Estate Planning 10% (17 Questions)

Question 1

Will

Rules to create a will:
1. Must be 18 y/o to create a will
(unless an emancipated minor).
2. Must be of sound mind (testamentary capacity).
3. Absence of undue influence
4. Absence of fraud

Answer 1

A legal document that enables the testator (maker) to transfer the title to property at the testator’s death in the manner the testator desires.

Advantages:
Name executor
pass property to anyone desired
Ability to use marital deduction for prop to spouse

Question 2

Intestacy

“To Die w/o a Will”

Answer 2

1. The probate court decides how the decedent’s property will be distributed according to the state’s intestacy laws
2. The intestacy laws are not likely to distribute property in the same way the decedent would have if he had written his own will.

Question 3

Types of Wills

Holographic (handwritten)
Nuncupative (oral)
Statutory (formal)

*To qualify for estate tax marital deduction the will CAN NOT require the spouse to survive for more than 6 months to receive the bequest

Answer 3

1. Holographic:
   Authorized by some states.
   Must be handwritten entirely by the will maker and signed/dated by the testator
   Does NOT usually require witnesses or notary
2. Nuncupative
   This type of will is made ORALLY but some state law may require that it may be reduced to a written memorandum with an assessment.
   NOT recognized in all states. MUST have at least one witness May only be used to pass personal property in some states
3. Statutory
   Drawn by an attorney
   MUST comply w/ laws of domiciled state
   Witnessed by required # of nonbeneficiary witnesses (2)
   Probate court decides if will is valid

Question 4

Per Stripes Distribution

Answer 4

Members of designated class inherit property as members of that class.

Example:

Stephen had 3 kids (Jay, Laura Dwan, and Laura).

Laura and Jay are alive and have NO children.
Dwan is dead but has 2 children (Paul and Damien).

If Stephen had a $300,000 asset, and his will left the asset to his living descendants on a per stirpes basis, then:
■ Jay would receive $100,000 (1/3 share)
■ Laura would receive $100,000 (1/3 share)
■ Paul and Damien each would receive $50,000 (one-half of Dwan’s 1/3 share)

Question 5

Per Capita Distribution

“All Parts EQUAL”

Answer 5

Members share in the inheritance as EQUAL parts.

Question 6

prenuptial agreement

Answer 6

Helps clarify each spouse’s respective property rights in the event of death or divorce

Requires full disclosure of assets/liabilities by both parties

Question 7

Living Will

*For terminally ill living patients end of life request to healthcare providers

Answer 7

1. A living will establishes the medical situations in which the maker no longer wants life-sustaining treatment.
2. It must be drafted in accordance with the formal requirements specified by state statute.

Question 8

Durable Power of Attorney (Healthcare)

Answer 8

1. Appoints a person to make healthcare decisions for the principle
2. Becomes effective on incapacity

Question 9

Durable Power of Attorney (Property)

1. Limited (pay bills)
2. Unlimited (full authority)

Answer 9

1. Document where one person designates another person to act as attorney in fact.
2. Survives the principal’s incapacity but NOT death

Question 10

Fee Simple (SOLE) Ownership

Probate = YES

Answer 10

1. Possesses the legal maximum ownership rights and shares those rights with no one else
2. Gives the owner the right to use possess and dispose of a property in way he chooses during life and death

Question 11

Life Estate

Answer 11

1. Partial interest in a property that gives a person a right to possess and use the property for the remainder of the individual’s life or for the remainder of someone else’s life
2. Life tenant has to be pay taxes

Question 12

Future Interest

Answer 12

A right to ownership or enjoyment of property at some point in the future or upon occurrence of a specified event.

Question 13

Tenancy In Common

Probate = YES

NO right of survivorship

*When one tenant dies, their % passes through probate

Answer 13

1. Ownership a property by 2 or more people each of whom owns an undivided but possibly unequal interest in the entire property
2. When one tenant in common dies the remaining tenants do not automatically receive the descendants interest by operation of law rather than tenant common must specifically provide for its disposition by will.
   3.When a tenant in common dies the amount included in the tenant ‘s gross estate for estate tax purposes is based on the tenants percentage of ownership in the property

4.A right of partition is inherent in a tenancy in common

Question 14

JTWROS

NO probate

Right to sell your % w/o consent

Answer 14

1. Involves a co-ownership property by two or more people each of whom own equal interest in the entire property (50/50)
2. Property owned as JTWROS at death passes to the surviving owner(s) by right of survivorship and does NOT pass through probate.
   Surviving spouse basis = 1/2 FMV of property at death + their basis
   3. In real estate a joint tenant who contributes more than his or her fair share of the purchase price makes a gift to the other joint tenant
3. Step up basis to FMV for survivor share of property (gross estate)

Question 15

Tenancy by Entirety (TE)

*Only for spouses

*NO probate

*Neither spouse may sever the survivorship right of the other without “mutual consent”

Answer 15

1. Is a limited form of JTWROS that can exist between OWNED BY SPOUSES ONLY
   2. Recognize only in some common law states. NOT recognized in all states.
2. Only half of the value of the property held as tenants by entirety is included in the gross estate of each spouse and the basis of the property is calculated in the same manner as with JT WROS property held by spouses

Question 16

Community Property

Probate = YES

*Inherited assets are NOT comm. prop

*Deceased spouse has the right to will the property to anyone

Answer 16

1. Property acquired during marriage belongs equally to both OWNED BY SPOUSES ONLY.
2. Both halves of comm prop. receive step up basis to FMV on date of death of 1st spouse to die
3. States that have adopted this policy:
   TX WA ID NV CA LA AZ NM &WI

Question 17

Common Law System

Answer 17

1. Does NOT assume that property acquired during marriage belongs equally to both spouses
2. Generally allows spouses to title their property in whatever manner they choose

Question 18

Gift Exclusion & Splitting

*Present Interest ONLY = immediate right to use

Answer 18

1. A donor may exclude from taxable gifts the first $17,000 of gifts each year to each donee
2. The annual exclusion can be doubled to $34,000 (for 2023) per donee by electing gift splitting with a spouse (the spouse must consent to gift splitting).

Question 19

Transfers NOT Subject to Gift Tax

Answer 19

1. Medical payments made directly to hospital
2. Payments made directly to educational institution
3. Property settlements btwn. spouses part of divorce settlement
4. Interest on gift loans below market loans
5. Payments made under obligation of support (state decides)
6. Political party donations
7. Qualified disclaimer (NOT accept property left for you)
   a. Must be in writing
   b. Must be made w/in 9 mos of the later of the date the interest came into being
   c. Could not have had previously benefited from interest disclaimed
   d. Must pass the interest w/o the direction of the person disclaiming

Question 20

2503b Trust

(Gift to Minors)

Answer 20

1. Income MUST distributed annually
2. Right to income = present interest = annual exclusion
3. Trust NOT required to end at age 21

Question 21

2503c Trust

(Gift to Minors)

*Trust set up for future interest but qualifies for current interest annual exclusion

Answer 21

1. Income distribution is discretionary
2. Property must be available to minor at age 21 & if they die before 21, property goes to their estate.
3. Trust pays tax on income @ trust income tax rate.

Question 22

Crummey Trust

(Gift to Minors)

*Income & corpus distro NOT mandatory at age 21 to minor.

Answer 22

1. Trust allows 30 window for w/d’s
2. W/D Options:
   Lesser of the amount of the available annual exclusion
   OR
   The value of the gift property transferred.

Question 23

Section 2035

Gifts made w/in 3 yrs of death

Answer 23

Any gift tax paid on gifts made w/in 3 yrs of death MUST be added to the gross estate.

Question 24

Valuation of Assets

Answer 24

1. Assets valued at FMV at persons date of death OR alternate valuation date (as of 6 mos after date of death).
2. Assets sold btwn DOD - AVD are valued at net proceeds
3. Real estate needs appraisal but if sold to unrelated party sale price usually accepted.

Question 25

Value of Stocks on DOD

(Stock that is actively trading)

Answer 25

The value of the stocks will be the average (mean) of the high and low trading values for the stock on the DOD or alternative valuation date.

Example:
Bill Cole died on August 29. At that time, he owned stock in XYZ Corporation.
The stock traded on August 29 High—60 Low—58.
The reported value of XYZ stock on Form 706 will be $59.

Question 26

When is Estate Tax Form 706 Due?

Answer 26

Due 9 months after DOD

*6 month extension available

Question 27

Spouse Gifting Rules

Answer 27

1. Unlimited gifts to a spouse can be given w/o transfer tax consequences (provided the donee is a US citizen)
2. Gifts from NON US spouse → US spouse = unlimited marital deduction
3. Gift taxes NOT included in gross estate except gift made w/in 3 yrs before death

Question 28

Powers of Appointment Rules

Answer 28

1. Donor = grants power
2. Holder = receives power
3. Appointee = person who holder appoints to receive/enjoy/own the property.

Question 29

Qualified Terminable Interest (QTIP) Trust

*election made Form 706

*When the 1st spouse dies, the trust supports the surviving spouse
When the 2nd spouse dies, the remaining assets go solely to the 1st spouse’s chosen beneficiaries

Answer 29

1. Spouses ONLY- (surviving spouse NOT given general POA)
2. Allows a terminable interest to be passed to a surviving spouse and the property to still qualify for the marital deduction
3. Income from trust payable to surviving spouse payable at least annually for life.
4. Assets included in 2nd spouse’s estate valued at DOD

Question 30

Power of Appointment (POA) Trust

“A Trust”

*The surviving spouse is given a GENERAL POA over the property during life or at death.

Answer 30

1. Allows a terminable interest to be passed to the surviving spouse and the property to still qualify for the marital deduction
2. Income from trust payable to surviving spouse payable at least annually for life.
3. Assets included in 2nd spouse’s estate valued at DOD

Question 31

Bypass Trust

Answer 31

1. The purpose of a bypass trust is to take advantage of the applicable credit amount when the first spouse dies.
2. The property transferred to the bypass trust does NOT qualify for the marital deduction in the estate of the first spouse to die.
3. A common scenario is for the first spouse to leave at death everything to the surviving spouse EXCEPT for the applicable exclusion amount, which is transferred into a bypass trust.
4. The trust can be designed to allow the surviving spouse to invade the trust for health, education, maintenance, and support (HEMS).
5. When the surviving spouse dies, the trust is not included in her gross estate, and the property passes to the remainder beneficiaries

Question 32

Trust Interest

Trust CANT last longer than 21 yrs & 9 mos after the death of the youngest person creating interest.

Answer 32

1. Income Interest:
   Beneficiary receives income from trust assets
2. Remainder:
   Beneficiary receives trust principal upon termination of the trust
3. Reversion:
   Grantor who retains the right to receive the trust principal upon termination of the trust is said to have a reversion

Question 33

Reasons for creating a Trust

Answer 33

1. Avoid Probate
2. Avoid/Transfer income taxes
3. Asset management
4. Charitable contributions while retaining an income interest

Question 34

Inter Vivos Trust

*Living Trust

Answer 34

1. Created during the grantor’s life
2. Property transferred to the trust before grantor’s death avoids probate
3. Gift tax applies if assets are transferred to irrevocable living trust during grantor’s life

Question 35

Testamentary Trust

*Trust effective at DEATH

Probate = YES

Answer 35

1. Created within a will & subject to probate
2. Irrevocable at the time of the testator’s death
3. NOT subject to gift tax because transfers to trust occur at death

Question 36

Simple v. Complex Trust

Answer 36

Simple:
Required to payout ALL income to beneficiaries annually
Trustee CANNOT distribute corpus to the beneficiaries or make charitable distributions

Complex:
Any simple trust will be complex in its final year b/c any corpus remaining is distributed in the final year.

Question 37

Grantor Trust

Answer 37

1. The grantor is treated as the owner of the assets
2. All the income, deductions, and credits of the trust are attributable to the grantor

Question 38

Special Needs Trust

Answer 38

1. Established for a dependent who is receiving gov’t assistance (Supplemental Security Income (SSI) or Medicaid) .
2. The trust pays for the beneficiary’s needs that are NOT covered by assistance.

Question 39

Pourover Trust

*revocable or irrevocable

Answer 39

Assets are poured from another source (IRA, insurance contract) into the trust.

Question 40

Dynasty Trust

Life insurance policy → grandkids

Answer 40

1. Passes life insurance policy to grandkids
2. Avoids GSTT Tax

Question 41

Totten Trust

*POD/TOD Trust

Answer 41

1. Created by NY statute
2. When a person opens a trust for another, it is NOT completed & grantor is taxed on income until it is made irrevocable.

Question 42

How are Trust Income Taxed?

Answer 42

1. Beneficiary is taxed on amount = to distribution deduction
2. Distribution Deduction =
   The lesser of distributable net income (DNI)
   OR
   The amount actually distributed to the beneficiaries.
3. DNI = maximum distro deduction

Question 43

Qualified Personal Residence Trust (QPRTs)

*Good for vacay homes

Answer 43

1. Grantor transfers personal residence to a trust & retains right to live in residence during trust term.
2. Interest in only 1 residence
3. Only occupied by term holder (grantor)
4. House can be rented or repurchased by grantor at end of term.
5. Can include cash
6. Able to sell residence & reinvest in another residence

Question 44

Grantor Retained Annuity Trust (GRAT)

Answer 44

1. Is an irrevocable inter vivos only trust designed to allow a grantor to retain an interests in trust assets for a term certain.
2. Grantor receives income annually
3. If grantor dies BEFORE trust expiration = grantor estate include FMV of assets
4. If the grantor SURVIVES the term of the trust = the assets in a GRAT are NOT included in the grantor’s gross estate

Question 45

Grantor Retained Unitrust (GRUT)

Answer 45

1. The grantor retains the right to receive fixed % of FMV amount from the trust at least annually.
2. The trust may provide that the grantor is entitled to any EXCESS trust income in addition to this unit trust amount

Question 46

Charitable Gift Annuity

Answer 46

1. Donor makes irrevocable transfer of assets to a charity & receives an annuity from charity.
2. Income tax deduction = value of property donated - PV of annuity payments.

Question 47

Pooled Income Funds

Answer 47

1. Donor transfers irrevocable property to trust in return for income for life.
2. Property combined w/ other donors funds and payments are determined by trust earnings annually.

NO muni bonds allowed.

Question 48

Charitable Remainder Trust (CRATs)

*Immediate tax deduction

*irrevocable trust

Answer 48

1. Grantor receives the right to receive FIXED annual payments from the trust during their life
2. NO additional contributions are permitted after inception

Question 49

Charitable Remainder Unitrust (CRUTs)

Irrevocable trust

Answer 49

1. Donor transfers assets → Trust
2. Beneficiaries receive fixed % of trust assets annually (between 5%- 50% of FMV) with the remainder of the trust going to a chosen charity
3. Additional contributions are allowed after inception
4. Catchup provisions allowed when income doesnt meet % requirement
5. Very flexible

Question 50

Charitable Lead Trust (CLTs)

Answer 50

1. Trust disperses income to a named charity while the noncharitable beneficiaries receive the remainder of the donated assets upon grantor’s death or at the end of a specific term

Question 51

Family Limited Partnership (FLP)

Answer 51

Typically, a senior family member transfers an asset (such as a closely held business) to a partnership in exchange for a 1% general partnership interest and a 99% limited partnership interest.
d. The senior family member then makes gifts (over time) of the limited partnership interests to junior family members.
e. The transfer of the limited partnership interests constitutes a gift, eligible for the annual exclusion

Question 52

Bargain Sale

Answer 52

1. Selling of an asset at a price that is less than FMV .
2. Gift Tax = (FMV of the asset - What the person paid)
3. If the property is sold for more than the seller’s basis in the property, a taxable gain will result.

Example:
Steve owns property with a basis of $50,000 and a current value of $140,000, which he sells to his son, Murray, for $90,000. Steve will have a taxable gain of $40,000 ($90,000 sales price less $50,000 basis). Steve has also made a gift of $50,000 ($140,000 value less $90,000 sales price). The gift will be eligible for the annual exclusion if the annual exclusion has not already been used by Steve on a previous gift to Murray

Question 53

Installment Sales & Self Cancelling Installment Sales (SCINs)

Answer 53

1. Used as planning device to minimize estate taxes
2. Installment note—a note providing that buyer will pay purchase price in installments over time
   a. If seller dies before note is paid off, remaining unpaid balance plus any unpaid interest accrued to the seller’s DOD generally is included in gross estate for estate tax purposes
   b. Value of the asset sold is not included in gross estate

Question 54

Cross Purchase Agreement w/ life insurance

*Cost more to insur old partners

*Premiums NOT tax deductible & proceeds NOT includable in tax income

Policies to buy = n(n-1)

Answer 54

Under a cross-purchase agreement funded with life insurance, a partner purchases a sufficient amount of life insurance on the lives of each other partner to ensure sufficient liquidity to buy out the deceased or disabled partner.

Question 55

Entity Agreement

(Life Insurance)

*Premiums are NOT tax deductible and the proceeds are NOT includable in taxable income.

Answer 55

1. The business entity itself buys the insurance policies on each partner & uses the death proceeds to purchase the interest of a partner who dies.
2. The advantage of an entity agreement is that the number of policies is reduced to one per partner or shareholder.

Question 56

Deferral & Minimization of Estate Tax

Answer 56

1. Section 2032A (farmland) If a decedent owned real property that was used as a farm or in connection with a closely held business, then a reduced gross estate valuation may be available for the property.
   The maximum reduction in value is $1.3mil for 2023.

Question 57

Generation Skipping Transfer Tax (GSTT)

*Direct payments to medical & educations institutions are excluded.

Answer 57

Objective:
Is to ensure the taxes are collected on transfers to generations 2 OR MORE generations below the transferor (Skip Person).

Skip Person:
1. Lineal descendent of transferor who is 2 or MORE generations younger
2. Transferor’s spouse or ex-spouse
3. Non-lineal or unrelated transferee who is > 37.5 years younger than the transferor
4. Direct skip = transfer of wealth in which only skip persons have an interest after the transfer

Indirect Skip:
Any GST where at least one skip person and one non-skip person has an interest in the transferred property after completion of the transfer.

EX:
Grandma will leaves life estate to her house to their child & grandchild

Grandma
↓
Child (non-skip)
↓
Grandchild (skip)

Only what goes to skip parties is subject to GSTT.

Question 58

GSTT Filing & Payment Responsibilities

Answer 58

Direct Skip GSTT:
Reported & paid by transferor or their estate
Due (April 15 of the year following the year of transfer).

Indirect Skip GSTT:
Each skip person who receives a taxable distro is required for filing the return & paying GSTT tax.

Question 59

Executor v. Administrator

Duties:
1. Locate and assemble property
2. Safeguard, manage, and invest property
3. Advertise in newspapers
4. Locate and communicate with potential beneficiaries 5. Pay expenses of decedent
6. Pay debts/taxes
7. Distro assets to beneficiaries

Answer 59

Executor: Appointed by a person’s will

Administrator:
Appointed by the court if a person died intestate or failed to name Executor

Question 60

Qualified Domestic Trust (QDOT)

When surviving spouse NOT a US citizen

Answer 60

Allows a surviving spouse who is NOT a U.S. citizens to take the full marital deduction on estate taxes.