Estate Issues & Wealth Transfer (III.B) (15%,19 Questions)

Question 1

Incapacity Planning

Answer 1

• Medical Directives
• DPOA
• Springing DPOA
• Revocable Living Trust
• Irrevocable Trust

Question 2

Powers of Apppointment

Answer 2

• The power or right granted by the owner of a property that enables someone to designate the recipients of property or interests in property.
  The powerholder may be able to appoint the assets of a trust to a new trust with different administrative
  provisions;
• Powers of appointment may also be used to move trusts from one taxing jurisdiction to another in order to
  change the governing law of the trust;
• The powerholder may be able to appoint the assets to a new trust with new dispositive provisions such as
  the ability to remove existing beneficiaries and add new ones, or change the terms under which income and
  principal may be distributed to one or more beneficiaries;

Question 3

Postmortem Planning - Disclaimer

Answer 3

• If the intended beneficiary does not accept a post-mortem gift, the gift is considered to be “disclaimed” and is treated
  as if the intended donee has predeceased the decedent.
• Refusal of the gift must be in writing and, for federal estate
  tax purposes, must be made within nine months of the gifting.

Question 4

Postmortem Planning - Disclaimer pt.2

Answer 4

• Generally used when proper planning was not possible or unforeseen circumstances arose that have
  frustrated the original planning.

Question 5

Annual Exclusion Gifts

Answer 5

• $17,000 per donor/per donee for 2023
  ▪ Methods of Completing:
  – Outright gifts
  – Crummey Trusts
  – Section 2503-C Trusts
  – Section 529 Plans

Question 6

Federal Estate Tax Rates

Answer 6

• For the marginal rates on Excess. It is a progressive rate, but I need to know the top tier rate which is 40%.

Question 7

Form 709

Answer 7

**Page One
Part I: General Information
Part II: Tax Computation
**Page Two and subsequent pages
Schedule A: Computation of Taxable Gifts
Schedule B: Gifts from Prior Periods
Schedule C: Deceased Spousal Unused Exclusion (DSUE)
Schedule D: Computation of Generation-Skipping Transfer Tax

Question 8

Form 709 - What is to be reported?

Answer 8

***Gifts to be reported
– Future interests of any amount given to a nonspouse
– Present interest gifts in excess of $17,000 (2023)
– Transfers to a non-U.S. citizen spouse if the gift exceeds $175,000 (2023)
– Transfers of qualified terminable interest property (QTIP) to a
spouse in any amount
– Split gifts with a spouse (regardless of the amount) made jointly to
a third party
* If spouses in a community property state make a gift of
community property to a third person, the gift is considered
made one-half by each spouse, and each must file a gift tax
return
– Transfers to charity if any part of the transfer was of a future
interest

Question 9

When Form 709 is Filed

Answer 9

• 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

Sources of Liquidity - Code Section 6166 Installment Payments

Answer 10

• Section 6166 is 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 11

Form 706

Answer 11

• Portability of Deceased Spousal Unused Exclusion
• This Part allows taxpayers to account for any DSUE
  amount received from a predeceased spouse,
  calculate the amount of DSUE to be transferred in
  the event of a portability election, and/or opt out
  of electing to transfer any DSUE amount to a
  surviving spouse

Question 12

Estate Tax = Tax Inclusive
Gift tax = Tax Exclusive

Answer 12

• 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 13

Tax Basis of Property Gifted

Answer 13

• 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 14

GSTT

Answer 14

• Generation-skipping transfer tax is imposed on transfer of property that skips generation. Transfer may be
  direct skip, taxable termination or taxable distribution. Each person is allowed an amount of lifetime
  exemption from tax. The amount of the exemption is indexed for inflation.

Question 15

Direct Skip

Answer 15

• A transfer to a skip person.
• A skip person is a person two or more generations younger than the generation of the transferor, or a trust if all the trust interests are owned by skip person.

Question 16

Indirect Skip (Taxable Distribution)

Answer 16

• a distribution is made to a skip person through an entity like a trust (not otherwise subject to gift or estate tax);
  beneficiary (transferee) is responsible for paying the GSTT.

Question 17

Indirect Skip (Taxable Termination)

Answer 17

• a distribution made to a skip person though an entity like a trust where a non-skip person is the primary beneficiary;
  example: parent established a trust for child with grandchildren named
  secondary beneficiaries, child passes away and distributions are now made to grandchildren; the trustee is responsible for paying the GSTT

Question 18

GSTT Planning

Answer 18

• GST tax imposed at a flat 40% rate.
• $12,920,000 exemption in 2023
• Not portable between spouses.

Question 19

GSTT Exemptions

Answer 19

• Medical Expenses (direct)
• Tuition expenses (direct)

Question 20

Crummey Trust Provision

Answer 20

• The language in a trust, giving the beneficiary (usually a minor) the right to demand a withdrawal of funds from the trust for some
  reasonable period of time, which usually is 30 or 60 days.
• 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 21

Annual Gift Exclusions

Answer 21

• During a calendar year, a donor can give assets equal in value to the annual gift tax exclusion amount to each intended donee without paying any gift tax. The annual gift tax exclusion is $17,000 in 2023 as indexed for inflation.

Question 22

Bypass trust

Answer 22

• Known as an A-B trust
• The assets of the deceased grantor are placed into the trust rather than passing directly to the surviving spouse.
• Help ensure the assets are not subject to estate taxes upon death of the surviving spouse’s death since they technically do not own the assets in the bypass trust.
• The surviving spouse can receive income generated from the trust, and in some cases can access the principal.

Question 23

Installment Sale to grantor trust

Answer 23

• A Strategy used in estate planning to transfer assets to a trust while allowing the grantor to retain certain benefits and control over the assets.
• The grantor sells assets to an irrevocable trust they have established, and the trust pays the grantor with regular installment payments over a defined period.
  -For income tax purposes, it is treated as if the grantor still owns the assets and therefor has to pay taxes.
• For estate tax purposes, the asset is no longer considered part of the grantors estate.

Question 24

Self-cancelling installment note (SCIN)

Answer 24

• Used to transfer assets between a sell (typically the parent) and a buyer (child typically).
• If the seller passes away before the note is fully paid, the remaining balance on the note is cancelled, and the buyer is no longer obligated to make any further payments.

Question 25

Private Annuity

Answer 25

• A financial arrangement between two parties. In this arrangement, the annuitant transfers an asset, such as real estate or a business, to the obligor in exchange for a regular annuity payment.

Question 26

Section 7520

Answer 26

• the 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 27

IRD (Income in respect of a decedent)

Answer 27

• Amounts of “gross income” of which a decedent was entitled to but was not included in his taxable income in the year of death.
• Ex: Distributions from an IRA / Compensation for services rendered / interest owed / payments to surviving spouse under deferred comp agreement.
• DOES NOT receive a step-up in basis.
• An income tax deduction is allowed to the recipient for an estate tax paid on the IRD.

Question 28

Valuation Discounts

Answer 28

• Discounts above 40% may be defendable but are often scrutinized and sometimes challenged by the IRS.
• EX: A working family busines which included a farm and undeveloped land would likely justify higher discounts.

Question 29

2503(c) Trust

Answer 29

• provides a specific set of rules which, if followed, will 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.

Question 30

2503(b) Trust - Irrevocable

Answer 30

• Trust that requires annual distribution of income. Also called a Qualifying Minor’s Trust or Mandatory Income Trust. There is no requirement to allow beneficiaries access when they turn 21.

Question 31

ILIT (Irrevocable Life Insurance Trust)

Answer 31

• May be created to receive the proceeds of insurance policies. A trustee is a
  beneficiary separate from a decedent’s estate or executor. Therefore, 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. If the trust is obligated to use any of the proceeds of the insurance to pay estate expenses such as
  taxes, administration expenses, debts, etc., the proceeds used to pay these expenses are included in the
  decedent’s gross estate. If the insured can alter the trust in any way, alone or with others, the proceeds may be
  included in his gross estate.

Question 32

Intentionally Defective Grantor Trusts

Answer 32

• 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.

Question 33

QDOT (Qualified Domestic Trust)

Answer 33

• The trust instrument must require that at least one of the trustees of the trust
  be an individual U.S. citizen or a domestic corporation (a U.S. trustee);
• Primary purpose is to allow assetes of a deceased US Citizen spouse to qualify for the marital deduction for estate tax purposes.
• The 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 34

QTIP (Qualified Terminable Interest Property Trust)

Answer 34

• Used to provide for a surviving spouse while maintaining control over the final distribution of the assets.
• Typically used when the individual has children from a previous marriage and wants to ensure that their current spouse is taken care of during their lifetime, but also preserving assets for their children after the spouses death.

Question 35

QPRT (Qualified Personal Residence Trust)

Answer 35

• Used to transfer a personal residence or vacation home to beneficiaries while potentially reducing estate and gift taxes.
• It allows the grantor to remove the property from their taxable estate while still retaining the right to live in the residence for a speicifed period of time.

Question 36

FLP (Family Limited Partnership)

Answer 36

Primary Advantages:
- retention of control and power of disposition.
- Discounting
- Creditor protection.
Primary Disadvantages:
- Uncertain estate and gift tax consequences.
- Must be administered properly
-Hassle factor to family.