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CFP > Estate Planning > Flashcards

Estate Planning Flashcards

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1
Q

Tenants in Common

A

% owned included in gross estate and probate estate

basis = amount contributed

if inherited = step up basis to FMV

freely transferrable, no survivorship rights

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2
Q

JTWROS

A
  • gross estate
    • nonspouse = % contributed, IRS assumes 100% by first to die, need to prove otherwise with documetnation
    • spouse = 50%
  • not included in probate estate, goes to joint owner
  • basis = total purchase divided equally
  • if inherited = step up to FMV
  • freely transferrable, survivorship rights, transfer results in TC
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3
Q

Tenancy by the entirety (TE)

A

JTWROS only between spouses

50% included in gross estate

not included in probase estate

basis = 50% of purchase price

basis if inherted = FMV 50%

transferable with spouse consent, survivorship rights, transfer results in TC

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4
Q

community property

A

9 states are community property states

property aquired during marriage is owned 50% by each spouse (except received by gift or inheritence)

50% included in gross estate

included in probate estate

basis = 50% of purchase price

basis if inherited = both halves get step up to FMV

transferable with spouse consent, no survivorship rights, transfer results in TC

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5
Q

installment sales

A
  • allows taxpayer to spread out gain as the payments are received (subject to immediate depreciation recapture)
  • partial return of basis, cap gain, and ordinary income
  • basis = amount paid
  • remaining unpaid balance, and any upaid interest accured is included in seller’s gross estate
  • estate must recognize debt as IRD and report on 1041
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6
Q

Buy-Sell Agreement: cross purchase arrangement

A
  • each partner buys life insurance on the lives of the other partners to buy out the deceased or disabled partner
  • N x (N-1) = total policies purchased
  • survivors will receive income tax free and then will write a check to buy ou the deceased’s interest.
  • gives the surviors a higher basis in their ownership of the firm
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7
Q

Buy-Sell Agreements: Entity Arrangement

A
  • entity itself buys the insurance policies on each partner or shareholder
  • premiums are paid by entity and are not tax deductible
  • proceeds are not included in taxable income
  • surviving owners DO NOT get an incerase in their basis
  • entity will receive death benefit and will redeem the deceased’s ownership
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8
Q

Buy Sell Agreement: wait and see

A
  • wait until an owner dies before deciding on who (surviving owners or entity) will pruchase deceased’s interest
  • business typically has the right of irst refusal to pruchase but agreement requires that entity and/or owners must purchase entire interest
  • advantage - flexibility
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9
Q

bargain sale

A
  • when sold for less than FMV
  • part sale and part gift
    • sales price - basis = captial gain
    • FMV - sales price = gift (qualifies for annual exclusion)
  • buyers basis = greater of the amount paid by buyer or the seller’s basis at the time of transfer
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10
Q

Sale/Leaseback

A

business property sold to younger family member, then leased back to the family business

seller realizes capital gain or loss

no gift tax if sold for FMV

business gets income tas deduction for lease payments

younger family member can start depreciating assets at purchase price

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11
Q

SCIN (self cancelling installment note)

A
  • installment notes that cancels at seller’s death
  • unpaid balance is not included in seller’s gross estate
    • Premium over FMV is necessary to avoid gift tax
  • any unrecognized gain must be reported on Form 1041
  • can be secured by Collateral

SCIN = Collateral

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12
Q

Private Annuity

A
  • sale of an asset in exchange for an unsecured promise to pay
  • used when seller is not expected to live to full life expectancy
  • payment consists of: return of basis, gain, and ordinary income
  • ceases at sellers death and not included in gross estate
  • may not have collateral
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13
Q

Gift/Leaseback

A

fully depreciated business property gifted to a younger family member

then leased back to donor, provides income to younger family member while donor still has the asset for business use and gains a lease expense deduction

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14
Q

Family Limited Partnership (FLP)

A

used by senior family member to transfer busienss or investment to the partnership

senior family member can make substantial gifts, but retian control of assets and income

can reduce gift and estate tax

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15
Q

recapitalization

A

estate freezing technique for corporations

current common stock is traded fro new common and preferred stock

owner retains preferred stock and gives common stock to children, this way owner can retian control but common stock appreciation happens outside of the estate

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16
Q

GRTs (grantor retained trusts)

A
  • appreciating assets are transferred to a trust with income paid to the grantor during the term
  • not included in gross estate unless grantor dies before the term ends
  • gift to the extent the value exceeds the PV of the retained income

GRAT - grantor receives annual payment that is a fixed amount or fixed % if the initial FMV.

GRUT - grantor receieves payment at least annually of a % of the net market value of the trust assets determined annually. helps combat inflation

ideally trust term should be shorter than life expectancy

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17
Q

Dynasty trust

A

irrevocable - allows donor to pass wealth from generation to generation without payment of transfer taxes, estate and gift tax, and GSTT

may be subject to rule of perpetuities - term measured by lives or life + 21 years or 21 years and 9 months (determined by state)

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18
Q

noncitizen spouse annual exclusion amount for gifts

A

$159,000

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19
Q

crummey provision

A

gives beneficiary the power withdrawal the funds (although not intented for bene to actually use it)

beneficiary will allow the power to lapse, and then the gift to the trust can qualify for the annual exclusion

  • withdrawal amount usually limited to lesser of the amount contributed or annual exclusion
  • if multiple benes - withdrawal right can be limited to greater of 5% of contribution or $5k to avoid gift tax issues for the benes
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20
Q

gift splitting

A

assumed if community property

if not, form 709 must be filed

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21
Q

portability

A

surviving spouse may use decednets lifetime exemption if they didnt use all of it

executor must have made the portability election on timely filed estate tax return

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22
Q

gift and estate tax

A

over $1mil taxed at 40%

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23
Q

Gift basis of Donee (no gift tax paid)

A
  • Gain property = carryover
  • loss property: FMV on date of gift less than basis
    • basis for losses = FMV on date of gift and new holding period
    • basis for gains = carryover basis and carryover holding period
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24
Q

gift basis of Donee (gift taxes paid)

A

donors adj basis + {[unrealized appreciation/(FMV- annual exclusion used by donor)] X gift tax paid} = donee’s basis

FMV on date of the gift

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25
Q

net gifts

A

when donee pays the gift tax due

donor will have taxable inome to teh extent gift tax paid exceeds donors basis in gifted property

26
Q

AGE (adjusted gross estate)

A

gross estate

  • funeral and admin expenses
  • debts of decedent, mortgages, and losses

= AGE

27
Q

taxable estate

A

gross estate

  • funeral and admin expenses
  • debts of decedent, mortgages, and losses

= AGE

  • chartiable deduction
  • marital dedcution
  • state death tax deduction

= taxable estate

28
Q

section 2035

A

gifts made within three years of death

  • gift tax paid out of pocket on gifts made within three years of death included in gross estate
  • life insurance proceeds if donor was owner and insured and policy was transferred to someone else within three years of death

other actions that need to happen more than 3 years before death

  • release of donor retained life estate
  • makeing a revocable trust irrevocable
29
Q

AVD (alternate valuation date) section 2031

A
  • 6 months after the date of death
  • executor needs to make election to use AVD
  • must lower gross estate and the estate tax
  • applies to all assets except:
    • assets disosed of before 6 months
    • wasting assets and IRD assets
      • patents
      • annuties
      • installment notes
      • retirement plans if bene has taken a distribution prior to AVD, if not then AVD is allowed
30
Q

qualified disclaimer

A

needs to be filed within 9 months after interst came into being

must be in writing

cannot have previously benefited from asset being disclaimed

31
Q

form 706

A

estate tax form

due 9 months after decedents death

32
Q

IRD assets basis

A

carryover basis

income retains character

33
Q

special use valuation (section 2032A)

A
  • real estate used in farming or business
  • allows valuation based on current value rather than best value
  • qualification:
    • qualifed use and material participation prior to death for 5 of 8 years
    • qualifed heirs - relatives and bsuness partners
  • election made on 706
  • subject to recapture if disposed or no longer qualifiying within 10 years
34
Q

illiquid estates/section 303

A
  • stock redemption - closely held corporation
  • treated as sale rather than reciept of div
  • requirements
    • stock included in gross estate
    • value must exceed 35% of AGI
    • redeemed amount cannot exceed federal and state death taxes plus funeral and admin costs
35
Q

illiquid estates/section 6166

A
  • deferred payments of estate tax - farm or closely held business
  • deferred up to 5 years, then payable in 10 installments
    • interest rate 2% on a portion of business/farm asset value
    • interest rate 45% of rate applicable to underpayment for remainder
    • interest payments are due during deferral period
  • requirements:
    • farm or closely held business must exceed 35% of AGE
    • collateral or bond required to secure debt
    • purpose of deffering estate tax is ot allow busienss to continue, if business sold, then estate tax is due
36
Q

Overqualifying

A

if the first spouse to die does not take advantage of the exemption amount, thus some of credit is not used

this issue is reduced now that portability is allowed

37
Q

QTIP trust (C trust)

A
  • election made on form 706
  • allows for terminable interest to go to surviving spouse, and qualify for the marital deduciton
  • income must be payable to surviving spouse at least annually
  • value of any assets remaining when surviving spouse dies is included in surviving spouse estate
  • survivor NOT given general power of appointment
  • first to die spouse has specified in the trust provisions who the ultimate benes are
  • often used in second marriages
38
Q

A Trust (power of appointment trust)

A
  • allows a terminable intest to be passed to the surviving spouse and qualify for marital deduciton
  • no election required, automatically gets marital deduction
  • income paid to surviving spouse at least annually
  • assets remaining in the trust at death are included in survivors gross estate
  • survivor has general power of appointment
  • survivor controls ultiamte beneficiaries
39
Q

B trust (Bypass trust)

A
  • purpose to take advantage of the applicable credit amount when first spouse dies
  • included in first to die gross estate
  • does not qualify for marital deduction
  • can allow surviving spouse to invade trust for HEMS
  • usually highly apprecaited assets are moved to B trust
  • when survivor dies goes to children without estate taxation

B trust for person Below the ground

40
Q

qualified domestic trust (QDOT)

A
  • for the benefit of a noncitizen spouse
  • one trsutee must be a US citizen or company
  • estate tax pays when
    • assets are distributed
    • trust ceases to qualify
    • surviving spouse dies
41
Q

GSTT

A

seperate from gift and estate tax

$11.7 exemption NOT portable between spouses

40% tax rate

42
Q

Skip person

A
  • related person two or more generations younger (ex - grandchild)
    • exception if predeceased parent - then their child is no longer a skip person from grandparents perspective
  • trust when all beneficiaries are two or more generations below the donor
  • unrelated individual younger than the donor by 37.5 years or more
43
Q

direct skip

A

goes directly to a skip person

44
Q

taxable termination (GSTT)

A

remainder beneficary is a skip person

triggers GSTT and trust is responsible for paying GSTT tax that is due

ex: irrevocable trust set up by mom, son is to receive income, son dies and grandson receives trust corpus

45
Q

taxable distribution (GSTT)

A

trust distribution to a skip person

triggers GSTT

recipient is responsible for paying any GSTT that is due

ex: irrev trust set up by mom for child and grandchild, makes a distribution from the trust directly to grandchild

46
Q

simple trust

vs

complex trust

A

simple - required to distribute income to beneficiaries annually

complex - not requried to distribute income

47
Q

CRAT

A
  • noncharitable bene receives fixed annuity and remainder goes to charity
  • must recieve annuity income of at least 5%, no more than 50% of original value of assets transferred. income MUST be paid
  • can be term up to 20 years
  • immediate chartiable deduction
  • contributions at set up ONLY
  • value of property included in gross estate, but charitable deduction reduces it to 0
  • irrevocable
48
Q

CRUT

A
  • noncharitable bene receives fixed annuity and remainder goes to charity
  • must recieve annuity income of at least 5%, no more than 50% of current FMV of assets
  • can be term up to 20 years or for life
  • immediate chartiable deduction
  • contributions after set up allowed
  • value of property included in gross estate, but charitable deduction reduces it to 0
  • has some hedge against inflation
  • very flexibile, doesnt have to make annual payments as long as there is a makeup provision allowed
  • irrevocable
49
Q

Pooled Income fund

A
  • maintained by the charity
  • pools property from all contributions and pays a return based on earnings
  • cannot hold tax exempt securities
  • like a mutual fund that goes to the charity at the death of the owner
  • donor eligible for immediate charitable deduction for income tax purposes
  • included in gross estate but charitable deduction reduces it to 0
50
Q

Charitable Lead Trust (CLT)

A
  • income paid to charity for a specific term and remainder goes to noncharitable bene (grantor, spouse, child, other)
  • if grantor trust - grantor claims the income and is eligible for a charitable deduction for the amount paid to charity
  • if nongrantor trust - grantor does not claim income or dedcution but value is out of gross estate
51
Q

Section 2503b trust

A
  • mandatory income trust - distributed at least annually
  • annual exclusion available for the income interest
  • income taxable to beneficiary
  • trust assets may be held beyond age of majority

B = Beyond age of majority

52
Q

Section 2503c trust

A
  • gift of future interest to minor, qualifies for annual exclusion
  • income distribution is discretionary
  • corpus must be distributed at age 21
  • if bene dies before then goes to benes estate

C = corpus

53
Q

Private foundation

A

tax exempt organization created by family or corporation to direct charitable contributions

allows for donor to control investment and distribution

must disribute at least 5% of net investment assets each year

  • limitations:
    • cash: 30% of donors contribution base for the tax year
    • long term cap gains: limited to 20% of taxpayers contribution base
54
Q

QPRT

A
  • qualified personal residence trust
  • transfers personal residence to trust and retains right to live there during trust term
  • passes to family members at the end of the term
  • grantor may repurchase or rent if they outlive the term
  • gift is future interest, no annual exlcusion
  • value of gift is FMV of residence discounted for number of years of trust term
55
Q

Distributable Net Income (DNI)

A

maximum distribution dedcution

max amoutn beneficiaries can be taxed

includes normal income and expense items

EXCLUDES: items relating to corpus - capital gains, stock splits, and depreciation of business assets

56
Q

exclusion

vs

exemption

A

exclusion: annual amount $15k
exemption: applicable credit amount $11.7 million

57
Q

interest on gift loans

A
  • loan $10k or less = not subject to gift tax unless used to buy income producing property
  • loans of $100k or less
    • if donee’s net investment income does not exceed $1k then no gift tax
    • if donee’e net investment income does exceed $1k then gift tax
      • imputed interest = interest at federal rate - interest charged
      • capped at donee’s net investment income
  • ​​​​loans of more that $100k
    • imputed interest = gift
    • imputed interest = interest at federal rate - interest charged
58
Q

when to file form 709

A
  • gifts exceed annual exclusion ($15k)
  • gifts of a future interest have been given
  • gift splitting of non community property/non jointly owned property (filed by donor spouse and signed by consenting spouse)
  • due april 15th the year following the gift
59
Q

form 706 elections

A

AVD

QTIP election

section 2032A

filed 9 months after death (6 month extension can be requested)

60
Q

reverse QTIP

A

special election to take advantage of the decedents GSTT exemption

marital deduction will still be available for estate tax purposes

CFP (7 decks)

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