Estate Planning Flashcards
Bargain Sale
- Combination of both a gift & sale of specific property
Example: Sam owns property with 100k basis and $515k FMV.
- Sam gifts to daughter for $300k
- Sam’s taxable gain is $300-100 = $200k
- Sam’s taxable gift is 515k-300k + 15k = $200k
Gift Lease Back
- Parents give fully depreciated assets outright in a trust to a lower tax bracket person
- Lease it back for use
- Parent can continue to use asset & claim a deduction for lease payment
Net Gift Technique
Son pays gift tax
Mom gifts son $1.5 million
$1,500,000 x 40% = $600,000 tax
$600,000 / 1.40 = $428,571
$1,500,000 - $428,571 = $1,071,429
- If she dies in 3 years, $428,571 is added back to her estate
QDOT QDT
- Non U.S spouse
- No unlimited marital deduction
- $159,000 per year
- To qualify for marital deduction must pass to QDOT trust
SCIN
- Balance of remaining payments @ sellers death cancelled
- Payment stream to seller until death or earlier date
- Removed from estate
- Seller pays more income tax while living. Why? Buyer pays a premium.
Grat
- Valued once - on initial transfer
- More convenient than GRUT
- Grantor retained annuity
- Irrevocable trust
- “Holds a string”
- Transfer appreciating property or income producing property in exchange to receive fixed annuity for a number of years
- When term ends, remaining balance goes to beneficiary
- Grantor must outlive term
Net Gift Technique
- Donee pays gift tax
- $11,700,000 exemption exhausted first
- Decedents gross estate includes the amount of gift tax paid by donee on net gifts made by decedent within 3 yrs of death
Reverse Gift Technique
- Wealthy spouse gifts low basis stock to not wealthy/healthy spouse with short life expectancy
- Low basis stock steps up at death
- Spouse must live one year after the transfer for this to work
Installment Sale
- Spreads out taxable gain from sale of property
- Remove appreciating property from estate
- If seller dies during sale period, PV of remaining payments brought back into estate
Private Annuity
- Sale of asset by client in exchange for unsecured promise of life annuity
- Phantom income
S-Corp
- Cannot be service related business
- Transfer equity to younger family members over the years
FLP
- Transfers income from parents to children or other family members
- Can use valuation discounts & gift 600k per year to 10 family members
DNI & Distribution Deduction
- Lesser of two numbers
Example: Tess Trust has DNI of $30k, distributions for the year are $45k. Income distribution is $30k (lesser of the two numbers)
Mutual Will
- Two persons who leave all their property to each other
Will Substitute
- Property passes outside of probate
- Avoids public scrutiny
- Testamentary control
- Cannot be overridden by bequests
Testamentary Trust
- Becomes effective at death
- Created within a will
- Effective at testors death
- Not subject to gift tax — transfers to trust at death
- Subject to PROBATE
- No tax savings — Income from assets taxed to testator.
Intervivos Trust (living)
- Creating during life
- Property transferred to trust before grantors death
- AVOIDS probate
- Gift tax applies if passed to irrevocable trust
Appreciated Property (community property)
Full step up basis at death of first spouse
Testate
Passes through probate valid a will
General Power of Appointment
Included in gross estate
Taxable Portion of DNI
EXAMPLE
Trust has 20k DNI and 5k tax exempt interest
Trustee made $1,000 distribution
$1,000 distribution X (15k Taxable DNI / 20k Total DNI)
= $750
Avoid Ancillary Probate
- Real property JTWROS
- Revocable Living Trust
- Tenancy by Entirety
Qualified Disclaimer
- Cannot select where it goes if disclaiming
- Must be received by executor within 9 months of death of decedent
- Written & irrevocable
- Can disclaim for any interest, partial or full
If a couple move to a non community property state
Retains its community property status
Probate Costs
Generally 2% - 5%
Unfunded ILIT
Premium —- Yearly gift to ILIT life policy on Grantor
Funded ILIT
- LUMP SUM gift to ILIT
- Income pays premium on life policy
- Taxable to Grantor
Simple Trusts
- Income distributed
- Income taxed to BENIE
- Normally no distribution of corpus
- No charitable gifts
- Separate tax entity
What can an estate deduct?
- Admin costs
- Accounting and attorney fees
- Expenses for preparing estate return
Complex Trusts
- Most often irrevocable
- Income must or may be accumulated
- Income accumulated is taxed to TRUST
- Income distributed taxed to BENIE
- Corpus can be distributed
- May make charitable gifts
Tenancy In Common Basis
- Calculated on each contributors share of property
- Example:
Andre contributes 75% of original 200k purchase
75% x 250,000 = $187,500 basis
Complex Trust Exemptions:
Required to distribute all income — $300 exemption
No required to distribute income — $100 exemption
Testamentary Trust
- Created under a will & testament
- Assets included in gross estate
- Assets included in probate estate
What Trust Does Not Need To File On Calendar Year?
Charitable trust - 501a
What happens if Grantor dies during retained interest term of QPRT?
- Full FMV @ death is brought back into gross estate
- Same thing as if the QPRT has never been established
GST
- Not subject to gross up rule
- GST will reduce gross estate & ultimately reduce estate taxes
Community Property
Gets full 100% step up in basis
3 Year Rules
- Gift taxes PAID past 3 years
- Incidents of ownership last 3 years
Empowers Executor to act as agent in probate court
Letters of testamentary
Advantages of Probate
- Administer the estate
- Marshall all the assets, inventory/valuation
- Pay bills and resolve credit issues
- Oversee distribution of the estate as directed by will or by intestacy law
Five tests met to qualify as dependent
- Gross Income
- Support
- Member of household or family
- Citizenship test
- Joint filing test
Installment Sale Example
Dan sells classic car to his brother
selling price $25,000
Purchase price $15,000
Dan’s brother paying five annual installments of $5,000
$10,000 Profit / $25,000 Contract Price = 40%
$5,000 x 40% = $2,000
Charitable Bargain Sales
Basis of property sold to charity for less than fair market value must be allocated.
$300,000 realized / FMV = X basis = 60k
300k sale price - adjusted basis $60k = 240k
Disclaimer Trust (simple trust)
- Spouse can disclaim property BUT receive a stream of income from disclaimed bequest
- If spouse disclaims — transferred to irrevocable trust & income paid to surviving spouse
- Spouse cannot invade corpus
- Can use HEM’s but NO 5 or 5
What does 2032A Accomplish
- Reduce gross estate
- Indirectly provides estate liquidity
- Reduces potential estate tax
Special Use Valuation
- Real Property
- A Farm
- Residential development
- MUST BE REAL ESTATE
Planning Techniques Considered “Freezing”
- GRAT - Donor must outlive term, trust assets in estate DOD value
- RE CAP
- QPRT - Donor must outlive term
- Private annuity - owner dies, nothing added to estate
- SCIN - Owner dies, nothing added to estate
Installment Method 6166
“Closely Held” 35% gross estate
- Estate qualifies for estate tax attributable to closely held biz, sole proprietorship, partnership or corporation
- Can be paid in 10 equal installments
- Beginning 4 years after decedents death
- Deferred tax an interest rate of 2%
Code Section 303
- Biz must be closely held stock
- Must exceed 35% gross estate
- Must be corporation
- S corp
- Only amount stock equal to all estate taxes and admin expenses can be redeemed
Durable Powers of Attorney
- State specific forms may not be recognized in multiple states
- Easier to form than trusts
Revocable Trust Taxation
- Tax NEUTRAL
- Tax conduit, passing income and tax liability to the grantor
Portability of unused exemption
Executor of deceased spouses estate can transfer any amount of unused exemption to surviving spouse
Special Use Valuation of 2032A
50% gross Estate
25% Real Property
- Discount valuation of real estate use in connection with a closely held business of farming operation
- Max reduction of $1,180,000
- Qualified use and active management by family for 5 out of 8 prior years to decedents death
- Must continue for 10 years after decedent death
Grandfather makes a gift & already used GSTT Exemption & 11.7 Mill
Gift Tax (5,015,000 - 15,000) x 40% = $2,000,000
- GST Tax (3,015,000 - 15,000) x 40% = $1,200,000
GSTT Total = 2,000,000 + 1,200,000 = $3,200,000
$5,015,000 - $2,000,000 = $3,015,000
Crummey Trust
- Can be simple or complex
- Irrevocable trust with demand rights
- Gift of future interest that counts as PRESENT interest
- Eligible for the annual exclusion
- Can be used for a minor beneficiary
- Benie has temporary right to demand a withdraw from the trust
- Annual withdraw is equal to the LESSER of annual exclusion or the value of the gift transferred
Grantor Trust
- Established to benefit the grantor
- Tainted
- Taxed to grantor
Form 706
Estate tax calculation occurs
3 Yr Rule
Incidence of ownership
Probate Estate
Soley owned
Tenancy in common
Will
Benie is estate
Community property
Intestacy
Die without a will - still go through probate process
Probate Process
Time consuming
Lose control
Costly
Lose privacy - Public
Avoid Probate
T - Trust
L - JTWROS - TbyE
C - Contract
JTWROS Step Up
Surviving spouse 50% of original basis
Deceased spouse their portion gets stepped up
Gifting (Annual Exclusion)
15k to unlimited amount of people per year
Super funding
$75,000
5yr for 529 Plan
Community Property Gifting
No gift split needed
Outright gift
Intra Family Transfers
d
SCIN
Key terms
- Collateral
- Secured
What is not IRD?
What is NOT
- Capital assets
- CD’s
- Stocks
- Bonds
What is IRD?
Annuity
A Trust
Power of appointment
“When you hold the power, it is taxing”
“Power remains A above the ground”
Surviving spouse has the control
- they get income
- they get to chose beneficiaries
- surviving spouse is taxed
General Power of Appointment
Taxable
B Trust
“Crown gets buried below ground”
“Fill B trust up to its Maximum = life exemption amount 11.7 Mill”
Appreciation is not taxed
QTIP / C Trust
2nd marriage
Kids from first marriage
Spouse income for life
QDOT
Foreign spouse
$159,000 Exemption
U.S IRA = gets their taxes
Marital deduction = unlimited - keep on US Soil
Simple Trust
e
Complex Trust
d
Pooled Income Fund
Charitable
NO MUNIES
Can add to it
Pool of other people
NO 5%
Payable to ONE SPECIFIC CHARITY
Payments variable
Pooled Income Fund
Charitable
NO MUNIES
Can add to it
Commingle in the pool (multible swimmers)
NO 5%
Payable to ONE SPECIFIC CHARITY
Payments variable
CRUT
f
CRAT
f
Donar Advised Funds
f
ILIT
Reduce gross estate
Competed gift
Income retained —-taxed to trust
Direct Transfers
Educational Institution
Pay tuition directly
Pay for medical stuff directly to hospital
GRAT
Grantor retained annuity trust
- fixed payments
GRUT
Grantor retained UNIT trust
-variable payments
Taxable Termination
Gift of future interest
No $15,000 exclusion
Taxable Distribution
Any distribution out of trust to a skip person
Gift of future interest no $15,000
Who pays the tax? the grandchild/ skip person
Who pays the GSTT tax when the beneficiary’s (the donor’s child) interest in a trust terminates and thereafter only the skip person has an interest in the property?
This is a taxable termination. Any GSTT due is paid by the trustee from trust assets
Mrs. Jackson died and left $150,000 to her grandson (a skip person). She had already used $11,700,000 (2021) of her GSTT exemption. How much GSTT will be due at her death if her maximum estate tax rate is 40%?
No annual exclusion is available at death. $150,000 x 40% = $60,000 estate tax due. Then $150,000 – 60,000 = $90,000. $90,000 x 40% = $36,000 GSTT.
Harry Potter, age 75, is considering gifting $50 million to various family members. He has been informed by his attorney that the gift tax of approximately $15 million is subject to a 3-year gross-up rule. Part of the $50 million will also be subject to GST tax. Of the $50 million, approximately $28 million will go to skip persons. The estimated GST tax will be around $5 million. He is asking you - is the GST tax subject to the 3-year gross-up rule and whether his estate will get a credit for the GST paid?
No, it is not subject to the 3-year gross-up rule. No, he will not get a credit against estate taxes for the GST paid.
The payment of the GST will reduce his gross estate and ultimately reduce estate taxes. GST taxes paid are not subject to the 3-year look back rule (like gift taxes paid). Unlike gift tax paid, an estate receives no credit for GSTT paid.
Taxable Termination
A taxable termination involves a skip person and a non-skip person. A non-skip person is a primary beneficiary who will receive property before it is transferred to the skip person. The transfer to the skip person occurs upon the death of a non-skip person—typically the child of the transferor.
Taxable Distribution
A taxable distribution refers to any distribution of income or property, from a trust to a skip person that is not otherwise subject to estate or gift tax. If a grandmother established a trust that made payments to her grandson, those payments would be subject to GST taxes, which the recipient is responsible for paying
Direct Skip vs. Indirect Skip
The taxation of a GST depends on whether the transfer is a direct or an indirect skip. A direct skip is a property transfer that’s subject to an estate or gift tax. An example of a direct skip would be a grandmother gifting property to a grandchild. The transferor or their estate is responsible for paying the GST tax for direct skips.3 An indirect skip involves a transfer that has intermediate steps before reaching a skip person.3 There are two types of indirect skips: taxable termination and taxable distribution.4
Taxable Distribution’s who pays the tax?
When exceed $11,700,000 - the receiver (grandchild) pays the GSTT
Tax diss niece or nephew
Taxable Termination who pays the tax?
GSTT is paid by the trustee
Tax Term Trusteeeeee
If Transfer is a direct skip, who pays the tax?
Transferrer pays GSTT
By Pass Trust
Non Marital, B Trust, Family Trust
Below ground
No Marital Deduction
Power of appointment holders must exercise:
Powers in accordance with the provisions of power, will, or trust
Out of the indexes which is the only one that uses geometric average to compute its daily value?
Value Line
GEO Value
Identify the estate planning document on which a testator can name guardians, appoint an executor, and direct assets separately-owned assets and property at death.
The last will directs distribution of separately-owned assets/property at death. In addition, the testator (creator of the will) can appoint guardians and name an executor to administer the estate on the will.
Remember ‘Will.I.AM’ … Will = Individually-owned Asset Movement!
Identify the estate planning document on which a testator can name guardians, appoint an executor, and direct assets into a revocable living trust (RLT) that were incorrectly titled.
Pour Over Will
The pour-over will has similar basic functions to the last will, however, it is often used with a revocable living trust in estate planning. Specifically, the pour-over will serves to direct assets into a revocable living trust (RLT) that were:
Acquired after RLT established
Incorrectly titled
Excluded from the trust
