Estate Issues and Wealth Transfer Flashcards
What is the role of a will in estate planning?
A will directs how assets are distributed upon death, ensuring that an individual’s preferences are followed and reducing potential conflicts among heirs.
Define probate and its primary purpose.
Probate is the legal process of validating a will, managing a decedent’s assets, paying debts, and distributing remaining assets to heirs.
What is intestacy, and what are its consequences?
Intestacy occurs when an individual dies without a valid will, leading to asset distribution according to state law rather than the decedent’s wishes.
Describe the unlimited marital deduction and its importance in estate planning.
The unlimited marital deduction allows assets to be transferred to a surviving spouse without incurring estate taxes, deferring tax until the second spouse’s death.
Explain the concept of a power of appointment.
A power of appointment grants an individual the authority to decide how certain assets are distributed, allowing for flexible estate planning.
What are the two types of powers of appointment?
General and special (or limited) powers of appointment. General allows broader control, potentially adding assets to the powerholder’s estate, while special limits appointees.
What is the generation-skipping transfer (GST) tax, and who does it affect?
GST tax applies to transfers made to individuals at least two generations below the donor, preventing tax avoidance by skipping generations.
Define a Qualified Domestic Trust (QDOT).
A QDOT allows non-U.S. citizen spouses to receive assets without incurring estate tax, deferring it until distributions are made or the spouse passes away.
What is the annual gift tax exclusion for 2024?
The annual gift tax exclusion for 2024 is $18,000 per recipient, allowing donors to give up to this amount without incurring gift tax.
Describe a disclaimer in estate planning.
A disclaimer allows beneficiaries to refuse an inheritance, causing the asset to pass as if the disclaiming individual predeceased the decedent, often for tax benefits.
What is the difference between a revocable and an irrevocable trust?
Revocable trusts can be changed or canceled by the grantor, while irrevocable trusts cannot, often providing greater tax advantages and asset protection.
Explain the concept of portability in estate planning.
Portability allows a surviving spouse to use any unused estate tax exemption of their deceased spouse, maximizing tax-free transfer opportunities.
What is a Charitable Remainder Trust (CRT)?
A CRT provides income to beneficiaries for life or a set term, with the remaining assets passing to a charity, offering tax benefits for the donor.
How does a Family Limited Partnership (FLP) aid in wealth transfer?
An FLP allows wealth to be transferred to family members at reduced tax rates due to valuation discounts, while retaining control within the family.
What is the purpose of a Living Will in estate planning?
A Living Will provides directives for medical care in cases of incapacitation, ensuring that healthcare decisions align with the individual’s wishes.
Define “stepped-up basis” in estate planning.
Stepped-up basis adjusts the asset’s cost basis to its value at the owner’s death, potentially reducing capital gains tax for heirs upon sale.
How does a Crummey Trust work in gifting?
A Crummey Trust allows contributions to qualify for the annual gift tax exclusion by providing beneficiaries with a temporary withdrawal right.
What is the purpose of a durable power of attorney?
A durable power of attorney appoints someone to manage financial matters on behalf of an individual in case of incapacitation.
What is a health care proxy?
A health care proxy names someone to make medical decisions for an individual if they become unable to do so themselves.
Explain the concept of a charitable lead trust (CLT).
A CLT provides income to a charity for a set term, with the remaining assets passing to non-charitable beneficiaries, offering estate tax benefits.
What is an irrevocable life insurance trust (ILIT)?
An ILIT holds a life insurance policy outside of the insured’s estate, helping avoid estate tax on insurance proceeds.
Describe the purpose of a Qualified Personal Residence Trust (QPRT).
A QPRT allows a residence to be transferred out of an estate at a reduced gift tax value, with the grantor retaining use for a set term.
What are bypass or credit shelter trusts?
Bypass trusts preserve the estate tax exemption of the first spouse to die, passing remaining assets tax-free to heirs after the second spouse’s death.
Define intestate succession.
Intestate succession is the legal distribution of a decedent’s assets when there is no valid will, following state laws.
What is an executor’s role in estate administration?
The executor manages and distributes the decedent’s estate according to the will, including paying debts and filing taxes.
Explain the concept of fair market value in estate valuation.
Fair market value is the price at which an asset would sell between willing buyers and sellers, used for estate tax purposes.
What is a durable power of attorney for health care?
This document appoints an agent to make medical decisions on behalf of an individual when they are unable to do so.
How does a special needs trust work?
A special needs trust provides for a disabled person without affecting their eligibility for government benefits.
What is the purpose of lifetime gifting in estate planning?
Lifetime gifting reduces the taxable estate and may allow the use of annual exclusions, reducing estate tax liability.
Explain an irrevocable trust’s role in Medicaid planning.
Assets in an irrevocable trust are excluded from Medicaid calculations, potentially qualifying the grantor for benefits.
What is a testamentary trust?
A testamentary trust is established upon the grantor’s death per their will, often for minor children or charitable purposes.
Define the concept of “gift splitting” in gift tax planning.
Gift splitting allows a married couple to split a gift, doubling the amount eligible for the annual exclusion.
What are Qualified Charitable Distributions (QCDs) from an IRA?
QCDs allow individuals over 70½ to make charitable contributions directly from an IRA, excluding the amount from taxable income.
Explain tenancy in common.
In tenancy in common, co-owners have separate, undivided interests in property, which can pass to their heirs upon death.
What is the benefit of a step-up in basis at death?
The step-up in basis reduces capital gains tax on inherited property, as the cost basis resets to the value at the decedent’s death.
Describe the gift tax exclusion for education and medical expenses.
Payments made directly to educational or medical institutions are excluded from gift tax, regardless of the annual exclusion.
What is the federal estate tax exemption for 2024?
The federal estate tax exemption for 2024 is $13.61 million, allowing estates below this amount to avoid federal estate tax.
Explain the use of marital trusts in estate planning.
Marital trusts, like QTIP trusts, defer estate tax by providing income to a surviving spouse, with remaining assets passing to other heirs.
What are Medicaid look-back periods?
The Medicaid look-back period is the timeframe in which asset transfers may disqualify a person from Medicaid eligibility.
Describe a Qualified Terminable Interest Property (QTIP) Trust.
A QTIP Trust provides income to a surviving spouse, allowing the remaining assets to pass to other beneficiaries, deferring estate taxes.
What is the purpose of a GRAT (Grantor Retained Annuity Trust) in estate planning?
A GRAT allows a grantor to transfer assets with minimal gift tax by retaining an annuity, with remaining assets passing to beneficiaries tax-free if the grantor outlives the trust term.
Define the “Crummey power” and its use in estate planning.
Crummey power allows beneficiaries a temporary withdrawal right over contributions to a trust, enabling gifts to qualify for the annual exclusion.
What is an Irrevocable Life Insurance Trust (ILIT), and why is it used?
An ILIT holds life insurance policies outside the grantor’s estate, providing estate tax benefits by excluding death benefits from the estate.
Explain how a Qualified Domestic Trust (QDOT) benefits non-U.S. citizen spouses.
A QDOT allows a non-U.S. citizen spouse to inherit assets without immediate estate tax, deferring tax until distributions or the spouse’s death.
Describe the purpose of the annual gift tax exclusion.
The annual gift tax exclusion allows individuals to give up to $18,000 per recipient (2024) without gift tax implications, reducing taxable estate size.
What is a bypass trust, and how does it function in estate planning?
A bypass trust (credit shelter trust) uses the estate tax exemption of the first spouse to die, preserving assets for heirs and minimizing estate taxes upon the surviving spouse’s death.
What are GRATs and GRUTs, and how do they differ?
A GRAT pays a fixed annuity to the grantor, while a GRUT pays a percentage of the trust’s value, with both used to pass assets with minimized gift tax.
Explain “incidents of ownership” in life insurance and estate inclusion.
If a decedent holds any control over a life insurance policy, such as the ability to change beneficiaries, the policy is included in their estate.
What is the purpose of a dynasty trust?
A dynasty trust allows wealth to be preserved and transferred across multiple generations with minimal estate and generation-skipping transfer taxes.
How does a community property arrangement affect estate planning?
In community property states, each spouse owns half of marital property, with both halves receiving a step-up in basis upon one spouse’s death.
What is a Tenancy by the Entirety (TBE) and its advantage in asset protection?
TBE is a form of joint ownership for married couples providing creditor protection, as one spouse’s creditors cannot claim the other’s interest.
Define a charitable lead trust (CLT) and its tax benefits.
A CLT pays income to charity for a set term, with the remainder going to beneficiaries, reducing estate and gift tax liability.
What is the difference between a living trust and a testamentary trust?
A living trust is created during the grantor’s lifetime and avoids probate, while a testamentary trust is established at death through a will.
Describe the alternate valuation date in estate tax calculations.
The alternate valuation date allows estate assets to be valued six months after death, potentially reducing estate tax if asset values decline.
What is a special needs trust?
A special needs trust provides for a disabled person without impacting their eligibility for government benefits like Medicaid or SSI.
Explain the concept of “step-down in basis.”
Step-down in basis occurs if an inherited asset has declined in value, resetting the basis to fair market value, reducing tax benefits.
What is the kiddie tax, and who does it affect?
The kiddie tax applies to unearned income of children under 18 (or students under 24), taxing investment income at their parents’ rate.
What are 529 plans, and how are they used in estate planning?
529 plans are tax-advantaged savings accounts for education expenses, allowing high contributions without gift tax when spread over five years.
Describe the importance of the 5-and-5 power in trust planning.
The 5-and-5 power allows beneficiaries to withdraw the greater of $5,000 or 5% of the trust value, ensuring tax efficiency and asset control.
What is the primary benefit of gifting assets with a lower basis during the donor’s lifetime?
Gifting assets with a lower basis can shift future appreciation to the recipient’s estate, reducing the donor’s estate tax liability.
Define a 2503(c) trust.
A 2503(c) trust is a minor’s trust allowing assets to grow tax-deferred until the beneficiary turns 21, qualifying for the annual gift tax exclusion.
Explain the purpose of a disclaimer trust.
A disclaimer trust provides flexibility by allowing beneficiaries to disclaim assets, transferring them into a trust for tax or asset protection.
What is a GRAT and its tax strategy benefit?
A GRAT is used to transfer appreciation on assets tax-free to beneficiaries, with minimal gift tax if the grantor outlives the trust term.
What is a Qualified Personal Residence Trust (QPRT) used for?
A QPRT reduces the value of a residence in the estate by allowing it to pass to heirs after a term, while the grantor retains use of the home.
Define a Tenancy in Common (TIC).
TIC allows co-owners to hold an undivided share in property, with each owner’s share passing to their heirs upon death.
Explain gift-splitting for married couples in estate planning.
Gift-splitting allows spouses to combine their annual exclusions, doubling the amount they can gift to each recipient without tax.
Describe a testamentary trust’s role in estate planning.
Established upon death through a will, testamentary trusts allow asset control and management for heirs, often used for minors.
What is a Qualified Terminable Interest Property (QTIP) Trust?
A QTIP Trust provides income to a surviving spouse and allows remaining assets to pass to other heirs, commonly used in second marriages.
What are Medicaid look-back periods, and how do they affect asset transfers?
The look-back period (up to five years) checks for asset transfers made to qualify for Medicaid, impacting eligibility if disqualifying transfers are found.
How does a Crummey Trust qualify gifts for the annual exclusion?
By giving beneficiaries temporary withdrawal rights, Crummey Trusts enable contributions to qualify for the annual gift tax exclusion.
What is the function of an irrevocable trust in estate planning?
Irrevocable trusts remove assets from the grantor’s estate, providing tax advantages and asset protection, as the grantor cannot alter the trust.
Describe a dynasty trust’s advantage.
Dynasty trusts allow assets to pass through multiple generations, reducing estate taxes and preserving wealth over time.
Define the concept of ‘fair market value’ for estate tax purposes.
Fair market value is the price an asset would fetch in a willing sale, essential for calculating estate tax.
What is a GRAT’s primary risk to the grantor?
If the grantor dies before the GRAT term ends, the remaining assets are included in their estate, losing tax benefits.
Explain portability of the estate tax exemption.
Portability allows a surviving spouse to use any unused estate tax exemption of their deceased spouse, maximizing tax-free transfers.
What is a Qualified Charitable Distribution (QCD)?
A QCD allows IRA owners over 70½ to make direct charitable donations up to $100,000 per year, excluding it from taxable income.
Describe a Special Needs Trust’s benefit.
Special Needs Trusts provide for disabled beneficiaries without affecting eligibility for government assistance programs.
What is the marital deduction in estate planning?
The marital deduction allows unlimited asset transfers to a spouse without estate or gift taxes, deferring tax until the second death.
Explain the impact of the GST tax exemption.
The GST exemption protects certain transfers to younger generations from the generation-skipping transfer tax.
What is a spousal lifetime access trust (SLAT)?
A SLAT allows one spouse to make a gift to an irrevocable trust for the benefit of the other, offering asset protection and estate tax savings.
