Estate Planning Flashcards
Summary of rules regarding gifts and the donor’s estate
- Generally, gifts given that exceed the annual exclusion are “taxable gifts”.
- Taxable gifts are added to the taxable estate.
- Gift taxes paid 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.
“5 or 5” Power
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
2) 5% of the total value of the fund subject to the power as measured at the time of lapse.
Gift & 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 a “5 or 5” power - greater of the “5 or 5” is taxed
Simple vs Complex Trusts
- Simple trusts (2503(b), Marital, 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:
1) It is irrevocable, and the grantor has not retained any control
2) Income is accumulated
Non-marital “B” Trust (Family, Bypass, Credit Shelter, Unified Credit Shelter)
- Property transferred to the trust at time of decedent’s death.
- Can be structured to provide a stream of income to surviving spouse or other individuals.
- Decedent has postmortem control
QTIP “C” Trust (Current Income Trust)
- Provides surviving spouse with a stream of income for life, but decedent has postmortem control of trust property.
- Property qualifies for marital deduction.
- Mainly used for second marriages
- Keyword for QTIP - LAME
Lifetime income for the spouse
Annual payments to spouse
Mandatory payments to spouse
Exclusively for spouse
Present Interest Gift Vehicles
- UGMA
- UTMA
- 2503(c) trust
- Section 529 college savings plan
Gift to a 2503(b) trust is a gift of a 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 5% required
Income to charity:
- Charitable Lead Trust (CLAT/CLUT) - no 5% required
- Private Foundation - 5% - can give money to individuals
Intrafamily Transfers (Property owner needs income)
PIGS need income
Private annuity
Installment sale
Grantor Annuity Trusts (GRAT/GRUT)
Self-Canceling Installment Note (SKIN)
Intrafamily Transfers (Property owner wants to gift assets and/or income to family members) 4
- Partnership/S-corp
- Family Limited Partnership (FLP)
- Gift Leaseback
- Qualified Personal Residence Trust (QPRT)
In order to disclaim property, the following requirements 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 any interest in the benefits.
- As a result of refusal, the interest will pass without the disclaiming person’s direction to someone else.
Postmortem Planning Techniques (Estate Liquidity)
Stock Redemption (Section 303)
1. Business must be incorporated (closely held).
2. Value of business must exceed 35% of dependent’s adjusted gross estate.
3. Redemption cannot exceed the sum of the estate taxes plus administration 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.
Postmortem Planning Techniques (Estate tax Reduction)
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
Tenancy In Common
- 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
Assets NOT subject to Probate (7)
- JTWROS
- TBE
- TOD/POD
- Transfer by contract: Named beneficiaries for QP/Retirement plans, IRAs, life insurance/annuities.
- Trusts: Revocable and/or Irrevocable
- Totten Trust
- Deeds of title
Assets included in Gross Estate
!Most everything within reason!
- Singly owned assets
- TIC
- JTWROS/ Tenancy by the Entirety
- Community property
- Beneficiary is the estate
- Life Insurance
- General Powers
- 3-year gross-up on gift taxes paid (but not GST taxes paid
Life Insurance added to the estate
- Proceeds are paid to the executor of the decedent’s estate.
- Decedent has an incident of ownership at death
- Decedent transferred a policy where they had incident of ownership within 3 years of death.
Powers of Attorney:
- Traditional, non-durable POA
- Durable POA
- Springing durable POA
- 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: The agent has no authority over the principal’s assets UNTIL incompetency.
Powers of Appointment (Trusts):
- Special Power
- Ascertainable standard
- General Power
- 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 they wish.
Elements of a Trust
- In order for a trust to exist, there must be property (Also known as Principal or Corpus).
- There must be 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 (trust instrument).
- There must be a beneficiary, who has equitable title to the property.
- The grantor and trustee must be legally competent.
Non-community property interest (Common law, NY is Common)
- 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.
Joint Tenancy With Rights Of Survivorship
- Property can be held by husband and wife, parent and child/children, siblings, and business partners.
- Control, ownership and enjoyment is 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 spouse’s separate creditors, but NOT protected from the claims of both spouse’s joint creditors.
Can be terminated by mutual consent, death, divorce, or SEVERED BY JOINT CREDITORS!!
Assets subject to probate
- “Singly” owned assets.
- Property held by tenancy in common (undivided ownership).
- Assets where the beneficiary is the “estate of the insured”
- Community Property (50% attributable to each spouse).
Valuation of a gift
For gift tax purposes, the value of the gift is its FMV on the date of the gift.
Basis of a gift
- 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 use the chart:
If sale price is above basis, use the donors carry-over basis, and accept a gain.
If FMV on the date of gift is less than basis, but the sale price is in between donors basis and fmv, there is no gain or loss.
If FMV on the date of gift is less than basis, and the sale price is less than that FMV, you use the FMV at the date of gift as your “adjusted basis” and accept a loss.
Deductible Gifts (not taxable gifts) also called exempt gifts or qualified transfers.
- 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 care provider on behalf of ANY individual.
- Gifts to a political organization.
- Gifts to the President of the US.
Grantor Trust Rules (Tainted / Defective Trusts):
Income Tax & 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 or enjoy trust property (beneficial enjoyment).
- A reversionary interest exceeding 5% (retained interest).
Crummey Trust
- Irrevocable trust with demand rights.
- Demand right given to a minor through their 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.
Qualified Domestic Trust (QDT/QDOT)
- No unlimited marital deduction, however, no estate tax due.
- Jointly held property between spouses is not considered on-half owned.
- Limited gift between spouses of only 100k (indexed) per year.
What is Probate?
- It is the process for the orderly distribution of property from a decedent to one or more beneficiaries.
- Court supervision, filing of claims against the estate by creditors, and publication of a last will and testament.
Testamentary distribution (read)
- The person making the will is the testator.
- The will creates testamentary transfers.
- Probate is the process by which the transfer is accomplished.
- A testamentary trust does not go through probate, but the property passing through the will does.
Whats it called when someone dies without a will?
The person is said to died INtestate.
Advantages of probate
Court supervision, marshaling of all the assets, paying of bills and resolving credit issues, overseeing distribution of the estate as directed by Will or by intestacy law.
Disadvantages of probate
Loss of privacy, possible will contest, cost and delays, ancillary probate.
What assets are included in the probate estate? (4)
- Singly owned assets. Fee simple.
- Property held by TIC
- Community property (half at first death)
- Assets where the beneficiary is the estate of the insured.
Probate avoidance strategies
- Revocable or inter vivos trusts (Totten also because it’s a revocable trust)
- Transfer by operation of law (joint tenancy with rights of survivorship).
- Transfers by contract (beneficiary arrangements in life insurance policies, annuity contracts, and retirement accounts.)
- Titling TOD/POD. Accomplish the same result as Totten trust. Controlled by depositor and probate avoidance at death.
Revocable trust, JTWROS, beneficiaries, TOD/POD.
The uniform simultaneous death act
Any persons who die within 120 hours of each other, by law, are deemed to predecease each other.
This rule keeps the property of one deceased person from passing through the estate of another deceased person before ultimately passing to those who survive both.
Totten Trust
This is a revocable trust in a bank account in which the depositor is named as trustee for another’s benefit.
The depositor retains the rate of withdrawal until death. When the depositor dies, the balance passes to the beneficiary.
Avoid probate.
What type of property with ancillary probate affect?
Real property
Community property
- Form of ownership held by spouses.
- Both spouses own a separate, undivided, and equal interest in the property. Each spouse owns a one-half interest.
- All property acquired by the spouses during the marriage is generally presumed to be a community property.
- there are no survivorship rights, thus, a will is needed, and the property will be subject to probate.
What property is considered community property?
- Income earned by spouses, or only one spouse during marriage.
- Appreciation on solely on property that is a attributable to the contributions of the non-owner spouse.
- Commingled assets.
What property is not considered community property?
- property received as a gift by one spouse.
- Property inherited by one spouse.
- Income earned by spouses prior to marriage that is not commingled.
- Interest earned on separate assets held by one spouse as sole owner.
If a house or condo is purchased with gift/inheritance money by one spouse, it is not community property.
Tax advantage of community property versus common law property:
- Community property gets a full, 100% step up in basis on long-term capital gain property if at least one-half of the whole property is includable in the deceased spouses gross estate.
- Common law (NY is common to me) property only receives a half step-up in basis on the deceased spouses half, and the living spouses basis remains the same. Add the two basis’ together and that’s the new basis.
If someone living in a community property state, buys investment real estate in a common law state, and then dies, what happens?
The property will go through probate in her estate, and it will go through ancillary probate.
The property bought in the common law state will be classified as community property since she paid for it with their earned income (while living in a community property state).
JTWROS
Not subject to probate, can be disclaimed. Not controlled by the terms of the will.
Nonspouse joint tenants with JTWROS
The full value of jointly held property is included in the gross estate of the first tenant to die, unless the survivor can establish ownership or consideration, of some portion of the property before joint tenancy was created.
A gift of property is not a contribution or consideration.
Income generated by a gift can be applied as bona fide consideration, but not the amount of the gift itself.
Spousal joint tenant with JTWROS
When the first spouse dies, his or her gross estate must include one half of the properties fair market value as of the date of death
Tenancy by the entirety
Entirely for spouses.
Not subject to probate, cannot be disclaimed. Only one that cannot be disclaimed. can only occur with mutual consent of both parties.
TBE property can be attached by joint creditors.
TBE ownership arrangement can be terminated in which ways?
By mutual agreement by both spouses, at the death of either spouse, upon divorce settlement.
Tenancy in common
Subject to probate, can be disclaimed.
Property can be owned unequally by several owners simultaneously. Undivided interest.
There is a division of income and tenants are free to transfer to their respective shares to other parties.
For estate tax purposes, there are no survivorship rights in property held in TIC. Upon the death of the holder, their respective share will go through the probate process and included in their gross estate.
Trust ownership
A trust is a fiduciary arrangement which one person (the trustee) holds the title to property (trust corpus), subject to the obligation to accumulate or distribute income or principal for the benefit of another (the beneficiary). The trustee holds legal title, the beneficiary holds
What are the legal requirements for a will?
Must be in writing (handwritten or typed) and I must be witnessed.
Some states require an attestation clause to validate a will. It just makes sure that the will was validly executed according to the states statutory execution requirements, and has actually been witnessed.
What is a power of attorney?
A written document which one person (the principal) uses to empower another person (the attorney in fact or holder of the power) to act on his or her behalf.
Advantages of trusts (revocable)
A trustees authority to act in managing assets may be recognized in virtually all states, and can be enforced while a durable power of attorney may not be.
The trust continues after death, while a durable power expires at death.
Testamentary trust
A trust that is created by Will.
It becomes effective only if the will creating a testamentary trust is admitted to probate. A testamentary trust itself does not go through probate.
It designates a person to serve as trustee, names the beneficiaries of the trust, and includes directions on how trust assets are to be administered.
federal estate tax form_________ Must be filed for all decedents, who are citizens or residents with a total ____________ plus ______________ Equaling or exceeding the amount of the exemption for the year of death.
706
Gross estate plus adjustable taxable gifts
Key elements of form 706:
GROSS ESTATE
- Funeral expenses, admin expenses, debts, taxes and casualty losses.
= ADJUSTABLE GROSS ESTATE
- Marital and Charitable deductions
= TAXABLE ESTATE
+ Adjusted taxable gifts (amounts exceeding annual gift tax exclusion)
= TAX BASE
- Estate tax deduction
x Remainder at 40% tax
= TENTATIVE TAX
- Gift taxes paid
= NET ESTATE TAX
At what step in form 706 do assets go into a bypass trust?
At the Tax Base, before the estate tax deduction.
Inclusion in the gross estate: joint tenancy property with a spouse versus with a non-spouse
Joint tenancy property with a spouse would be one half includable.
Joint tenancy property with a non-spouse would be subject to the contribution/consideration test.
Is GSTT paid within three years of death includable in the decedents gross estate?
No, but gift tax paid out of pocket on gifts within three years is includable.
An annuitys full value is included in the gross estate if a survivor has the right to take __________
A lump sum.
If a survivor is to receive periodic payments, the present value of the future payments is included in the gross state.
Exclusions from the gross estate
Life insurance owned by others, even when the decedent is the insured.
Completed gifts.
Life estate for the decedents own life only. A life estate gives the owner the absolute right to possess, enjoy, or derive income from the property for life, after which the interest terminates.
Why should wealthy individuals make taxable gifts?
To get the appreciation out of their Estates.
T or F: If the insured possesses any incident of ownership on a life insurance policy, covering his/her own life, the full proceeds of the life insurance will be included in the gross estate.
T
Powers of appointment:
- What is it?
- What types of powers can someone hold?
- What are the differences?
- Power of appointment is an interest held by a person providing the holder with the ability to determine who shall enjoy, use, and possess the property subject to the power.
- General (outright ownership), Special (Limited).
- General power entitles the holder to transfer property to anyone, power to invade or consume corpus, and power to affect the beneficial enjoyment of a trust.
Special power allows the holder to have limited powers, such as transferring property only to specific individuals, or only under specific circumstances.
What is a five or five power?
A technique used by estate planners to provide flexibility and financial security for a beneficiary with minimal tax consequences.
Property subject to a general power will be included in a donee-decedents estate only to the extent that the property exceeds the greater of $5000 or 5% of the total value of the fund subject to the power as measured at the time of lapse.
What is in ascertainable standard?
HEMS = health, education, maintenance, and support.
It is not a general power or a limited power. It is its own category. An ascertainable standard is a power limited by some unit of measure relating to HEMS
What does a five or five power do for a general power holder?
If power is exercised, released, or lapsed, with a 5 or 5 power there are NO gift tax implications but for estate tax purposes, the greater of 5% or $5000 is taxed.
Again, a five or five power provides the holder with flexibility and financial security with minimal tax consequences.
In comparison, a general power that is exercised, released, or lapsed without a five or five power will have gift tax AND estate tax implications.
T or F: in order to have gift taxes paid added to the gross estate, the individual must have taxable gifts exceeding the exclusion.
T. If gifts don’t exceed the $12,920,000 gift tax exclusion, there is never any gift taxes paid.
T or F: to be valid under law a gift must have donative intent, but for gift tax purposes, donative intent is not required.
T.
To be subject to gift taxation, the gift must be a ___________
Completed gift.
A transfer to an irrevocable trust is a completed gift. A transfer to a revocable trust is not a completed gift.
Unusual forms of gift giving: read only
The forgiveness of debt, below market rate loans, the assignment of the benefits of a life insurance policy, or the transfer of property to a trust.
Strategies for closely held business owners: read only
Business owners may gift business interest to family members using FLP, LLCs, preferred stock recapitalization, or by gifting closely held stock. These transfers will reduce the value of the business interest in the donors estate.
Another strategy is to gift fully depreciated property to family members, then lease it back. Lease payments by the business to the family member are an income tax deduction.
What is the gift tax exclusion for 2023, and what is the difference between present and future interests?
The first $17,000 of the total annual value of gifts of present interest to EACH DONEE is excluded from the donors taxable gifts.
Gifts of present interest qualify for the annual gift exclusion, but gifts of future interest do not.
The following are exceptions to future interests, and still qualify for the annual gift exclusion. 4
Gifts in trust of future interests on behalf of minors, 2503C trusts, crummey trust, 529 plans.
Gifts to noncitizen spouses
There is a super annual gift tax exclusion from a US citizen spouse to a non-citizen spouse of $175,000
