Estate Planning

Question 1

Non-community property interest

Answer 1

1. Income earned by spouses PRIOR to marriage
2. Property received as a GIFT by one spouse
3. Property INHERITED by one spouse
4. Interest earned on separate assets held by one spouse as a sole owner

Question 2

Joint tenancy with right of survivorship (JTWROS)

Answer 2

• Property can be held by husband and wife, parent and child or children, siblings, and business partners
• Control, ownership and enjoyment shared equally by all joint tenants
• Upon death of each tenant, property immediately passes to surviving joint tenants in equal shares
• Property NOT controlled by terms of the will
• NOT subject to probate

Question 3

Tenancy by the Entirety

Answer 3

• Ownership can only be held by a husband and wife
• Transfer of property can only occur with the mutual consent of both parties
• In most states, property is protected from the claims of each spouse’s separate creditors, but NOT protected from the claims of both spouse’s joint creditors.

Question 4

Tenancy in Common (TIC)

Answer 4

• Two or more owners each own an undivided interest in the property
• Any income is distributed according to each owner’s respective share in the property
• Owners are free to transfer their respective share of the property to other individuals
• Ownership stake goes through probate upon death

Question 5

Assets NOT subject to probate

Answer 5

1. Property conveyed by deeds of title (IRA)
2. Property held by joint tenancy with rights of survivorship (JTWROS)
3. Government savings bonds - co-ownership
4. Revocable living trusts
5. Payable on death accounts (PODs)
6. Totten trust

Question 6

Assets subject to probate

Answer 6

1. “Singly” owned assets
2. Property held by tenancy in common
3. Assets where the beneficiary is the “estate of the insured”
4. Community Property (CP)

Question 7

Assets included in the Gross Estate

Answer 7

1. Singly owned assets
2. Tenancy in common
3. Beneficiary is the estate
4. Community property
5. JTWROS/Entirety
6. Life insurance
7. General powers
8. 3-year gross-up on gift taxes paid (but NOT GST taxes paid)

Question 8

Life Insurance added to the estate

Answer 8

• Proceeds are paid to the executor of the decedent’s estate
• Decedent at death possesses an incident of ownership in the policy
• Decedent transferred a policy with an incident of ownership within three years of death

Question 9

Valuation of a gift

Answer 9

The value of a gift for gift tax purposes is its fair market value (FMV) at the date of the gift

Question 10

Basis of a gift

Answer 10

• If FMV on the date of the gift is greater than the donor’s adjusted basis, use the donor’s adjusted basis
• If the FMV of the gift is less than the donor’s adjusted basis, use the list below:

1. If sales price above donor’s substituted basis, there is gain.
2. If sale price is between FMV on date of gift and donor’s substituted basis, there is no gain or loss
3. If sale price is below FMV on date of gift, there is a loss

Question 11

Deductible Gifts (non taxable gifts) also called Exempt Gifts or Qualified Transfer

Answer 11

1. Gifts to a spouse, provided they are not a terminal interest
2. Gifts to qualified charities
3. Qualified payments in any amount made directly to an educational institution for tuition
4. Qualified payments in any amount made directly to a medical care provider on behalf of any individual
5. Gifts to American political parties

Question 12

Summary of rules regarding gifts and the donor’s estate

Answer 12

• Generally, gifts given are simply “taxable gifts” to the extent such gifts exceed the annual exclusion
• Taxable gifts are added to the taxable estate
• Gift taxes paid (or payable) are generally allowed as a credit against the tentative tax
• Gift taxes paid on any gifts within three years of death are added to the gross estate

Question 13

Powers of Attorney

Answer 13

Traditional, non-durable power of attorney - Power ceases when the principal is no longer legally competent

Durable power of attorney - Authority of agent continues when principal becomes incompetent

Springing durable power of attorney - Main strength is the agent has no authority over the principal’s assets until incompetency.

Question 14

Power of Appointment (Trusts)

Answer 14

• Special Power: Exercisable only with the consent of the creator of the power or a person having a substantial adverse interest
• Ascertainable standard: Relating to health, education, maintenance or support (HEMS)
• General Power: Holder may exercise the power in any manner he/she wishes

Question 15

Gift & Estate Tax Implications (General Power)

Answer 15

Gift Tax Implications (General Power)

• Exercised, released, or lapsed - taxed
• Lapsed with a “5 or 5” power - not taxed

Estate Tax Implications (General Power)

• Exercised, released or lapsed - taxed
• Exercised, released or lapsed with a “5 or 5” power - greater of the “5 or 5” is taxed

Question 16

“5 or 5” Power

Answer 16

Property subject to a general power will be included in a donee decedent’s estate (or considered a taxable gift) only to the extent that the property exceeds the greater of:

1. $5,000 or
2. 5% of the total value of the fund subject to the power as measured at the time of lapse

Question 17

Grantor Trust Rules
(Tainted / Defective Trusts)
Income Tax & Estate

Answer 17

Trust may be defective / tainted for Income Tax and Estate Tax purposes if the grantor retains:

1. A right to income or the right to use/enjoy trust property (beneficial enjoyment)
2. A reversionary interest exceeding 5% (retained interest)

Question 18

Elements of a Trust

Answer 18

1. In order for a trust to exist, there must be property (also known as principal, re, or corpus)
2. There must be a grantor. This is any person who transfers property to and dictates the term of a trust
3. There must be a trustee, who receives legal title to the property placed in the trust, and who generally manages and distributes income according to the terms of a formal written agreement (trust instrument)
4. There must be a beneficiary, who has equitable title to the property
5. The grantor and trustee must be legally competent

Question 19

Simple vs. Complex Trusts

Answer 19

• Simple trusts (2503(b), Marital, QTIP) are considered merely a “conduit” for forwarding income ot the beneficiaries (pass-through)
• Complex trusts (2503(c)), are separate tax entities and taxed as such if it meets two requirements:
  1. it is irrevocable, and the grantor has not retained any control
  2. income is accumulated

Question 20

Crummey Trust

Answer 20

• Irrevocable trust with demand rights
• Demand right given to a minor through his/her guardian
• Beneficiary has temporary right to demand a withdrawal from the trust that is the lesser of the amount of the annual gift exclusion or the value of the gift transferred

Question 21

Nonmarital “B” Trust

Family, Bypass, Credit Shelter, Unified Credit Shelter

Answer 21

• Property transferred to the trust at the time of decedent’s death
• Can be structured to provide a stream of income to surviving spouse or other individuals
• Decedent has portmortem control

Question 22

QTIP “C” Trust

Current Income Trust

Answer 22

• Provides surviving spouse with a stream for income for life, but decedent has portmortem control of trust property
• Property qualifies for marital deduction
• Mainly used for second marriages
• Key word for QTIP - LAME
  
  • Lifetime income for the spouse
  • Annual payments to spouse
  • Mandatory payments to spouse
  • Exclusively for spouse

Question 23

Qualified Domestic Trust

QDT/QDOT

Answer 23

• No unlimited marital deduction
• However, no estate tax due
• Jointly held property between spouses is not considered one-half owned
• Limited gift between spouses of only $100K (indexed) per year ($164K for 2022)

Question 24

Present Interest Gift Vehicles

Answer 24

1. UGMA
2. UTMA
3. 2503(c) trust
4. Section 529 college savings plan

Gift to a 2503(b) trust is a gift of FUTURE interest.

Question 25

Charitable Contributions / Transfers

Answer 25

Income to DONOR until donor’s death:

1. Charitable Remainder Annuity Trust (CRAT) - 5%
2. Charitable Remainder Unitrust (CRUT) - 5%
3. Pooled Income Fund - no 5% required
4. Charitable Gift Annuity - no 5% required

Income to CHARITY:

1. Charitable Lead Trust (CLAT/CLUT) - no 5% required
2. Private Foundation - 5% - can give money to individuals

Question 26

Intrafamily Transfers

Property owner need income

Answer 26

PIGS need income:

1. Private annuity sale
2. Installment sale
3. Grantor Annuity Trusts (GRAT/GRUT)
4. Self-canceling installment note (SCIN)

Question 27

Intrafamily Transfers

Property owner wants to gift assets and/or income to family members

Answer 27

1. Partnership / S-corp
2. Family Limited Partnership (FLP)
3. Gift Leaseback
4. Qualified Personal Residence Trust (QPRT)

Question 28

Disclaimer

Answer 28

In order to disclaim property, the following requirements must be met:

1. Disclaimer must be an irrevocable refusal to accept the interest
2. Refusal must be in writing
3. Refusal must be received within nine months
4. Intended donee cannot have accepted any interest in the benefits
5. As a result of refusal, the interest will pass, without the disclaiming person’s direction, to someone else

Question 29

Postmortem Planning Techniques

Estate Liquidity

Answer 29

Stock Redemption (Section 303)

1. Business must be incorporated (closely held)
2. Value of business must exceed 35% of decedent’s adjusted gross estate
3. Redemption cannot exceed the sum of the estate taxes plus administrative expenses

Installment payment of estate taxes (Section 6166)

1. Value of business must exceed 35% of decedent’s adjusted gross estate
2. During the first 4 years (of 14 years) can pay interest only on taxes due

Question 30

Postmortem Planning Techniques

Estate Tax Reduction

Answer 30

Special Use Valuation (Section 2032A)

1. 25% of the gross estate consists of real property
2. Must be in qualified use - 5 out of 8-year rule before death and 10 years after death