamily Transfers

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

A
  • Partnership / S-Corp
  • Family Limited Partnership (FLP)
  • Gift Leaseback
  • Qualified Personal Residence Trust (QPRT)
33
Q

Disclaimer

(requirements)

A

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
Q

Post-mortem Business Planning Techniques

(Estate Liquidity)

A
  • Stock Redemption (Section 303)
  • Installment Payment of Estate Taxes (Section 6166)
35
Q

Port-mortem Business Planning Techniques

(Estate Tax Reduction)

A

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
Q

Charitable Reaminder Annuity Trust

(CRAT)

A
  • 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
Q

Charitable remainder unitrust

(CRUT)

A
  • 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
Q

Pooled Income Fund

(Mutual fund of a specific charity)

A
  • 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
Q

Charitable Gift Annuity

(overpaid annuity)

A
  • no additions
  • fixed lifetime income
  • payable to one specific charity
  • charitable deduction based on gift in excess of annuity

(remember NO, FIXED, SPECIFIC)

40
Q

CLAT/CLUT

A
  • 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
Q

Private Foundation

(family foundation)

A
  • 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
Q

Installment Sale

(PIGS need income)

A
  • 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
Q

Self-cancelling installment note [SCIN]

(PIGS need income)

A
  • 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
Q

Private Annuities

(PIGS need income)

A
  • 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
Q

Grantor Retained Annuity/Uni- Trust [GRAT/GRUT]

(PIGS need income)

A
  • 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

46
Q

Partnership/S Corp [gifting shares]

(owner wants to gift assets/income to family)

A
  • 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
Q

Family Limited Partnership [FLP]

(owner wants to gifty assets/income to family)

A
  • gift interests to LP to reduce the estate
  • qualifies for various “valuation discounts” allowing for a lower gift tax
  • GP maintains control
48
Q

Gift Leaseback

(owner wants tog gift assets/income to family)

A
  • 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
Q

Qualified Personal Residence Trust [QPRT]

(owner wants to gift assets/income to family)

A
  • 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
Q

When would a QPRT be recommended?

A
  • 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
Q

Three type of transfer to skip persons

A
  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
Q

Taxable termination

(GSTT)

A
  • 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
Q

Taxable distribution

A
  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
Q

summary of liability for payment of the GST tax

A
  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
Q

Outcomes that must occur before AVD method can be elected

A
  • 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
Q

Disclaimer Trust (simple trust)

A
  • 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
Q

Stock Repemption (Section 303)

A
  • 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
Q

Installment payment of Estate Taxes (6166)

A
  • 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
Q

Dynasty Trust

A
  • “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

CFP EXAM FLASHCARDS (7 decks)

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