Estate Planning (10%) Flashcards
4 things that cause an invalid Will? (CUNF)
(CUNF)
Capacity Lacking
Undue Influence
Not Executed Correctly
Fraud
4 types of Wills
- Mutual Will - made in agreement with someone else.
- Reciprocal Will - each will distributes everything to the other.
- Holographic Will - handwritten
- Nuncapative Will - Oral will
Per Capita Distribution
Equal amongst all living bene’s.
i.e. 1/4 each grandkids, kids, etc.
Per Capita by Generation distribution
All heirs at each successive generation getting equal shares of that generation’s portion.
Alternate Valuation Date (AVD) rules
Choose date of death or 6-mo later.
Election is irrevocable - must use it even if values increase.
Cannot use it on depreciating assets:
Cars, patents, life estates, remainder interests.
Must elect by time filing 706 return with extensions.
2503(b) trust
also known as a Qualifying Minor’s Trust or Mandatory Income Trust. This is an irrevocable trust which requires distribution of income on an annual basis. Most often, distributed funds are placed into a custodial bank account until the child reaches legal age.
2503(c) trust
also known as a minor’s trust, is a trust established to hold gifts for one child until they attain the age of 21. A gift to this type of trust qualifies for the annual federal gift tax exclusion
Present Interest Gifts for Minors
4-examples
($18,000 annual exclusion applies)
- UTMA or UGMA
- 529 Plans
- 2503(b) Trusts
- 2503(c) Trusts
Future Interest Gifts to Minors
4-examples
(no annual exclusion applies)
- Remainder interest in property
- Trust that accumulates income (2503(c) is an exception.
- Non-income-producing property in trusts: unless TE can sell the property and buy income-producing property.
- Trust with sprinkle or spray provision.
Unified Credit Amount
$5,389,000 - aka Lifetime applicable credit.
Represents the gift tax that would be payable on $13,610,000. This credit offsets taxes on the exemption amount.
DSUE
Deceased Spouse Unused Exclusion.
Transfer of any unused lifetime exclusion amount to the surviving spouse.
Used for portability.
Qualified Disclaimer
In Writing
No later than:
i. 9-mo date transfer is created
ii. reaching age 21
Must not have accepted it.
Cannot influence who potential recipient is.
Cannot be undone.
Basis of Gifted Property
Donee gets Donor’s basis
Donee gets Donor’s holding period
Portion of gift taxes paid are added to basis
Calculation of Gift Tax Adjustment added to donee basis
- When Donor actually paid gift taxes AND
- FMV is > donor’s basis.
Appreciation Factor = Appreciation / Taxable amount of gift (subtract $18,000 annual exclusion)
Gifted Loss Property - Basis and holding period calculations
Scenario 1 - Final sale above adjusted basis (gains basis)
- Donee uses original basis to calculate gain
- Inherits the donor’s holding period.
Scenario 2 - final sale below FMV (loss basis)
- FMV is basis
- Holding period begins on date of gift
Scenario 3 - final sale between basis and FMV.
- No gain or loss.
Basis calculation on Spousal property.
e.g. H paid 80% of house; W paid 20%
50/50 basis for spousal property.
Each has $40k basis. If prop is worth $200k at death, survivor gets $140k basis due to step-up.
Or $200k basis if community property
Basis calculation on NON-Spousal property.
e.g. Dad paid 80% of house; Son paid 20%
Retain their contribution basis percentage.
Who is a skip person?
Related persons 2 or more generations below.
or
Unrelated and 37.5+ years younger.
The skip person is not the person skipped - it is the person who receives the bequest
Simple Trust vs. Complex Trust
how they distribute income and principal, and whether they can make charitable contributions.
Simple - Must distribute all income. No Charity. no principal.
Complex - No required distributions, May have charities.
65-day Rule for Trustees
Allows fiduciaries to make distributions until March 6 of following year and count towards prior year
Section 645 Election
Allows executor and Trustee to treate estate and trust as one for tax purposes.
When is 1041 required to be filed?
- Any taxable income
- Gross income of $600+ - even if no taxable income
- Bene who is non-resident alien
Distributable Net Income (DNI)
DNI is max that can be taxed to Bene.
e.g. Trust has $10k income and distributes $12k to bene. Bene is only taxed on the $10k - that is the DNI.
Income in Respect of Decedent (IRD)
Untaxed income that a decedent had earned or had a right to receive during their lifetime. Taxes on IRD are owed by the individual beneficiary or entity that inherits this income.
e.g. IRA/401k;
GRAT payments to grantor
A - Always the Same; an Annuity for a fixed period of years. Must be paid - even if invade corpus or borrow money.
Disadvantages of a GRAT
- If grantor dies before end of GRAT term it’s back in their estate.
- Initial gift is taxable - valued at FMV - PV of annuity payments.
- No additional assets permitted
- No instance of control for grantor
- Income is taxable to grantor
- Fixed annuity must be paid even if it means using corpus or borrowed funds.
GRUT payments to Grantor?
Fixed percentage - determined annually for a fixed period of years
Must be paid - even if invade corpus or borrow money.
Qualified Personal Residence Trust (QPRT)
Irrev trust that holds a personal residence and allows grantor to live in home for a specified period. At end of term it passes gift-tax free to bene’s.
Back in estate if grantor does not outlive the term.
No step-up in basis for bene.
After QPRT term grantor either needs to move out or pay rent
Restriction on Unlimited Marital Deduction
Limit to Non-Citizen spouse is $185,000
Not available for Terminable Interest Property
Best time to use a CLAT
Low interest rates. The calculation on paymens to the charity is lower and therefore more remains for family bene remaindermen.
Best time to use CLUT?
When GST is a concern. Percentage of trust assets go to annually to a charity and balance to family bene.
Best reasons for QTIP trusts?
Grantor in second marriage
Wants to provide support for current spouse and children from prior marriage.
Concerna bout spouse’s ability to manage assets.
Risk of surviving spouse changing bene’s
Bypass vs. QTIP
Bypass = Discretionary Income
QTIP = Mandatory all income
Who needs QDOT Trust?
Use for non-US citizen surviving spouse.
To qualify as a QDOT, a trust must meet the following requirements:
Trustee: At least one trustee must be a U.S. citizen or domestic corporation
Distributions: No distributions can be made from the trust, except for income, unless the trustee has the right to withhold estate taxes
Withholding: The trust must meet withholding and collection regulation
If the trust assets are over $2 million, one trustee must be a domestic bank. If the trust assets are under $2 million, a bank trustee is not required if no more than 35% of the trust assets are non-domestic real estate.
2503(b) Trust vs. 2503(c) Trust
b = Bring Beneficiaries Bucks. Must distribute income annually. Principal can be retained for life.
c = accumulate & can cease current cash. Principal and Income must be distributed at 21.
Rules for funding ILIT with existing policy?
3-year rule. Owner who is the insured must survive transfer of the policy by 3-years or it’s back in their estate.
Crummy powers
When unfunded ILIT and grantor contributes assets every year to ILIT to pay life insurance premiums.
Turns future interest life insurance benefit to a present interest gift.
Liability exposure in FLP?
Older generations retain general partnership interests and have unlimited liability.
Younger generations get limited partnership interests and have liability protection.
Private Annuity
Like an installment sale to family.
Receive unsecured annuity payments.
Buyer or their heirs must make payments for life of Seller.
If single life annuity - value is out of seller’s estate.
If joint life annuity - PV of future annuity payments is included in estate.
