Estate and Incapacity Planning 2 Flashcards
Outright gifts of business interests
- Gift
- Private Annuities
- Grantor Retained Annuity Trusts (Grantor transfers business interests to an irrevocable trust and retains an income stream for a set number of years. At termination, it is passed to beneficiaries. Not exempt from GST
Intentionally Defective Grantor Trusts (IDGTS)
A complete transfer for estate tax purposes but an incomplete transfer for income tax purpose. This is a way to remove highly appreciated assets from the estate. An appraisal has to take into account a complete valuation.
Installment Sale
Owner acts as bank, selling assets or business to buyer, over time, so as to defer capital gains tax recognition over time.
Self-Cancelling Notes
A promissory note is issued which is cancelled at the owner’s death.
Buy Sell Agreement - Requirements
- Valuation Clause - formula for valuing the business
- Funding Mechanism - a way for the buyer to purchase - do they have money available to do that? Fund with life insurance?
- Define the triggering event - is it death, divorce, illness?
- Tax Considerations - estate tax, property taxes, GST, Gift Tax
- Audited financials for three years
Charitable Remainder Trust (CRT)
Donor retains income benefit during life and charity gets the remainder.
What are the two types of CRT?
Charitable Annuity Trust (CRAT) - It distributes a fixed annuity amount each year, and additional contributions are not permitted. The annuity amount must be at least 5% and not more than 50% of all trust assets.
Charitable Remainder Uni Trust (CRUT) - This distributes a fixed percentage based on the value of trust assets on an annually determined basis. Additional contributions may be made.
Charitable Remainder Trust - Taxes
Are typically tax exempt. Typically, will add a low basis asset to it so when it is sold, you avoid capital gains. Cannot hold S Corporation stock.
Charitable Lead Trust
It is irrevocable that operates for a set term.
After the term, the assets are distributed to the beneficiaries.
Charitable Remainder Trusts - When to Use
- Donated assets are usually highly appreciated capital assets.
- Client has a charitable intent.
- Client wants to defer tax recognition.
- Client is or at retirement
- Contribution is made in a high interest rate environment
- Client wants to diversify
- Client wants to convert net worth into an income stream
Two Types of the Charitable Lead Trust
Grantor and Non-Grantor
Retirement Assets
Example - Naming the charity as the beneficiary. While the client is alive, the client can transfer the RMD to the charity.
Tax Benefits of a CRT
- Immediate tax deduction for the value of the remainder interest as a charitable contribution in the year of the transfer to the trust.
- Reinvestment is allowed.
When not to use a CRT
- An operating business or for debt-financed assets
- In a low interest rate environment, unless the annuity stream is not important to the client.
- When the client’s charitable intent is not genuine.
Charitable Lead Trust - When to Use
- The donor has excess income for which he or she has little need.
- The donor wants to give income to a charity over a period of years.
- Wants to give highly appreciated assets to family members.
- Wants to recognition for making substantial gifts.
Charitable Lead Trust - When Not to Use
- If the client will need the income.
- Does not have appreciating assets
- When an outright gift to charity will meet the same goals.
Private Foundation
Independent legal foundation.
Advantages - Autonomy and control - can choose the board, etc.
Disadvantages - Can be expensive to operate; complicated compliance requirements.
Donor Advised Fund
The donor can have a lot of control, but the community foundation can take care of compliance.
Tax Apportionment Clause
There should be an equitable apportionment clause is used when charities are part of the remainderman beneficiaries, rather than a “pay out of residue” clause (PC 20100)
C Corporations
- The Shareholders are not liable for company debts and obligations.
- Subject to double taxation - once at the corporate level and again when dividends are distributed.
- Losses cannot be deducted by shareholders
- Are not pass-through entities
S Corporations
- They do qualify for QBI
- Are a pass through entity - tax benefits and losses pass to individual shareholders
- Not subject to double taxation
S Corporations - Limitations
- Cannot have more than 100 shareholders
- No stockholders can be a non-resident alien
- Cannot have more than one class of stock
- Certain types of trust can be shareholders (QSST or ESBT)
- Limitations on liability - same as the C Corporation
General Partnership
- Easy to form
- Pass-through nature of partnerships for income tax purposes
- Flexibility for management and control
Limited Partnerships
- Limited Liability (for limited partners only, not general partner)
- Common when investors are needed
- Easy to establish
- Flexibility
- Not subject to double taxation
