Estate Planning Flashcards
Section 303 Stock Redemption Plan
- Agreement to pay for estate costs with proceeds from the sale of decedent’s company stock to the company.
- Decedent’s estate must be 35% company stock.
- May be paid for by life insurance from the company.
- Share price of stock is fixed by agreement or formula.
- No taxable gain is realized if all shares are redeemed.
- Gains are treated as capital gains to the extent that they’re used for estate costs.
- Special capital gain treatment (50% of estate) would result in no gain reported.
Gifted Asset Basis w/ Gift Tax Paid Formula
(Appreciation / Gift Amount) x Gift Tax Paid = New Basis
Reverse Gift Rules
- Gift appreciated property to someone who will die and then leave it to the original owner in their will for a step up in basis.
- Legal if property is gifted and held one full year before the death of the second party.
- Property will receive a full step-up in basis.
Tenancy By Entirety Rules
Allows married couples to own property jointly as a single entity.
- Rights of survivorship.
- Bi-lateral disposition.
- Cannot be attached by creditors.
- Divorce forces tenancy in common.
- If one spouse dies, 50% of the property will receive a step-up in basis.
Split Dollar Life Insurance Agreement Rules
Economic Benefit Arrangement:
- The employer owns the policy and pays premiums.
- The employee may have right to a portion of the cash value as a taxable economic benefit paid each year.
- A beneficiary would receive a portion of the proceeds.
Loan Arrangement:
- The employee owns the policy but employer pays premiums as an annual “loan”.
- The employer establishes authority to decide how the policy is managed.
Life Estate Rules
- Creates joint ownership of property between a life tenant and a remainderman.
- The life tenant has rights to use the property until death. The remainderman receives the property after.
- Life tenant must maintain property and cannot dispose property rights but remainderman may.
- At death, the FMV of the property is included in the decedents gross estate and passes to remainderman without going through probate and with a full step-up.
- Creating a life estate as a gift may constitute a taxable gift in the amount of the value of the future interest.
- Inherited Life Estates are not included in the decedent’s gross estate.
Net Gift
Obligates the recipient to pay the gift tax as a condition of accepting the gift.
Inheritance Tax
Tax that is levied on the value of the inheritance received by the beneficiary, paid by the beneficiary to receive the inheritance.
Totten Trust
Allows a person to deposit money into a bank account in his or her own name as trustee for another person. Similar to TOD and POD accounts, a Totten trust avoids probate.
Qualified Terminable Interest Property (QTIP) Election Rules
- Trust income is paid to a surviving spouse/partner until their death at which point it is paid to the beneficiaries.
- Must be elected by executor, irrevocable.
- QTIP property qualifies for the marital deduction and only becomes taxable after the second spouse’s death, with tax liability transferring to the named beneficiaries.
- May allow 5x5 power for spouse only.
Testamentary Trust Rules
- Created by the decedents will, it’s set up after death to distribute property.
- Property in the trust still goes through probate and is included in the decedent’s gross estate.
- Able to establish distribution requirements beyond estate settlement and reduce estate taxes.
Gift-leaseback Rules
- One party gives property to another party and then leases the property back.
- Good for appreciating assets.
- Great for removing assets from your estate even when you need to continue to use those assets.
Private Annuity
- A special agreement where a grantor sells property to an obligor who makes payments to the annuitant.
- Payments only taxable as income and cease at death.
- Since it’s a sale, any gain is realized, the asset gets a step-up in basis, and now belongs to the obligor.
Qualified Domestic Trust (QDOT) Rules
- Allows surviving spouses who are not U.S. citizens to take the marital deduction on estate taxes.
- At least one trustee must be a U.S. citizen or a domestic corporation authorized to retain estate tax.
- Doesn’t exempt trust from paying estate tax, it simply defers it until the death of the non-citizen spouse.
- Trustee may pay estate tax of the surviving spouse from corpus while the surviving spouse is still alive.
Charitable Lead Trust
- Donates payments to a charity, for a limited period.
- Irrevocable.
- Non-grantor trusts allow a charitable deduction to be taken as the income is distributed to the charity.
