Estate Flashcards
community property step up in basis
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
widower- home sale 121 exemption
$500,000 exemption allowed for 2 years following spouse’s death
step up in ordinary income property?
NO- LTCG type (stock, real estate, home) would get step up in basis
*car wouldn’t go up in value!
inheritance (like inherited appreciated property)
always LTCG, so use LTCG rates
gifts of future interest (annual exclusion?)
NO annual exclusion!
Present interest rule- 4 exceptions
- UGMA/UTMA
- 2503(c)
- Crummey
- 529 plans
these qualify for annual exclusion
tainted/defective trusts-
don’t taint for both estate and income tax purposes!
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
distributions for ascertainable standards- taxation
not subject to estate tax or gift tax
regular QTIP/ reverse QTIP
elect reverse, use GSTT exemption for grandkids instead of kids
grandkids–>reverse QTIP
Wealth replacement trust=ILIT
ex: a CRUT with a wealth replacement trust
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
for GRAT/GRUT- what’s the best asset to use
something likely to appreciate (not necessarily income producing)
QPRT (qualified personal residence trust)
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
skip person (unrelated)
unrelated person 37.5 yr difference
liability for payment of the GST tax (direct skip, taxable termination, taxable distribution)
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
AVD (alternate valuation date)
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)
GRIT
good for nontraditional family members (common law relationships, same sex relationships)
nontraditional:
children of another relationship/cohabitation/adoption
revocable trust or tenancy in common are best answers
will is usually wrong answer- why
can be contested
why JTWROS can be dangerous
one partner can sever, make withdrawals (and create taxable gift), asset reachable by creditors of both partners
grandparents and trusts
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
“gift of $15,000 can be discounted by 50%” (FLP valuation discount etc)– what does that mean?
$30,000 gift split can be $60,000
Form 706 and 709
Form 706 is estate tax
Form 709 is gift tax and GSTT
when is estate closed?
after all distributions are made and executor is discharged by the court. (not when all taxes are paid)
sprinkling or spray provision
discretionary provision
support trust
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
3 year rule
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!!!]
corporate/partnership recapitalization (section 2701)- when is says “freeze”
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
FLP (family limited partnership)
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
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)
- 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
Private/Family Foundations
Donor Advised Funds
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
simple trusts vs complex trusts
both can be irrevocable
simple: 2503b, QTIP, QDT, Dynasty, spray
complex: 2503c
“taxes paid” that’s added back to Gross Estate
just Gift taxes paid, but not GSTT
gift split-
form 709
they need to be married at the time of gift, not just by year end
pour-over trust (will)
catch any assets that the client owns but are not yet controlled by the revocable trust at death
what can be disclaimed?
tenancy by the entirety property cannot be disclaimed
JTWROS can be disclaimed (you would retain your half)
qualified disclaimer is a thing.
disclaimer trust?
disclaimer trust-
where the spouse disclaims property yet receives a stream of income from the disclaimed bequest- a clause in the will
divorce and gift tax liability
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
QDT- how to use
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
IRD
included in gross income, but deduction normally permitted for estate and GSTT paid on that income
testamentary trust
created by will- effective only when the will creating it is admitted to probate
can be either simple or complex trust
Gift tax and GSTT example
$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
charitable gift of life insurance
life insurance is ordinary income type asset, so lesser of cash value or cost basis is the gift (further limited to 50% AGI)
community property- what’s included
home, cars
life insurance policy
one spouse’s IRA
one spouse’s CD
holographic will
nuncupative is oral will
accepted by courts
in testator’s handwriting and signed
deduction from AGE (adjusted gross estate)
- 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
revocable trust vs durable power at/after death?
revocable trust continues after death;
durable power dies at death
special needs trust (SNT)
allows private funding for disabled person while preserving that person’s gov’t benefits
portability of unused exemption
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)
“estate trust”
marital trust that doesn’t provide the surviving spouse an income stream (usually holds non income producing assets)
QTIP vs B (bypass) trust
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.
2503(b) trust (bad boy) example
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
NIMCRUT concept (net income with make-up unitrust)
$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]
charitable lead trust good for?
wealthier, fed estate tax-avoiding clients…effective if client can afford to forego substantial income and own a significant amount of highly appreciating assets
charitable gift annuity example
gifts $1m to a university. in exchange, gets charitable gift annuity worth $750k. $250k is the deductible charitable gift
charitable bargain sale ex
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)
life insurance inclusion in decedent’s estate
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
someone owns life insurance (on someone else) and dies…(interpolated terminal reserve)
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
Estate and GST tax (and gift)
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
if 2032A election is available…
the estate will also qualify for 6166 election
303 is only for closely held CORPORATION
discounts (business)
key person discount- for biz that lost a key employee
co-ownership discount- real estate ownership with another person
might not be included in the gross estate at FMV?
life estates, remainder interests, reversionary interests, single (pure) life annuities (page E-9)
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
JTWROS
Property can be held jointly with spouses and non spouses
Control, enjoyment, ownership 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 a wife
Transfer or property can only occur with the mutual consent of both parties
Protected from individual creditors but NOT the claims of both spouse’s creditors
Tenancy in Common
PROBATE
undivided interest in property
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
Assets NOT subject to PROBATE
property conveyed by deeds of title (IRA) Property held by JTWROS Govt savings bonds co-ownership Revocable living trusts PODs accounts Totten Trust
Assets subject to PROBATE
Singly owned assets
property held tenants in common
Assets where the beneficiary is “estate of the insured”
Community Property (CP)
Assets included in Gross Estate
Singly owned assets TIC Bene is the estate Community property JTWROS/Entirety Life Insurance General Powers 3-yr gross up on gift taxes paid (but NOT GST taxes paid)
If each spouse gifts $15,000 or the $30,000 to one donee gift is written from a spousal JTWROS or community property account, is a 709 required?
NO
Community and joint property does not require splitting
When is a 709 required to be filed?
Gift exceeds annual exclusion amount
Gift of future interest has been given
Gift splitting has been elected
Gift splitting
between spouses, but do not have to file joint return
Other spouse must consent in writing on Form 709
Community and joint property does not require splitting
Gift splitting is available even when one spouse has no assets in their name
Cannot split gifts from one spouse to another
Applies to ALL gifts made in that year by either spouse must be married at time of the gift.
Mr. and Mrs. James are wealthy. no estate plan. All assets are either in his name or in joint tenancy. Recently learned Mrs has a terminal illness. Which of the following assets do you suggest Mr. James transfer to Mrs revocable trust.
Transfer high basis investments to her trust
Transfer his IRA to her trust
Transfer low basis inv to her trust
Transfer his annuity to her trust
Transfer low basis investments to her trust because they will get a step up in basis. IRA and annuity transfer would trigger ordinary income tax due to change in ownership.
Rule against perpetuities (not local law)
Covers lives in being plus 21 years and 9 months
When would a charitable gift annuity be preferred over a CRAT?
Specific charity
guaranteed income
SCIN vs installment sale
Needs income
concerned about estate taxes eliminates installment sale moving to SCIN
Depreciation recapture may be a problem with the installment sale
Taxable Termination
passes property to the grandson only after the son’s interest ends
2032A election
Requires that the closely held business, ranch, or farm comprise 50% of the decedent’s gross estate and the real property 25%.
303
35%
Code Section 6166
35% - to pay federal estate tax in installments is available. After all discounts (estate reductions) have been taken.
Section 179
an election to expense the cost of certain assets
available for tangible personal property
1245 property
