Estate Issues And Wealth Transfer

Question 1

How is life insurance valued for gift and estate tax purposes?

Answer 1

The value of life insurance is the cost of replacement NOT it’s cash surrender value.

The replacement value is determined at the date of death or date of the gift.

The cost of a single premium policy, or paid up policy issued by a commercial insurance company at the date of the decedents owners. Death is the value for estate or gift tax purposes.

If payments are still being made on the policy, then the value is determined using the interpolated terminal reserve.

Question 2

What is a qualified disclaimer?

Answer 2

A qualified disclaimer is a written disclaimer by a person who would otherwise be entitled to an interest, but who has not excepted the interest or any of its benefits.

The person cannot dictate who the recipient of the interest shall be. If the disclaimer is not qualified then
The original beneficiary will have been deemed to have received the assets.

Must be in writing

Within 9 months from the date of transfer or 9 months after a minor turns 21.

Question 3

What is a reverse Q-tip?

Answer 3

A reversed Q-tip election simply means that the executor allow for the deceased spouse to continue to be treated as the transferor of the property for GST tax purposes.

Note: The GST tax exemption is not transferable to a surviving spouse.

Question 4

What is a QTIP?

Answer 4

Hey QTIP is a qualified terminable interest property trust.

It allows the decedent to transfer their estate tax exemption to the surviving spouse by way of an A-B trust or credit shelter trust. Where the principal property goes in to B trust that has the children as beneficiaries while the trust income can be distributed to the surviving spouse can pull from.

Question 5

Who pays the generation skipping transfer tax in a direct skip?

Answer 5

The transferee is responsible for paying GSTT

Question 6

Who pays the generation-skipping transfer tax in a indirect skip - taxable distribution

Answer 6

The beneficiary or transfer re-is responsible for paying the GSTT

Question 7

Who pays the generation-skipping transfer tax in an indirect skip - taxable termination?

Answer 7

The trustee is responsible for paying GSTT.

This is a distribution matrix get person through entity like a trustworthy nonskid person is the primary beneficiary.

An example is if the parent is if the child is a primary beneficiary, and the grand child is the secondary beneficiary, if the child passes away, distributions are now made to the grand children and the trustee is now responsible for paying the GSTT.

Question 8

What are GSTT exemptions?

Answer 8

Medical expenses, and tuition expenses paid directly to the company or institution.

Question 9

What is the generation skipping transfer tax?

Answer 9

It is a flat rate of 40%, unlike the progressive estate tax.

Question 10

Is the GSTT portable?

Answer 10

No, it is not portable between spouses.
Each spouse should use their GST exemption so it is not lost.

Question 11

What is the gift and estate tax credit for 2023

Answer 11

$5,113,800

Remember, the applicable credit also known as a unified credit, applies to both estate and gift tax. It is the amount of tentative tax that would be imposed on an amount equal to the applicable exclusion amount.

Question 12

What is the 2023 gift tax and estate tax exclusion amount?

Answer 12

$12,920,000

Question 13

What is the AFR rate?

Answer 13

It is the Applicable Federal Rate or Section 7520

It is used by the government to discount the value of various gifts, including charitable gifts, lifetime and estate, annuities and insurance business interests etc.

Question 14

What are examples of IRD?

Answer 14

Income in respect of a decedent.

Payments to surviving spouse under deferred compensation

Compensation for services rendered

Dividends declared but not paid

Interest owed

Proceeds from unrealized, receivables, or sell of a partnership

Distributions from retirement plan or IRA

Proceeds from sales on the installment method

Question 15

What is the primary estate, tax provision applicable to tax qualified plans?

(Unrated probability but still interesting)

Answer 15

Call section 2039 provides that a decedents gross estate includes the value of any annuity or other payment receivable by a beneficiary by reason of having survived the decedent if both the following are true.

The annuity payment arises under a contract other than an insurance policy on the decedents life.
Or
The contract provides for an annuity or payment based on the decedents life expectancy.

So an interest in a tax qualified plan that provides for payments to an employee over his life, and there after to his son, will be included in the employees gross estate

The amount included is proportionate to the amount of the purchase price contributed by the decedent, or the decedents employer.

Question 16

What is an acceptable range of discounts for minority ownership illiquid assets lack of Marketability, etc?

Answer 16

Discounts of 40% and below.

A FLP established for managing family assets and holding highly liquid assets such as stocks, bonds, and mutual funds would not justify a large discount and most likely be scrutinized or challenged by the IRS.

Question 17

What is a section 2503 B & C trusts?

Answer 17

They are special trust for minors with a present interest exclusion.

Section 2503 (C) trust allows a transfer to a person under age 21 to be considered a gift of “present interest“ even if the beneficiary will not receive ANY OF THE BENEFITS OF THE TRUST, INCLUDING DISTRIBUTIONS OF INCOME until attaining age 21

Section 2503 (B) trust is an irrevocable minors trust. That requires annual distribution of income also called a “qualifying, minors, trust” or “mandatory income trust”. Terminates when the beneficiary turns 21.

Both trusts may be taxed as a grantor trust or complex trust.

Question 18

What is a section 2503 (B) irrevocable minors trust?

Answer 18

Section 2503 (B) trust is an irrevocable minors trust. That requires annual distribution of income also called a “qualifying, minors, trust” or “mandatory income trust”. Terminates when the beneficiary turns 21.

Both trusts may be taxed as a grantor trust or complex trust.

Question 19

What is a section 2503 (C) trust?

Answer 19

They are special trust for minors with a present interest exclusion.

Section 2503 (C) trust allows a transfer to a person under age 21 to be considered a gift of “present interest“ even if the beneficiary will not receive ANY OF THE BENEFITS OF THE TRUST, INCLUDING DISTRIBUTIONS OF INCOME until attaining age 21

Question 20

How can clients avoid the three-year retained interest rule as it pertains to life insurance?

Answer 20

The irrevocable life insurance trust (ILIT) should purchase the life insurance to avoid the three-year rule.

Question 21

Can a group life insurance policy be included in a decedents estate?

Answer 21

Yes

Question 22

Are corporate owned life insurance policies included in a decedents estate?

Answer 22

If a corporation owns a life insurance policy on a decedent, who is the sole or controlling shareholder, and the proceeds are not payable to the corporation, or for a valid business purpose, the decedent will be deemed as having an incident of ownership, and the proceeds will be included in the decedents estate.

Question 23

A decedent is considered to have an incident of ownership “the right of the insured to economic benefits of insurance policy” if…

Answer 23

The decedent has power to change the beneficial ownership of the policy.

Can change beneficiaries. 

Question 24

A decedent is NOT considered to have an incident of ownership in a life insurance policy, if…

Answer 24

They retain a right to receive policy dividends if those dividends are applied against the current premium

They retain the right of substitution, if the substituted value is equal and if exercise does not shift benefits among the trust beneficiaries.

To borrow from the policy when ….

Question 25

Is life insurance purchased in a community property state included in either spouses estate tax?

Answer 25

If premiums are paid from community funds, the incidence of ownership constitute community property rights, which means one half of the proceeds is includable in the gross estate of the insured spouse.

Question 26

Is a Q TIP election revocable?

Answer 26

The QTIP election is irrevocable, though the IRS allows unnecessary Q-tip elections to be voided. Voiding is available when the Q-tip election was not necessary to reduce the federal estate tax liability to zero.

Question 27

When must the QTIP election be made?

Answer 27

On the estate tax return which is due 9 months after the date of death.

Question 28

What are the advantages of a QPRT?

Answer 28

The advantages of a qualify personal residence trust are:

• Donner retains the right to live in the residence
• Donor may lease the residence at the end of the trust term
• The residence plus appreciation passes to the children at a fraction of its value
• The residence can be sold during the trust term

Question 29

What happens if the donor dies before the termination of a QPRT term?

Answer 29

The trust will terminate, and the residence will revert to the donors estate

Question 30

This type of trust is a hybrid trust containing elements of spendthrift support and discretionary trust. The trust assets are not used for the general support of the beneficiary, but instead for supplemental support.

Answer 30

Supplemental needs trust a.k.a. special needs trust

Question 31

What are the key differences of a spendthrift and discretionary trust?

Question 32

This person as held to the highest standard of all fiduciaries

Answer 32

Trustee. The trustee has a duty to make trust property productive. They may not sit idly by and simply invest the trust assets in a money market account.

Question 33

This person is held to a lesser standard than a trustee

Answer 33

The executor’s primary duty is to safeguard the assets of the estate and ensure that all of the assets are accounted for. They do not have an obligation to invest assets for the long term. They would most likely immediately liquidate a decedents stock portfolio and be required to invest into short term investments, including money market funds. Depositing assets in a FDIC insured checking account over a non-insured money market fund would not be appropriate.

Question 34

This person is held to an even lower standard than an executor

Answer 34

A custodian has no responsibility for earning a particular rate of return on assets. The function of a custodian is to safeguard assets.

Question 35

What is per stirpes

Answer 35

A form of distributing assets (by branch)to beneficiaries through a will, trust or beneficiary designation.

If a client wants to leave assets to heirs within a branch of the family tree.

example: If a client has three children and one passes away, under per stirpes, the first and second child will receive 1/3 shares while the descendants of the third child would receive the last 1/3.

Question 36

What is per capita?

Answer 36

A form of distributions (buy head) to beneficiaries through a will trust or beneficiary designations.

The assets would be left to surviving heirs in equal percentages

Example: a client has three children and the third child dies, only the first and second child would receive distributions at 50% of the assets each. The children of the third child would receive nothing.

Example: (to all decedents per capita) a client has three children and their children have three children and so on. Under per capita distributions for all descendants, the first and second child, and any other living heirs receive equal shares of the assets distributed.

Question 37

What are the estate characteristics of an S Corp.?

Answer 37

S corporation trust are limited to single beneficiaries

S corporations are expensive to set up

Question 38

Grant to retain annuity trust

Question 39

Family limited partnerships

Answer 39

Primary advantages:
-Protection from the claims of creditors, although subject to charging an orders
-Valuation discount for gifts and estate tax purposes
-Retention of control and power of disposition

Primary disadvantages:
-uncertain estate and gift tax consequences
-IRS scrutiny
-legal accounting and administrative cost and burdens

Question 40

What are 6166 installment payments

Answer 40

It is an IRS statue that permits closely held businesses where the value of the business exceeds 35% of the decedents adjusted gross estate to delay estate tax payments for 5 years and then implement a 10 year installment plan.

Closely held businesses can elect to defer estate taxes for up to five years, and there after passing the taxes in up to 10 annual installments

Estate tax attributable to non-closely held business assets is due at the regular time of nine months from the decedents date of death

A closely held business is more broadly defined than just a corporate interest under section 6166

Question 41

The gross estate includes the value of any interest in property transferred to a trust if the decedent retained the power to alter, amend, revoke or terminate interest, if the power was for relinquished within how many years of death?

Answer 41

Three years. This also applies to life insurance policies.

Question 42

What gifts are not reported on IRS form 709?

Question 43

A QDOT– qualified domestic trust has the following conditions:

Answer 43

• Has at least one trustee who is a US citizen or a domestic corporation.
• any distributions that are in NOT income must be done by a US trustee that has the right to withhold estate tax.
• Executor must make an irrevocable QDOT election on the estate tax return.

Question 44

What are the requirements for closely held business?

Answer 44

• A sole proprietor
• A partnership that has less than 45 partners OR the decedent owns 20% or more a capital interest in the partnership. 

Question 45

The unlimited marital deduction is allowed for terminable interest property if:

Answer 45

The surviving spouse has general powers of appointment over the trust corpus.

Question 46

What discounts can be taken into consideration when evaluating a closely held business?

Answer 46

Lack of marketability discount

Minority discount

Pending litigation discount

Blockage market absorption discount – applies to large block of property, which cannot be placed on the market at the valuation day without depressing the price

Control premium

Discount for built in capital gains tax liability

Question 47

Family limited partnership assets will be fully included in an estate if:

Answer 47

The decedent made an inter-vivos transfer of property

Decedent, retained income or the use of the property until death

The transfer of property was not a bonafide sale with full and adequate consideration.

There is not a significant nontax reason for creating the partnership.

Question 48

How is joint tenancy property between a husband and wife taxed?

Answer 48

In general, when the a spouse dies 1/2 of the property value will be included in the spouses estate, regardless of which spouse paid for it

Question 49

When is a trustee allowed to borrow from a trust?

Question 50

What is a special or limited power of appointment?

Answer 50

A general power of appointment that is limited by an ascertainable standard relating to the holders, health, education, maintenance or support (HEMS)

Any power of appointment that cannot be exercised in favor of the holder, the holders estate, creditors or creditors of the holders estate?

A practitioner should not get to Creative and deviate from HEMS. The courts have found that using the words, comfort, welfare, benefit, or happiness will not be enough and caused the power to be taxed as a general power of appointment.

Question 51

What is the pre-deceased ancestor exception in relation to gift taxes?

Answer 51

It’s when the primary beneficiary (the child) passes away it moves the secondary beneficiary (the grandchild) up a generation. The result is that gifts are not subject to GSTT but are subject to regular gift tax.

Question 52

A _______ interest rate increases the value of the annuity retained by the grantor, reducing the value of the remainder interest. Therefore, when interest rates are______ it is a good time to consider GRATs

Answer 52

Low

Question 53

The objective of the QPRT is to enable the donor to get a discount in computing the value of a taxable gift for the interest they retain. Therefore QPRTs are a good strategy when the interest rates are_______ and the term of the trust is ________

Answer 53

High, Long. Higher sec. 7520 rates make the value of the remainder interest (used to compute gift taxes) lower. The higher the rate, the higher the retained interest

The longer the grantor stays in the home the higher the retained interest used to discount the gifted value.

Question 54

What are the adverse estate tax consequences for minor section 2503C trust?

Answer 54

If the donor also serves as trustee and retains power to control the beneficial enjoyment of the trust property; the trusts could be included in the donors gross estate.

Question 55

How is income taxed under a section 2503 minors trust?

Answer 55

Under a minors, trust, income is taxable to the minor if it is distributed
And
Income is taxed to the trustee if it is accumulated.

Question 56

What are the three types of trust that qualify for the marital deduction?

Answer 56

QTIP
Power of appointment trust
Estate trust

• A grantor trust may also qualify but is typically used for income tax purposes.

Question 57

Does terminable interest qualify for the marital deduction?

Answer 57

No. The exception are
- QTIPs
- Short survivorship (requirement that spouse outlives deceased by 6 months or less )
- Life estate with power of appointment
- Life insurance, and annuities

Question 58

What are the requirements for a Q TIP trust status?

Answer 58

• Must receive income from entire interest for life
• Income paid at least annually
• Accumulated income must be paid to surviving spouse’s estate at death
• Spouse nor 3rd person can transfer trust property
• QTIP election must be made on for 706 & is irrevocable

Question 59

What type of trust is eligible for the marital deduction, but does not require the trusts to pay out income annually. Where the trust is allowed to accumulate income.

Answer 59

An Estate Trust.

An estate trust differs from a power of appointment and QTIP, in that the trust can accumulate income and is not required to pay out to the surviving spouse annually or during their lifetime.

Question 60

This trust is exempt from the terminable interest rule for the marital deduction. It allows the surviving spouse to receive trust income for life, and trust income must be payable annually. It also gives the surviving spouse control over trust assets.
However, the decedent can select the beneficiaries

Answer 60

Power of Appointment Trust

Page 37, section IIIB KS - 7B

Question 61

What is reported on gift tax return IRS form 709?

Answer 61

• Future interest of any amount given to a non-spouse
• Future interest given to a charity
• Present interest GIFs above annual gift tax exclusion amount of $17,000
• Split gifts with a spouse made jointly to a third-party, regardless of the amount
• Transfers to a QTIP in any amount
• Transfers to a non-US citizen above the annual exclusion of $175,000

Question 62

Who pays the GST tax on a direct skip?

Answer 62

The transferor.

The transferee pays the tax on an indirect skip – taxable distribution

The trustee pays the tax on an indirect skip – taxable termination

Question 63

What are the requirements to be considered a closely held business?

Answer 63

• a sole proprietor
• a partnership with less than 45 partners, or Partnership interest of more than 20%
• a corporation with less than 45 stockholders or 20% or more of stock ownership