Estate Issues and Wealth Transfer

Question 1

Powers of Appointment

Answer 1

• The power the donor grants to the donee to designate who will own the property in the future.
• The power could be a general power of appointment or a nongeneral power of appointment, which is sometimes referred to as a “special” or “limited” power of appointment.
• Distinction is important because estate or gift tax consequences of powers of appointment vary
  depending on whether the power of appointment is a general power or a special power of appointment.

Question 2

Disclaimer

Answer 2

• Refusal of the gift must be in writing and, for federal estate tax purposes, must be made within nine months of the gifting
• Transfers made after nine months are considered subsequent transfers of current ownership, which are then subject to federal gift taxation to the intended beneficiary who is disclaiming the gift.

Question 3

Non-traditional Relationships

Answer 3

• Unmarried couples cannot typically take advantage of certain estate planning tools and strategies such as the unlimited marital deduction, portability, or gift-splitting.
• Trusts, life insurance, and GRATs are also commonly utilized estate planning tools and strategies for unmarried couples.

Question 4

IRA Beneficiary

Answer 4

If multiple beneficiaries are named for the same IRA (e.g., the client’s children and grandchildren), advise the client that the life expectancy of the oldest will control for purposes of stretching IRA payments (separate groupings of similarly aged individuals can be more effective for stretch purposes). This is subject to the SECURE Act (2019) rules by which non-eligible designated beneficiaries are subject to a 10-year max rule for distributions.

Question 5

Probate and Intestacy

Answer 5

• If the decedent did not have a valid will, the decedent is said to have died intestate.

Question 6

IRS Form 709

Answer 6

• Page One
• • Part I: General Information
• • Part II: Tax Computation
• Page Two and subsequent pages
• • Sched A: Computation of Taxable Gifts
• • Sched B: Gifts from Prior Periods
• • Sched C: Deceased Spouse Unused Exclusion (DSUE)
• • Sched D: Computation of GSTT

Question 7

IRS Form 709 - What is to be reported?

Answer 7

• Future interests of any amount given to a nonspouse
• Present interest gifts in excess of $15k
• Transfers to a non-U.S. citizen spouse if the gift exceeds $150k
• Transfers of QTIP to a spouse in any amount
• Split gifts with a spouse (regardless of the amount) made jointly to a third party
• Transfers to charity if any part of the transfer was of a future interest

Question 8

IRS Form 709 Gift Tax Splitting

Answer 8

When spouses split gifts, the consenting spouse is not required to file a gift tax return in two situations, i.e., if:

• Only one spouse made gifts, the total value of gifts made by the donor spouse to any single donee is not more than $28,000 (for 2017) and $30,000 (for 2018-2021), and all gifts made are present interest gifts in the transferred property
• Only one spouse made gifts of more than $14,000 in 2017 and $15,000 in 2018-2021, but not more than $28,000 in 2017 and $30,000 in 2018-2021 to any third-party donee, the only gifts made by the other (consenting) spouse were gifts of not more than $14,000 in 2017 and $15,000 in 2018-2021 to donees other than the donees to whom the other donor spouse made gifts, and all the gifts by both spouses were present interests

Question 9

When Form 709 Is Filed?

Answer 9

• Form 709 is due to be filed not later than April 15 of the year following the calendar year in which the gifts were made
• If the donor dies during the calendar year in which a gift is made, the gift tax return must be filed no later than the earlier of the due date (including extensions) for filing the donor’s estate tax return, or April 15 of the year following the calendar year in which the gifts were made

Question 10

Alternative Valuation Date

Answer 10

• All the property that the decedent owned is valued at the date of death, or six months later if the executor or administrator elects the alternate valuation date, provided use of the later date reduces the value of the decedent’s estate and the estate tax payable

Question 11

Code Section 6166 Installment Payments

Answer 11

• Relief provision to permit the deferral of estate tax payments
• Available only if the decedent was a U.S. citizen or resident at the time of death and the value of the decedent’s interest in a closely held business exceeds 35% of the value of the decedent’s adjusted
  gross estate
• Elect to defer completely for five years payment of the portion of the estate taxes attributable to the CLOSELY held business interest and thereafter pay the deferred portion of the estate taxes in up to 10 annual installments

Question 12

Form 706

Answer 12

• Portability of Deceased Spousal Unused Exclusion
• Filing the return is presumed to be a portability election
• To not elect portability on a filed return, there must
  be an affirmative opt out

Question 13

Estate Tax = Tax-Inclusive

Gift Tax = Tax-Exclusive

Answer 13

• Estate tax is tax-inclusive because the “estate tax paid” is/was included in the taxable estate.
• Gift tax is considered tax-exclusive because the “gift tax paid” is not included in the taxable estate, and therefore will not be taxed when the final estate is settled.

Question 14

Tax Basis of Property Gifted

Answer 14

If the FMV is equal to or greater than the donor’s adjusted basis, your basis is the donor’s adjusted basis at the time you received the gift. If you received a gift after 1976, increase your basis by the part of the gift tax paid on it that is due to the net increase in value of the gift.

Question 15

Generation Skipping Transfer Tax

Answer 15

• $11.7mm - Not portable between spouses
• Direct skip is a transfer to a skip person that is also subject to estate or gift tax (transferor is responsible for paying GSTT)
• Skip person is two generations or more younger than the transferor, or a trust if all of the trust interests are owned by skip persons or if no one has a current interest in the trust and at no time in the future may a distribution be made to non-skip person
• Taxable distribution is any distribution from a trust, including a distribution of income, that is not a taxable termination or direct skip (beneficiary is responsible for paying the GSTT)
• Taxable termination occurs when an interest in property held in trust terminates and trust property is held for or distributed to a skip person (trustee is responsible for paying the GSTT)

Question 16

Crummey Trust Provision

Answer 16

• Giving the beneficiary (usually a minor) the right to demand a withdrawal of funds from the trust for reasonable period of time, usually is 30 - 60 days
• When additions to the trust are made, the trustee informs the beneficiary in writing of this withdrawal right. Then the beneficiary either declines to exercise the right by notifying the trustee in writing or by failing to respond to the trustee’s letter within the prescribed time
• Permits the grantor’s transfer to the trust to qualify for the annual gift tax exclusion because transfers subject to such demand powers are gifts of present interests.

Question 17

Strategies to utilize the lifetime exemption

Answer 17

1. Traditional Method – Bequest to bypass trust equal to deceased spouse’s applicable exclusion amount
2. Alternative Methods (Portability)
   – Outright to surviving spouse
   – Outright to surviving spouse (with disclaimer to bypass trust)
   – Bequest to QTIP-able trust (with partial QTIP election)
   – Bequest to QTIP trust (with Clayton provision)

Question 18

IRC Section 7520 rate

Answer 18

Rate used by the government to discount the value of various gifts including charitable gifts, lifetime and estate gifts, annuities and insurance, business interests, etc. for tax purposes.

Question 19

Examples of IRD

Answer 19

• payments to surviving spouse under deferred compensation agreement
• compensation for services rendered
• dividends declared but that had not yet been paid
• interest owed
• amounts paid for unrealized receivables or liquidation from a partnership
• distributions from retirement plan or IRA
• proceeds from sales on the installment method

Question 20

Other things to know about IRD

Answer 20

• Recipient of IRD does not receive a step-up in basis.
• The recipient, estate or beneficiary, pays tax in the same way that the decedent would have (i.e., as ordinary income or CG depending on the situation)
• An income tax deduction is allowed the recipient for any estate tax paid on the IRD. This helps offset the double taxation as IRD is includible in the estate of the decedent and included as income to the recipient.

Question 21

Valuation Discounts

Answer 21

• Higher valuation discounts may be justified by multiple factors including minority ownership, illiquid assets, lack of marketability, etc.
• Discounts above 40% may be defendable but are often scrutinized and sometimes challenged by the IRS.

Question 22

Section 2503(c) Trusts

Answer 22

Allow a transfer in trust for a person under age 21 to be considered a gift of a present interest even if the beneficiary will not receive any of the benefits of the trust, including distributions of income, until attaining age 21.
- May be taxed as a grantor trust or complex trust.

Question 23

Section 2503(b) Trusts

Answer 23

• Irrevocable
• Requires annual distribution of income. Also called a Qualifying Minor’s Trust or Mandatory Income Trust. Terminates when beneficiary turns 21.
• May be taxed as a grantor trust or complex trust.

Question 24

Irrevocable Life Insurance Trust (ILIT)

Answer 24

• Irrevocable inter vivos trusts may be created to receive the proceeds of insurance policies.
• If the decedent rids himself of all incidents of ownership in the policy, the proceeds of insurance on his life that are paid to a trust are not included in his gross estate
• Insured holds purely administrative powers over the insurance trust. Thus, the insured may advise the trustee as to trust management and investments and may also be required to approve sales or investment of assets even though this affects how much income is paid to the insured once the costs of the insurance premiums are met.

Question 25

Grantor Retained Annuity Trust

Answer 25

• GRAT: features the irrevocable right to receive a fixed dollar amount annually for a fixed period of time
• GRUT: features the irrevocable right to receive at least annually a fixed fraction or percentage of the annually predetermined net fair market value of the property transferred to the trust
• Primary advantages
  • Little or no taxable gift
  • Low audit risk
  • Low interest rate environment
  • No additional income tax returns
  • No downside if assets depreciate
  Primary disadvantages
  • Can’t leverage GST exemption (safely)
  • Grantor must survive trust term

Question 26

Zeroed-out GRAT

Answer 26

Where a sufficiently calculated amount of payments are to be made to the grantor, OR to the grantor’s estate (should the grantor die during the term of a GRAT), the trust can be designed so that there is no taxable gift

Question 27

Intentionally Defective Grantor Trusts

Answer 27

• An irrevocable trust that intentionally violates one of the grantor trust rules so that trust income is taxed to the grantor. It has these characteristics:
  1. Transfers of property to the trust are completed gifts for federal gift tax purposes;
  2. Trust assets will not be included in the taxable estate of the grantor or grantors;
  3. The income of the trust is taxed to the grantor, who is treated as the “owner” of the trust for federal income tax purposes.
• Used when a grantor wants to remove the trust corpus from his estate for estate tax purposes but still desires to be taxed on the trust income for income tax purposes. Taxing income to the grantor, instead of the trust can result in substantial income tax savings due to the compressed tax rates applied to trusts.
• Grantor can retain the power in a non-fiduciary capacity to remove trust assets from the trust and substitute other assets of equal value.

Question 28

Qualified Domestic Trust (QDOT)

Answer 28

• Trust instrument must require that at least one of the trustees of the trust be an individual U.S. citizen or a domestic corporation
• Must provide that no distribution, other than a distribution of income, may be made from the trust unless a trustee who is an individual U.S. citizen or a domestic corporation has the right to withhold from the distribution the estate tax on the distribution
• Must meet security requirements to ensure collection of estate tax
• Executor must make an election with respect to the trust. This election must be made on the estate tax return and once made, is irrevocable

Question 29

Qualified Terminable Interest Property Trust (QTIP)

Answer 29

• Decedent’s executor must elect QTIP treatment on the estate tax return
• Could have the effect of reducing a decedent’s taxable estate and thereby increasing the unused exclusion amount
• Executor of the decedent’s estate that elected portability of the deceased spousal unused exclusion (DSUE) amount may want to make a QTIP election regardless of whether the QTIP election is necessary to reduce the estate tax to zero

Question 30

Reverse QTIP

Answer 30

• Executor of the first (donor) spouse’s estate (or the donor spouse in the case of a gift), may elect to treat a QTIP trust as if the QTIP election had never been made
• On making this reverse QTIP election, the donor spouse, rather that the donee spouse, is treated as the transferor of the trust for GST tax purposes
• A reverse QTIP election avoids wasting the donor spouse’s lifetime exemption to the GST tax. It also leaves the donee spouse free to allocate his or her own lifetime exemption, rather than using any of it for the QTIP trust created by the donor spouse.

Question 31

Qualified Personal Residence Trust (QPRT)

Answer 31

• Statutorily permitted estate planning tool that is commonly used by wealthy taxpayers to transfer a personal residence to family members and also enjoy considerable transfer tax savings
• Most effective when the Code Sec. 7520 rates are high
• Transferring his or her personal residence and/or vacation home to an irrevocable trust(s) for the benefit of designated beneficiaries, while retaining the right to live in and use the property rent free for a fixed number of years or until death.
• Right to occupy the residence is a retained income interest. When the trust expires, ownership of the residence will pass to the remainder beneficiaries of the trust
• If the donor dies before the termination of the QPRT term, the trust will terminate, and the residence will revert to the donor’s estate
• Objective of the QPRT is to enable the donor to get a discount in computing the value of a taxable gift for the interests he retains. If the donor survives the QPRT term, the entire property is out of his estate, even though he paid gift tax on only a discounted value

Question 32

Advantages of a QPRT

Answer 32

▪ Donor retains the right to live in the residence.
▪ Donor may lease the residence at the end of the trust term.
▪ Residence (plus appreciation) passes to children at a fraction of its value.
▪ Residence can be sold during the trust term

Question 33

Fiduciaries

Answer 33

• A person who holds or manages property for the express benefit of another. By definition the fiduciary owes the highest duty of good faith to the principal. Common examples of fiduciaries include trustees, guardians, executors, and estate administrators. A fiduciary is not obligated to accept appointment

Question 34

Trustee

Answer 34

Trustee is held to the highest standard of all of the fiduciaries. The trustee has a duty to make the trust property productive. A trustee may not sit idly by and simply invest the trust assets in a money market account. The trustee needs to determine the investment objectives of the trust, establish the asset allocation, and invest the trust assets accordingly. The trustee will then invest the balance of the assets for the benefit of the trust beneficiaries consistent with the terms of the trust document

Question 35

Executor

Answer 35

Executor is held to a lesser standard than a trustee. The primary duty of the executor is to safeguard the assets of the estate and ensure that all of the assets are accounted for. However, the executor generally does not have an obligation to invest assets for the long term given that most estate administrations (i.e., probate) are expected to be concluded within one year’s time. For example, an executor would most likely immediately liquidate a decedent’s stock portfolio. The executor would be required to invest the estate’s moneys into short-term investments, including money market funds. The executor would be liable if he or she invested the assets in a FDIC-insured checking account that yields less than a noninsured money market fund.

Question 36

Custodian

Answer 36

Custodian is held to a lesser standard than an executor. A custodian has no responsibility for earning a particular rate of return on assets. Rather, the function of the custodian is to safeguard assets. For example, a custodian collects the valuable assets in the inventory of the decedent’s small business and transports these assets to a secure facility to prevent their theft.

Question 37

Second-to-Die Insurance

Answer 37

Since the estate tax marital deduction is unlimited, there is generally no need to pay estate taxes when the first spouse dies. Postponing the estate taxes until the death of the second spouse is generally advantageous; however, this means that the entire estate tax burden falls on the estate of the second spouse to die. Second-to-die insurance is a useful option to provide funds to cover the estate taxes due on the second death.

Question 38

Family Limited Partnership

Answer 38

Primary Advantages
• Retention of control and power of disposition
• Discounting
• Creditor protection
Primary Disadvantages
• Uncertain estate and gift tax consequences
• Must be administered properly (can be costly)
• Hassle factor to family