Estate Planning Flashcards
Non-community property interest
- Income earned by spouses prior to marriage
- property received as a gift by one spouse
- Property inherited by one spouse
- Interest earned on separate assets held by one spouse as a sole owner
(JTWROS) Joint tenancy with right to survivorship
- 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
Tenancy by the entirety
- 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 spouses separate creditors, But not protected from the claims of both spouses joint creditors
Assets Not subject to probate
- property conveyed by deeds of title (IRA)
- Property held by JTWROS
- Government savings bonds
- Revocable living trusts
- payable on death accounts PODs
- Totten trust
Assets subject to probate
- singly owned assets
- property held by tenancy in common
- assets where the beneficiary is the “estate of the insured”
- Community property
Assets included in gross estate
- singly owned assets
- Tenancy in common
- bene is the estate
- community property
- JTWROS/Entirety
- Life Insurance
- General powers
- 3 ear gross-up on gift taxes paid (not GST taxes paid)
Life Insurance added to the estate
- proceeds are paid to the executor of the decedents estate
- Decedent at death possesses can incident of ownership in the policy
- Descendent xfered a policy with an incident of ownership within 3 years of death
Valuation of a gift
the value of a gift for gift tax purposes is its fair market value (FMV) at the date of gift
Basis of a gift
- if FMV on the date of gift is greater than the donors adjusted bass, use the donors adjusted basis
- if the FMV of the gift is less than the donors adjusted basis, use the chart below
if above basis gain if below FMV at date of sale then a loss if between basis and FMV there is no gain or loss
Deductible gifts (not taxable gifts) also called exempt gifts or qualified transfer
- gifts to a spouse, provided they are not a terminal interest
- gifts to qualified charities
- qualified payments in any amount made directly to an educational institution for tuition
- qualified payments in any amount made directly to a medical provider on behalf of any individual
- gifts to political parties
Summary of rules regarding gifts and the donors estate
- generally, gifts are given are simply “taxable gifts” to the extent such gifts exceed the annual exclusion
- taxable gifts paid (or payable) are generally allowed as a credit against tentative tax
- Gift taxes paid on any gifts within three years of death are generally added to the gross estate
Powers of Attorney
traditional non durable power of attorney- power ceases when the principle is no longer legally competent
Durable power of attorney- authority of agent continues when the principal becomes incompetent
Springing durable power of attorney- main strength is the agent has no authority over the principals assets until incompetency
Powers of appointment
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
Gift and estate tax implications (general power)
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 5 or 5 power - greater of the “5 or 5” is taxed
“5 or 5” power
Property subject to a general power will be included in a donee decedents estate ( or considered a taxable gift) only to the extent that the property exceeds the greater of:
- 5,000 or
- 5% of the total value of the fund subject to the power as measured at the time of the lapse
Grantor Trust Rules
(tainted / defective Trusts)
Income tax and Estate
Trust may be defective / tainted for income tax and estate tax purposes if the grantor retains:
- A right to income or the right to use/enjoy trust property (beneficial enjoyment)
- A reversionary interest exceeding 5% (retained interest)
Elements of a Trust
- in order for a trust to exist, there must be a property
- there must be a grantor. this is any person who transfers property to and dictates the term of a trust
- 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
- There must be a beneficiary, who has equitable title to the property
- the grantor and trustee must be legally competent
Simple vs Complex trusts
Simple trusts (2503(b), Martial, QTIP) are considered merely a conduit for forwarding income to the beneficiaries ( pass through)
Complex trusts (2503 (c)) are separate tax entities and taxed as such if it meets two requirements:
- it is irrevocable, and the grantor has not retained any control
- Income is accumulated
Crummy Trust
- 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
Nonmarital “B” Trust (Family, bypass, creditor shelter, unified credit shelter)
- property xfered to the trust at time of decedents death
- can be structured to provide a stream of income to surviving spouse or other individuals
- Descendent has postmortem control
QTIP “C” Trust (Current Income Trust)
- provides surviving spouse with a stream of income for life but descendent has postmortem 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
Qualified Domestic Trust (QDT/QDOT)
- no unlimited marital deduction
- However, no estate tax due
- Jointly held property b/w spouses is not considered one-half owned
- Limited gift b/w spouses of only 100k (indexed) per year
Present Interest Gift Vehicles
- UGMA
- UTMA
- 2503 (c) trust
- Section 529 college savings plan
Gift to a 2503 (b) trust is a gift of future interest
Charitable Contributions/ Transfers
Income to donor until donor’s death
- Charitable remainder annuity trust (CRAT) - 5%
- Charitable Remainder Unitrust (CRUT) - 5%
- Pooled Income Fund - no 5% required
- Charitable Gift annuity - no %% required
Income to charity
- charitable lead trust (CLAT/CLUT)- no 5 % required
- Private Foundation - 5% - can give money to individuals
Intrafamily Transfer (property owner needs income)
PIGS need income
- Private Annuity
- Installment Sale
- Grantor Annuity Trusts (GRAT/GRUT)
- Self-canceling installment note (SCIN)
Intrafamily Transfer (property owner wants to gift assets and /or income to family members)
- Partnerships/ S-corp
- Family Limited Partnership (FLP)
- Gift Leaseback
- Qualified Personal Residence Trust (QPRT)
Disclaimer
in roder to disclaim property, the following requirmeents must be met
- Disclaimer must be an irrevocable refusal to accept the interest
- Refusal must be in writing
- Refusal must be received within nine months
- intended donee cannot have accepted an interest in the benefits
- As a result of refusal the interest will pass without the disclaiming persons direction to someone else
Postmortem Planning Techniques (Estate Liquidity)
Stock Redemption ( Section 303)
- Business must be incorporated (closley held)
- Value of business must exceed 35% of decedents adjusted gross estate
- Redemption cannot exceed the sum of the estate taxes plus administration expenses
Installment payment of estate taxes (section 6166)
- Value of business must exceed 35% for decedents adjusted gross estate
- During the first 4 years (of 14 years) can pay interest only on taxes due
Postmortem Planning Techniques (Estate tax reduction)
Special Use Valuation (section 2032A):
- 25% of the gross estate consists of real property
- Must be in qualified use - 5 out of 8 year rule before and 10 years after death
