Estate Planning Flashcards
Gift Splitting
Married donor, with the consent of non-donor spouse, elects to treat a gift to a third party as though each spouse has made 1/2 of the gift.
Thus, the maximum gift from the married couple to an unlimited number of recipients is $32,000, twice the annual exclusion of $16,000 for individuals. This way, neither of the spouse’s unified credit will be used.
Present interest only Spouses only ALL gifts Form 709 Tax-free Unlimited recipients
Gift splitting with taxable portion
Husband and wife gave their daughter $40,000
Taxable gift for husband: $40,000 / 2 = $20,000 - $16,000 = $4000
Taxable gift for wife: $40,000 / 2 = $20,000 - $16,000 = $4000
Gift Tax filing form 709
Filed separately by each spouse if the split value > annual exclusion ($16,000)
E.g., $34,000 / 2 = $17,000
Donor spouse files if split gifts < annual exclusion. Other spouse shows consent on Form 709
E.g., $20,000 / 2 = $10,000
No gift tax return is filed if the value of the gift < annual exclusion
E.g., $12,000 gift
Exam tip: Gifts can be made between spouses, tax-free, without limit. When spouses elect to gift-split for transfers to others, the gift-split treatment must be applied to all gifts in a calendar year.
Qualified Disclaimer - Definition and Requirements
A potential donee expressly refuses to accept a valuable gift, i.e., disclaims the right to the gift.
Qualified Disclaimer Requirements:
- Refusal or rejection in writing
- Writing must be received no later than 9 months of the later of:
(a) the date on which the transfer creating the interest is made OR
(b) the date the person disclaiming reaches age 21 - Person disclaiming must not have accepted the property interests or any benefits of the property
- Someone other than the disclaimant receives the disclaimed property interest; disclaimant cannot in any way influence the potential recipient of the property
When to use a Qualified Disclaimer
Transfers involving large gifts
Tax free gift to a contingent donee
Spouse is donee, but does not need/want the gift
Election to use a qualified disclaimer to transfer property is permanent and cannot be undone!
The gifted property cannot be received first and disclaimed later. A qualified disclaimer must be elected BEFORE reception of the gift.
Gifted Property with Gains - What happens to donee’s basis and holding period if FMV of donor’s gift is greater than donor’s basis?
Donee will use donor’s basis as their own
Donee will assume donor’s holding period
Example: Robert’s Aunt gave him $63,000 of MSFT stock that she purchased 19 years ago at a cost of $18,000. She did not have any gift tax liability as a result of this transaction. Robert’s basis in the stock is $18,000, and his holding period is 19 years.
Gift Tax Adjustment to Donee’s Basis
When the donor actually pays gift taxes AND when FMV > than donor’s basis, the gift tax adjustment is added to the donee’s basis:
Appreciation Factor X Gift Taxes Paid = Gift Tax Adjustment
Appreciation Factor = (FMV - Basis) / (FMV - Annual Exclusion)
Robert’s aunt gave him $63,000 of MSFT stock that she purchased 19 years ago at $18,000. She paid gift taxes of $10,000 after utilizing the $16,000 gift tax annual exclusion. How much is Robert’s basis in the stock and what is the holding period?
(63,000 - 18,000) / (63,000 - 16,000) = 0.9574
0.9574 x $10,000 Gift Tax Paid = $9,574 (= GIFT TAX ADJUSTMENT)
Robert’s basis in the stock = $18,000 + $9,574 = $27,574.
Robert’s holding period is 19 years.
Gifted Loss Property: Basis and Holding Period
When assets are gifted at a loss, a wait-and-see approach must be adopted until the asset is eventually sold.
Possible scenarios:
(1) Gift of loss property - final sale price > original basis of donor:
- donor’s original basis used to calculate gain
- donee inherits donor’s holding period
(2) Gift of loss property - final sale price < FMV on the date of the gift:
- donee will use FMV on the date of gift as basis
- holding period will begin on date of gift
(3) Gift of loss property - final sale price is between donor’s original basis and FMV on date of gift:
- no loss or gain
- holding period is not a factor
Illustration of Gifted Loss Property: Donor’s basis = $40,000, FMV at the time of gift = $20,000
↑
Gain basis $40,000 Donee sells for $40,000+
$39,999 uses $40,000 as basis
↑ Donee sells for $20,001+
$20,001 but less than $40,000; Loss basis $20,000 basis=selling price, no gain/loss
↓
Donee sells for $20,000 or less
uses $20,000 as basis
What is a generation-skipping transfer and what is a skip person?
Transfer of property by gift or death to any person who is 2 or more generations below that of the transferor
skip person = person who is 2 or more generations below that of the transferor
Generation-Skipping Transfer Tax (GSTT) - features
in addition to gift tax and estate tax
GSTT annual exclusions of $16,000 and a separate lifetime GSTT exemption of $12.06MM offsets this tax
flat rate of 40%
GSTT Payor = Transferor (Grandparent)
Tax-Exclusive
Types of GSTT - Direct Skip
Direct transfer to a skip person
Tax Exclusive: Transferor pays Tax
Related persons:
Skip persons determined by family tree: grandchildren, great-grandchildren, grand-nieces, grand-nephews
Non-related persons:
Skip person was born between 37 1/2 and 62 1/2 years after the donor
Types of GSTT - Taxable Distribution
Taxable distributions:
Any distribution of income or corpus from a trust to a skip person that is NOT otherwise subject to estate or gift tax
Scenario: Grandparent has a trust from which a taxable distribution is made, GSTT payor is the Transferee (Skip person)
Tax inclusive: Transferee pays tax
Types of GSTT - Taxable Termination
termination by death, lapse of time, release of power, or otherwise of an interest in property held in a trust resulting in skip persons holding all interests in the trust
Sample scenario: Grandparent has a trust, life income is paid to his/her child (parent of grandchild) who dies, Skip person (grandchild) now holds all interest in the trust
Tax inclusive: GSTT payor = trustee
Federal Estate Tax - definition
tax on transfer of property when a person dies
tax on right to TRANSFER property (rather than on right to receive property)
Steps in calculating the federal estate tax
- Determine value of gross estate
- Arrive at Adjusted Gross Estate
- Determine Taxable Estate
- Calculate federal estate tax payable before credits
- Apply allowable credits to arrive at NET FEDERAL ESTATE TAX
Payable by decedent’s executor on the date the return is due: within 9 months from the date of decedent’s death
Federal Estate Tax
Taxable Gifts
\+
Taxable Estate
↓
Tentative Tax Base
↓
Calculating tax with unified transfer tax rates
↓
Federal estate tax on tentative tax base
LESS
Credit for Gift Taxes Paid
Unified Credit Amount
Credit on Prior Transfers
↓
Federal Estate Tax Payable
Marital Deduction
Unlimited marital deduction is available for most gifts made to a donee spouse
Can NOT be used for gifts made to a non-citizen spouse (annual exclusion: $164,000)
NOT available for TERMINABLE INTEREST PROPERTY (TIP)
Gross Estate
minus: expenses, debt, taxes, losses
Adjusted Gross Estate
minus Marital Deduction
minus Charitable Deduction
= Taxable Estate
Charitable Deduction
Charitable estate tax deduction is available for property passing to a QUALIFIED charity
IRS Form for Estate Tax Return
Form 709
Charitable Lead Trust
Grantor receives charitable income tax deduction for PV of charity’s income interest
Charitable Remainder Trust
Grantor receives charitable income tax deduction for PV of charity’s remainder interest
Charitable Gift Annuity
donor transfers cash or property to a charity, and charity pays donor or other donees an annuity payment each year for life
Gift charitable deduction = PV of charity’s remainder interest
Gift annuity payments to a spouse: marital deduction is available if spouse receives all annuity payments and has general POA over payments after donor’s death
Gift annuity payments to others: gift tax = PV of the annuity payments
Pooled Income Funds
Donor gifts property to a charity and receives annual pro-rata share of income from charity’s commingled funds for life
Additional gifts can be made to the fund to increase donor’s income stream
Charity manages the fund which CANNOT INVEST IN TAX-EXEMPT SECURITIES and receives remainder when donor’s income interest ends
Donor takes income tax deduction for PV of charity’s remainder interest
Donor pays income taxes on income received from fund
Private Foundation
Separate legal entity, either non-profit or tax-exempt trust
Most are funded and controlled by family members. High set-up and maintenance fees.
Family members who make gifts to the foundation may take an income tax deduction limited to 30% for cash and 20% for LTCG property.
Foundation must distribute a minimum of 5% of the assets to public charities every year.
Ownership Titling - Separate Ownership
- one owner
- owner fully controls transfer
- transfers by will or laws of intestacy
- 100% Probate inclusion
- 100% Gross Estate inclusion
Ownership Titling - JTWROS
- 2 or more owners
- transferable without JT approval
- automatic survivorship at JT’s death
- not included in probate
- Inclusion in Gross Estate: 50% spouses, FMV x % ownership non-spouses
Appropriate to:
- ensure the property automatically passes to a specific individual upon owner’s death
- avoid probate
- reduce administrative costs and attorney’s fees
- minimize income tax liability
Ownership Titling - TBE
- only spouses
- transferable with approval of JT
- automatic survivorship at death of spouse
- no inclusion in probate
- 50% of FMV included in Gross Estate
Ownership Titling - TIC
- several owners
- transferable each owner separately, based on interest
- transfers by will or laws of intestacy
- FMV of interest included in probate
- FMV of ownership % included in Gross Estate
Appropriate to:
- reduce potential estate tax liability
- reduce any income tax liability
- ensure that the property is transferred to a designated beneficiary
Ownership Titling - Community Property
- 2 spouses
- transferable with spouse approval
- automatic survivorship if titled “S1 and S2 community property with rights of survivorship or titled in joint trust”; otherwise, not automatically transferred
- only assets that do not transfer to someone else are included in probate
- 50% of value of decedent’s interest is included in Gross Estate
Power of Attorney
Written agreement that allows an AGENT to act on behalf of a PRINCIPAL
Durable Power of Attorney
Immediate authority to act on behalf of principal
Agent’s power does not lapse even when principal becomes incapacitated or disabled
Non-Durable Power of Attorney
Remains active until incapacitation
Also used when principal needs agent to act on his/her behalf (e.g., sign a document while on vacation)
Springing Power of Attorney
Not operative until principal becomes incapacitated (must be confirmed, may delay decisions)
General Power of Attorney
Allows for a broad array of decisions (financial, legal, business matters)
Lapses at incapacitation
Special Power of Attorney
Used only for specific matter or until task is completed or time period has passed, then authority expires
Step up in Basis - Spousal vs. Non-Spousal JTWROS
Spousal: Regardless of contribution (basis), each spouse owns 50% of FMV at death of one spouse.
Add 50% of FMV to original basis (contribution %) to get Step-up Basis for surviving spouse
Non-Spousal: % ownership x FMV at death is added to other owner’s original basis
Legal requirements for will and intestacy
anyone over 18 can create a will, to execute a will you need testamentary capacity
Without a will, state laws of intestacy determine the distribution of property:
Minor children receive equal shares of parents’ property and take ownership at majority.
Community states: all property in intestacy passes to surviving spouse
Decedent’s estate gets marital deduction for percentage of property surviving spouse receives
Testamentary capacity
Testator must know they are executing a will
Testator must be aware of what assets they own
Testator must know and remember their relationship to the beneficiaries
Provisions in a will can be invalidated due to:
Fraud
Testator being subject to undue influence
Mistakes in will clauses
Will is not properly executed/signed/witnessed according to state law
Types of wills
Mutual will: made in agreement with another person to dispose of property interests
Reciprocal will: each person’s will designates property to be assigned to the other person
Holographic will: handwritten will
Nuncupative will: oral will
Probate
Process of proving will in court
Personal property: probated in decedent’s state of domicile
Real property: probated in state where it’s located (situs)
Ancillary property: property in another state, probated in the other state
Advantages of probate
court-supervised distribution of property
protects creditors by ensuring that debts are paid
bars future creditor claims against estate
documents title and transfer of property
Disadvantages of probate
public process
expensive
time consuming (9-12 mo)
Property transferred via a will that is subject to probate
solely owned personal or real property
TIC
Community property
property passing from will into a testamentary trust
property transferred by a pour-over will into a trust
life insurance policy owned by decedent who was not the insured
Property not transferred by will that is subject to probate
Intestate property
Life insurance policy proceeds or annuities payable to decedent’s estate
Homestead and exempt property allowances
Avoiding probate
Will substitutes: TLC
Trusts (funded revocable, irrevocable, and property in trust)
Operation of law (JTWROS, TBE, joint bank accounts, POD/TOD, life estate)
Contract (named beneficiaries on retirement accounts/plans, life insurance, annuities)
Asset Transfer at Death - Per Capita
By the head, to be split equally among ALL survivors
Distribution is based on surviving family members
Example 4 survivors (children and grandchildren): each gets 1/4
Capita by Generation: 3 siblings, 2 have passed A passed, has 1 child B survivor C passed, has 2 children
A’s child gets 2/9
B gets 1/3
C’s 2 children each get 2/9
Asset Transfer at Death - Per Stirpes
by the trunk/root or right of representation
distributions follow the family tree
Example 3 siblings, each get 1/3, but 2 have passed; sibling A has one child, sibling C has 2 children
B gets 1/3
child of A gets 1/3
2 children of C each get 1/6
Estate Tax Process
5 steps to calculate the federal estate tax:
- Determine value of Gross Estate
- Arrive at Adjusted Gross Estate
- Determine Taxable Estate
- Calculate federal estate tax payable before credits
- Apply allowable credits to arrive at net federal estate tax due
Due within 9 months of decedent’s death
Simple Trust
Required to distribute all income to beneficiaries in year earned
May not have charitable beneficiary
Can’t distribute principal during tax year
Personal exemption of $300
Complex Trust
not required to make distributions (can accumulate income)
may have charitable beneficiary
may distribute principal during tax year
personal exemption of $100
