Estate Planning Flashcards
Types of property
real property (land, anything attached to land), tangible personal property, intangible personal property (stocks, bonds, patents, copyrights)
Probate
legal process of changing title to the decedent’s assets from the decedent to the heirs or legatees
Probate Estate
property that transfers via probate process
excludes: state contract law, state titling law, state trust law
Gross Estate
tax-related term that describes all property that may be subject to federal estate tax law upon death
Types of Property Interests
sole ownership, joint tenancy with right of survivorship, tenancy in common, community property, tenancy by the entirety
sole ownership
complete ownership of property by one individual
Owners: 1
Right to Transfer: Freely
Automatic Survivorship Feature: No, transfers at death via will or intestacy laws
Included in Gross Estate: Yes 100%
Included in Probate: Yes 100%
fee simple
the owner has the right to use, sell, gift, alienate, convey or bequeath the property
Tenancy in Common (TC)
an interest in property held by two or more related or unrelated persons
Each owner is referred to as a tenant in common
Owners: 2 or more
Right to Transfer: freely without consent of co-owners
Automatic Survivorship Feature: No, transfers at death via will or intestacy laws
Included in Gross Estate: Usually the fair market value (FMV) of ownership percentage
Included in Probate: Yes, FMV of interest
Partitionable: Yes, without consent of joint owner
Joint Tenancy (JT)
interest in a property held by two or more related or unrelated persons called joint tenants. Each person holds an undivided, equal interest in the whole property
Right of Survivorship (ROS)
When a tenant dies, the other tenants will inherit the decedent’s interest outside of the probate process
Joint Tenancy With Right of Survivorship (JTWROS)
Owners: 2+
Right to Transfer: Freely without consent
Automatic Survivorship Feature: Yes, transfers at death to the other owners
Included in the Gross Estate: Yes, FMV times the % contributed
Included in Probate Estate: No
Partitionable: Yes, with or without consent of joint owner
Actual Contribution Rule
executor of will or estate administrator must provide proof of actual contribution percentage of joint tenant, otherwise the full value of the property is included in the estate taxes
Tenancy by the Entirety (TE)
essentially JTWROS that can only occur between married couples
Owners: 2 - spouses only
Right to Transfer: Need consent of other spouse
Automatic Survivorship Feature: Yes, transfers at death to spouse
Included in Gross Estate: Yes, 50% of FMV
Included in Probate: No
Partitionable: Not without consent of spouse
Community Property
all property accumulated is equally owned and shared via marriage
Owners: 2 - spouses only
Right to Transfer: Need consent of other spouse
Automatic Survivorship Feature: No, transfers via will or intestacy law
Included in Gross Estate: Always 50% + 100% of separate property
Included in Probate: Always 50% + 100% of separate property
Partitionable: not without consent of spouse
Life Estate
ownership for a lifetime before passing on to another specified owner
Situs
“site” of property
Real estate will be taxed and probated in the state in which it is located - according to its situs
Tangible personal property is also taxed and probated by its situs
Residence
real property in which someone is currently living
Domicile
is the place of a person’s permanent residence
Intangible property, however, will be taxed and probated according to the decedent’s domicile
Term Interest
Certain # of years
Property acquired prior to marriage
retains the same status after marriage
Property acquired prior to moving into a community property state
If a couple moves into a community property state from a non-community property state, then any property acquired prior to the move will retain its prior status
Gifts and inheritances to one spouse during marriage
If the gift or inheritance is specifically to one spouse and not the other, then the property retains its status as gifted or inherited
Compensation for personal injuries during marriage
Such compensation is generally treated as separate property
Property purchased during marriage with separate property
will itself be separate property
In some states, income generated by separate property
California is an example of a state where this is the case
transmutation
to change separate property to community property or vice versa
What happens with community property when one spouse dies?
Community property is subject to probate,
Half of the community property is included in the estate of the first to die,
All debts incurred during marriage regarding community property are community property debts
The step-up in basis on community property is more favorable than joint tenancy
divorce (community property)
divided equally
Estate Planning
broadly defined as the process of accumulation, management, conservation and transfer of wealth considering legal, tax and personal objective.
“planning in anticipation of a person’s inevitable death”
effective transfer
when a person’s assets are transferred to the person or institution intended by the transferor
efficient transfer
when transfer costs are minimized consistent with the greatest assurance of effectiveness
Goals of Estate Planning
Plan for healthcare decisions
Minimize Taxes (income, estate, gift)
Minimize Transaction Costs (lawyers, documents, probate process)
Provide sufficient liquidity (funeral, final medical costs, taxes)
Members of Estate Planning Team
attorney, CPA, financial planner, trust officer, life insurance consultant
Psychological Barriers to Estate Planning
anxiety, indecisiveness, hoarding, fairness, decision fatigue
Largest risks of avoiding estate planning
liquidity problems, lack of awareness of the client’s wishes, probate may take a lot longer (years), lack of preparation for a period of diminished capacity
Basic Documents of Estate Planning
Wills
Do Not Resuscitate
Living Wills or Advance Medical Directives
Powers of Attorney for Property
durable powers of attorney for healthcare
side letters of instruction
testate
“with a valid will”
intestate
“without a valid will”
Types of wills
Statutory Will - official, witnessed, signed and compliant with the domiciliary state
Holographic will - hand-written, dated & signed, no witnesses required
Nuncupative will - oral, dying declarations made before a sufficient number of witnesses
Heir vs. Legatee vs. Devisee
Heir - related to the decedent
Legatee - named beneficiary, sometimes an heir, sometimes not
Devisee - person who inherits real property
Systems of Representation
Per Stirpes - “by the roots” - if heir is deceased, children split their share
Per Capita - “by the head” each heir gets the same split
Per Capita at Each Generation - each heir of the same generation gets the same split
How to Change a Will
Revocation - “cancel” it
Codicil - “amend or supplement” it
dower
a wife’s interest in her husband’s estate
curtesy
a husband’s interest in his wife’s estate
irrevocable
unchangeable
Advantages of Probate
- protects the objectives of the testator
- protects the legatees and heirs (clean title)
- protects the creditors and pays up debts
- provides an orderly administration of assets
Disadvantages of Probate
- time
- money
- lack of privacy
Property that passes through Probate
- sole ownership property
- tenancy in common (whatever their share) property
- the decedent’s share of community property
Property that passes outside of the Probate Process
- State contract law (naming beneficiaries- if unnamed, goes through probate)
- State titling law (TE, JTWROS)
- State trust law
BASIC STRUCTURE OF A WILL
Section 1: Declaration of will
Section 2: Direction to pay all final expenses and taxes
Section 3: Bequests/Devises (Specific, General, Residuary)
Section 4: Creation of Trusts (Optional)
Section 5: Executor’s Powers
Section 6: Appointment of the Executor(s)
Order of items to be paid by estate
- Secured creditors who are entitled to be paid when the decedent dies
- Funeral expenses
- Taxes
- Debts to the United States or to a state
- Judgments with a lien against the estate
- Wages due employees
- Medical expenses
Other debts and claims
Power of Attorney (POA)
a legal document that authorizes a trusted person to act on another’s behalf (important financial or health care decisions)
Power of Attorney (POA)
a legal document that authorizes a trusted person to act on another’s behalf (important financial or health care decisions)
Parties of Power of Attorney
Principal: the person granting the powers (must be age of majority, competent)
attorney-in-fact: granted the powers; cease at death of principal
Power of Attorney can be revoked at any time by the principal
Power of Appointment
Power sometimes included in Power of Attorney, can appoint or transfer assets of one person to another
*can be revoked in life or death via will
Limited Power of Attorney
grants very narrow or broad powers, such as signing documents, paying bills or completing a business transaction (cannot assign assets)
“Durable” Power of Attorney
does not expire upon the incapacitation/disability of principal, only at death
“Springing” Power
triggered by a specific event (i.e. disability or incapacitation of principal) and lapses when they recover
Living Will
“advance medical directive” is not a will, but rather a legal document expressing an individual’s last wishes regarding sustainment of life under certain circumstances.
“die with dignity”
DNR
“Do Not Resuscitate”
trust
a legal document specifying how to handle assets held by the trust
assets include: investment accounts, banking accounts, real estate, businesses, insurance policies
benefits of a trust
-privacy
-avoid probate
-provide funds for family (in a way that benefits the assets)
-provide funds for charity
general process of a trust
Grantor of trust transfers property to the trust
Property is retitled to the trust or trustee
*Grantor may also be referred to as the Trustor, Creator, Settlor
Trustee makes annual payments to the income beneficiaries for life or a term of years (could be charity or family member)
Remainder of trust assets are distributed to the remainder beneficiary at the end of the trust term
trust beneficiaries
income beneficiary - person or entity that has the right to current income or distributions from the trust
remainder beneficiary - individual or entity who is entitled to receive the assets that remain in the trust on the date of its termination
spendthrift clause
promises to be paid by a beneficiary from trust fund income cannot be held up against the trust fund (some states allow child or spousal support to be used though)
revocable living trust
useful for avoiding probate, but will not avoid estate taxes (full FMV)
Revocable Trust “Living”
can be revoked at any time prior to the grantor’s incapacity or death; commonly used to avoid probate
All revocable trusts are grantor trusts
*become irrevocable on death of grantor
Irrevocable Trust
property cannot be taken back once transferred to the trust
Irrevocable trusts in which the grantor has retained certain powers over trust assets are grantor trusts
Inter Vivos
“created during the lifetime”
Testamentary
“created after death”
Standby
created as a underfunded or unfunded trust during lifetime, waits for a triggering event to fund
Pourover
trust that receives assets from another source, generally the grantor’s estate at the grantor’s death. “assets pour in”
Grantor Trust
grantor is responsible for paying income tax attributable to the trust’s income
All revocable trusts are grantor trusts
Irrevocable trusts in which the grantor has retained certain powers over trust assets are grantor trusts
simple trust
no charitable organization, all income is distributed annually
complex trust
charitable organization may or may not be included, makes distribution of principal and income
complex trust
charitable organization may or may not be included, makes distribution of principal and income
Inter Vivos Revocable Trust
perhaps the most common type of trust created
-avoids probate
-privacy
-gift tax may not be an issue yet
-grantor trust, so grantor pays federal income tax on trust income
-entire trust is included in grantor’s estate for taxes
Inter Vivos Irrevocable Trust
to achieve estate and gift tax benefits, an inter vivos trust must be irrevocable
-gift tax may be due
Crummey Power
allows beneficiaries of the trust to withdraw any contribution made to the trust within a certain period of time (typically 30 days)
the transfer qualifies as a present interest gift (annual exclusion applies)
Rule Against Perpetuity
Some states allow trusts to exist forever
Some don’t:
-21 Year States - irrevocable trusts have 21 years lifespan from the moment they are irrevocable
-90 Year States (The trust must terminate no longer than 90 years from the date it was created. At the end of this time, the trust must terminate and the assets must be distributed to the remaining beneficiaries.)
types of trust beneficiaries
Current interest vs. future interest
vested vs. contingent
Both current and future beneficiaries can be either vested or contingent
POWERS OF GRANTORS
As much power as desired
POWERS OF TRUSTEES
Statutory powers; whatever powers the document includes
POWERS OF BENEFICIARIES
Legally enforceable rights
May have powers of appointment:
-Limited, 5x5, general power
Reasons Why People Set Up Revocable Trusts
-escape probate
-maintain privacy
-provide management of assets in the event of incapacity
Reasons Why People Set Up Irrevocable Trusts
-remove assets from taxable estate
-remove assets from probate
-to make gifts
-protection from creditors
Discretionary Trust vs. Non-Discretionary Trust
“may” vs. “shall” - language of directive
Gift Taxation Four Questions
- Is the transfer a taxable gift?
- Do any exceptions, exclusions, or exemptions apply to avoid tax liability?
- What is the tax due, and how is it reported?
- Is the gift appropriate in the light of the goals and objectives of the donor and donee?
Definition of a Gift
a voluntary transfer, for less than full consideration, of property from one person (donor) to another person or entity (donee)
Elements of a Gift
- Donor must have intent
- Donor must be competent
- Donor must actually part with control over gifted property
- Donee must be capable of receiving the gift
- Donee must take delivery
Types of Gifts
Direct, Indirect, Completed, Incomplete, Reversionary interests, Net Gifts
Direct Gifts
- Person A gives Person B $10,000
Indirect Gifts
- Gift Loans - “give a better rate” (imputed interest)
- Pay a bill or note (mortgage/car) for someone else
- Buy something and title it “JT”
History of Modern Gift and Estate Tax
Estate Tax came first (1917), Gift Tax came second (1924), Unified Gift and Estate (1976) and Generation Skipping Transfer Tax (GST Tax) came in 1976 also
WHO IS SUBJECT TO THE GIFT AND ESTATE TAX?
U.S. citizens, resident aliens, and nonresident aliens (with assets in the U.S.) are all subject to the federal gift and estate tax when making lifetime or at-death transfers of assets.
WHAT ASSETS ARE CONSIDERED?
U.S. Citizens and Resident Aliens (Non-Citizen Residents) are subject to the federal gift and estate tax on their entire estates wherever situated in the world.
Nonresident Aliens are subject to the gift and estate tax only on their U.S. “situs” assets
applicable credit amount (unified)
4,769,800 on the first 12,060,000
formula for deriving unified tax base
(taxable estate + gifts made after 1976) - unified credit
GIFT AND ESTATE TAX DEDUCTIONS: CHARITABLE AND UNLIMITED MARITAL
Unlimited Charitable Deductions – Transfers to qualified charities during one’s lifetime or at death receive an offsetting deduction, which removes them from computation of the transfer tax.
The Unlimited Marital Deduction – Transfers of assets to U.S. citizen spouses are non-taxable events regarding gift and estate taxes due to a “marital deduction” that is provided on the gift or estate tax form. This marital deduction is unlimited, so any amount can be transferred to U.S. citizen spouses during life or at death without triggering a gift or estate tax.
UNLIMITED MARITAL DEDUCTION caveats
Must be married - separated is fine
Spouse must be US Citizen
One spouse must survive the other
taxable vs. gross estate
gross estate - deductions = taxable estate
Taxable Gift
Any gift in excess of the annual exclusion, unlimited marital deduction and charitable deduction
annual gift (16,000 for 2022)
annual non-citizen spousal super gift (164,000)
gift-splitting
spouses each have an annual exclusion, and this can be applied per donee. A father/mother can gift their kids $32,000 if they choose for the entire split gift exclusion.
Spouses can also decide to split a gift (ie. 50k) to a child - and split to 25k each to use their 16k exclusion and have a 9k taxable gift each (instead of one person having a 34k taxable gift)
Form 709 is required - this is for non-community property states
present vs. future interest
present: immediate use, possession or enjoyment (cash, cars, vacation homes)
future: generally, gifts in trusts are considered to be future interests.
ONLY present interest gifts can utilize the annual exclusion
The Five-and-Five Lapse Rule
turns present interest into future interest to remainder beneficiaries in the trust (lapse of Crummey powers is typically 30 days)
greater of 5,000 and 5% of trust assets
on a 32,000 lapse, 27,000 is split between the remaindermen
transfers resulting in no gift tax
-transfers to political organizations
- qualified transfers (educational institutions, qualifying medical expenses for another, tuition)
-Payments for support (children/dependents)
-Payments between divorcing spouses
-Transfers within a business setting
- Gifts to spouses (unlimited marital deduction) - remember the non-citizen annual amount is not unlimited, but 164k
-charitable gifts
front-loading 529
A single taxpayer can front-load a 529 with up to 5 times the annual exclusion. However, it will eat up some or all of the annual exclusion for the next 5 years
Gift Tax Return (Form 709)
Any donor who makes a gift during a calendar year must file a gift tax return by April 15 unless:
-all gifts are less than or equal to the annual exclusion
-not subject to gift tax (spousal, qualified, charitable)
Additional situations that required form 709:
-Any gifts that were split
- future interest gifts
-taxable gifts
Gift Tax Liability Calculattion
Step One: Calculate total lifetime taxable gifts
Step Two: Calculate the tax on the current year’s taxable gifts
Step Three: Calculate the remaining applicable credit (how much is left?)
Step Four: Calculate the gift tax due in current year
Gross Estate
all substantially valuable property owned by the person at death, including real estate, cash, stocks, life insurance, jewelry, furniture, and owed debts.
Determining the Taxable Estate
Gross Estate minus funeral expenses, administrative costs, medical expenses, decedent debts, losses (fire, shipwreck). Then deduct state estate tax, unlimited charitable and marital deductions
= Taxable Estate
Determining the Tentative Tax
Taxable Estate + Taxable Gifts
Reduced via credits: Previous gift tax paid or payable, estate tax credit, credit for tax paid on prior transfers, foreign death tax credit
= Federal Estate Tax Liability
deceased spousal unused exclusion amount (DSUEA)
“exemption portability” - lesser of:
- the basic exclusion amount
- the amount of the exemption previously used by spouse
portability is NOT AVAILABLE for the GST tax exemption
Prior Transfers Credit
If property is quickly inherited again (within 5 years of death) there is a table of a percentage tax credit
Form 706 Deadline
The return must be filed no later than 9 months from the date of death, unless an extension is granted by the IRS
Typically, an extension for filing is an extra 6 months
EXTENSIONS ASSOCIATED WITH A CLOSELY HELD BUSINESS
IRC Section 6166 allows an extension for tax payments involving a closely held business or farm when it constitutes more than 35% of the adjusted gross estate
The extension allows for interest-only payments for the first five years. At the end of the five years, the tax can be paid in 10 annual installments (including interest), with the first installment due on the same day as the fifth interest payment. This essentially stretches the deferral to 14 years and 9 months after date of death
Failure to File & Failure to Pay
Failure to File is 5% per month up to 5 months (25%)
Failure to Pay is 0.5% per month up to 25%
If they are concurrent expenses, the failure to file reduces to 4.5% per month
Determining what is included in gross estate
Who owns it? Who purchased it?
portability opportunities
If a spouse uses the DSUE to make taxable gifts before or right after remarriage, they can take advantages of the leftover exclusion in that manner.
The spouse can then port over the 2nd spouses DSUE or their own.
Special Use Valuation
For example, a farm might be located in an area that is rapidly undergoing residential development, with significantly higher property value. The farm may be worth much less as a farm than it would be if put on the market for residential development. For estate tax purposes, the value of the land might be adjusted downward from its market value due to its special use
10 year recapture
Example of “Stepped-Up” Basis
An individual purchased a security for $50,000. Years later, when the individual dies, the fair market value of the security is $100,000. If the asset is liquidated by the executor or distributed to an heir, the basis used for calculating capital gains will be $100,000, not $50,000
This has been an important feature of estate planning because it is often possible to avoid paying capital gains taxes simply by holding the asset until death, when the step-up takes place
Generation Skipping Transfer Tax (GSTT)
- flat tax 40%
- annual exclusion and exemption amounts
- two or more generations (lineal or over 37.5 years younger) “skip persons”
-transferor -> transferee
the GST tax is in addition to any gift or estate tax that may be due
Generation
25 years, but the GSTT is > 37.5 year difference
There are three events that can trigger the GST tax
- Direct Skip (trust counts) The tax for a direct skip is imposed upon the transferor
-Taxable Termination
*A taxable termination occurs when a non-skip person’s interest in the trust terminates and the current interest in the trust is transferred to a skip person(s)
*With taxable terminations, the tax is imposed upon the trust
-Taxable Distribution
*When a distribution is made out of a trust to a skip person, this is considered a taxable distribution for GST purposes
*With taxable distributions, the tax is imposed upon the transferee
Predeceased parent
if parent has died before transaction, the grandchildren move up a generation
USING THE GSTT EXEMPTION IN GST TRUSTS
Distributions from a GST trust to beneficiaries (skip persons) are GST tax-free IF the grantor’s contributions to the trust were sheltered by the GSTT Exemption Amount.
Grandmother contributed $10,000,000 ($10MM) to a GST irrevocable trust established solely for the benefit of her grandchildren (skip persons) in the current year.
Grandmother made no prior year GST taxable transfers; her GSTT Exemption amount was automatically allocated to the contribution.
The value of the trust grew to $40MM during the next 24 years.
The entire $40MM was distributed to the trust beneficiaries (skip persons) at the end of the twenty-fourth year.
GENERAL VALUATION RULE (Estate)
fair market value on date of death OR alternate valuation date (6 mo. after, decided by executor on wealthier estates)
stock valuation (estate)
average stock price on date of death (if traded)
if not traded on the day, the average valuation on the trading day averages before and after date of death (you will average twice)
VALUATION OF LIFE INSURANCE (estate)
The death benefit is included in the decedent’s estate when the deceased owned or controlled a life insurance policy on his or her own life within the three years prior to death.
*Term: The value is the unused (unearned) premium.
*Paid-Up/Single Premium: The value is its replacement cost
*Premium-Paying Whole Life in First Year: value is the gross premium paid
*Premium-Paying Whole life After the First Year: The value is its interpolated terminal reserve (approximately equal to its cash value) plus any unearned premiums (the proportional part of the last premium paid that is attributable to the remainder period for which the premium was paid)
VALUING REAL ESTATE (estate)
- unique & difficult to value
- if not marketable, the ‘highest and best’ price is used
- sometimes ‘current use’ is better - like farm land that will not be developed (if used, the use needs to be kept or the IRS will recapture the avoided tax)
- if still not marketable, salvage value is used
VALUING A CLOSELY-HELD BUSINESS (estate)
Three methods have emerged as the primary means of business valuation:
Adjusted book value
Capitalization of earnings
The excess earnings method (ARM 34)
Adjusted book value
is the book value on a company’s balance sheet after assets and liabilities are adjusted to market value
Adjustments are necessary to reflect the difference between true market value and book figures when:
-Assets are valued at cost.
-Assets have been depreciated at a rate in excess of their true decline in value.
-Assets have been completely written off even though they possess substantial value, resulting in a significantly reduced book value.
-Assets such as goodwill are shown on accounting statements at nominal cost or not shown at all.
-There are difficulties in collecting accounts receivable.
CAPITALIZATION OF EARNINGS
determine the value of the earnings by applying a rate of return or capitalization factor to the projected earnings of the business
The analyst would then apply the expected rate of return (the capitalization rate) to establish the value. If we assume a 15% rate and the earnings of the company have been determined to be $250,000 per year, the $250,000 would be divided by .15, which equals $1,666,667
cap rate = 15/100 = 6.67 (6.67 x $250,000 = $1,666,667)
APPEALS AND REVIEW MEMORANDUM (ARM) 34
also referred to as the Excess Earnings Method
Liquidity Issue in Closely-Held Business
- may not have enough cash to cover final expenses
- may require a buy-sell agreement
INCOME TAXATION OF NON-GRANTOR irrevocable TRUSTS
Income taxation in a non-grantor irrevocable trust depends upon whether the trust is a simple or complex trust
-showing the accounting income “passing through” the trust and being taxed to the beneficiaries who receive it
Remember the 3.8% Net Investment Income Tax (NIIT)
Complex trust
- The trustee is given the discretion to accumulate or distribute trust income.
- There is a charitable beneficiary
- The trustee exercises discretion to distribute corpus (principal)
“sprinkle” clause
gives the trustee discretion in determining which beneficiary needs the income the most; the trustee can “sprinkle” the income according to need.
**Income disbursed to such beneficiaries may cause them to be subject to the “kiddie tax.”
INCOME TAX RATE SCHEDULE FOR ESTATES AND TRUSTS
37% at the marginal rate (over $13,650)
is greater than individual or married income tax rates
sometimes grantor retaining income tax liability is better
So why are trust capital gain rates to be avoided where possible?
A non-grantor irrevocable trust pays a 20% long-term capital gains rate after the trust’s taxable income exceeds $13,700 (2022).
An individual filing as a single taxpayer does not pay the 20% long-term capital gains rate until taxable income exceeds $459,750 (2022).
Revocable Trust Fundamentals
- Most common; grantor trust for income tax
- inter vivos = during life, becomes irrevocable at death
- will does not govern due to probate being avoided, assets must be retitled to trust
*privacy
*discourages contests (unlike the will)
*not a tool to reduce estate taxes
Which Trust?
- avoid probate, retain income tax via grantor trust = inter vivos revocable trust “incomplete gift)
- take advantage of gift and estate tax benefits, but trust income tax rates are higher = inter vivos irrevocable trust “completed gift” – also can have Crummey powers
Life Insurance Trust (ILIT)
Irrevocable Life Insurance Trust or Wealth Replacement Trust;
Replaces wealth lost through estate and inheritance taxation or charitable contribution
Purpose: when a person owns a life insurance policy on themselves, their estate includes the death benefit. This is avoided with ILIT
Bypass (Credit Shelter) Trust
“B Trust”
- either inter vivos (in life) or testamentary (at death)
Goal: Utilize BOTH Unlimited Marital Deduction & Exclusion Amount by creating TWO trusts (A & B)
A - Marital Trust to Spouse (unlimited marital deduction)
B - Bypass Trust - subject to estate taxes, but typically this only uses up to exclusion amount
This uses up all of the DSUE
Power of Appointment Trust
- inter vivos or testamentary; irrevocable
*can give limited or general power of appointment; however this is usually general power of appointment to spouse in order to gain the spousal deduction
Qualified Terminable Interest Property (QTIP) Trust
Testamentary trust that gives surviving spouse a lifetime right to the income of the trust while transferring the remainder interest to individuals of the grantor’s choosing
Grantor Retaining Income Trusts (GRIT)
- Grantor Retained Annuity Trusts (GRAT)
- Grantor Retained Unitrusts (GRUT)
- Qualified Personal Residence Trusts (QPRTs)
- Tangible Personal Property Trusts (TPPT)
Grantor Retained Annuity Trusts (GRATs)
- Grantor funds a trust and retains a right to receive a fixed percentage of initial contribution on an annual basis for a specified term of years. At termination, the assets remaining will pass to the remainder beneficiaries
Grantor Retained Unitrusts (GRUT)
- similar to GRAT, but the annual income appreciates with the value of the assets in the trust
Qualified Personal Residence Trusts (QPRTs)
- Special type of GRIT
-Contributes personal residence to trust, and retains the right to “use” the personal residence as the “retained income interest”
Tangible Personal Property Trusts (TPPT)
- Can transfer artwork, jewelry, other items of personal property that have potential to appreciate in value
ABLE Account
“529 for Special Needs Allowances”
Credit Shelter Trust
also known as: bypass trust, family trust, applicable exclusion trust
created at death of first spouse
function: transfer the applicable exclusion amount to benefit the family, transfer the remainder to the surviving spouse using the marital deduction
Types of Marital Trusts
Power of Appointment (POA) - assets over the exclusion amount are put into a trust that the surviving spouse has power over, but these assets are not in the estate of the surviving spouse - (Divorce is a PROBLEM here)
Qualified Terminable Interest Property (QTIP) - gives surviving spouse income for life; the surviving spouse has the power only to compel the trustee to generate as much income as possible via the corpus of the trust (It gives the first spouse to die the ability to name ultimate beneficiaries, while utilizing the marital deduction)
Qualified Domestic Trust (QDOT) - for non-citizen spouses (the annual amount that can be transferred to a non-citizen spouse without gift taxes is $164,000)
Common Strategies for Family Trust
- Escape estate taxes; create a credit shelter trust up to the exclusion amount to benefit spouse/children/anyone
- Marital deduction (POA or QTIP) - in the case of remarriage or divorce, QTIP is the best option to provide income
Special Needs Trust
created to ensure that beneficiaries who are developmentally disabled, handicapped, or mentally ill can enjoy the use of property in the intended manner it was set aside for them to use
*may result in the denial or suspension of certain government benefits such as Medicaid
303 Stock Redemption
a closely held business’s purchase of its own stock at a shareholder’s death
-capital gains treatment, not dividend treatment
-allows executor to pay final taxes
Common Estate Planning Mistakes
- Dying without a will
- Not providing for management of the estate (beneficiaries with no experience)
- Premature Distribution (they aren’t ready)
- Disinheriting children (not specifying wishes)
- Subjecting life insurance to estate taxes
- Lack of Liquidity
- Not planning for inflation
- Not planning for mental incapacity
- Not naming successors
- Not providing for simultaneous deaths (car accidents, etc)
three types of charitable trusts
Pooled Income Funds (PIF)
Charitable Remainder Annuity Trust (CRAT)
Charitable Remainder Unitrust (CRUT)
CRUT vs CRAT
CRUT - Inflation protection (goes up); CRAT - Certain & fixed income stream
CRUT - annually valued at FMV, can be contributed to further
CRAT - valued ONCE at FMV, cannot be further contributed to
NIMCRUT vs NICRUT
NIMCRUT can take from corpus of the trust
CHARITABLE LEAD TRUST (CLT)
Unlike a CRT, if a specific number of years are chosen for the life of the trust, there is no 20-year limit
An annual payout is required, but, unlike a CRT, the payout can be less than 5% or more than 50%
GRANT-MAKING TECHNIQUES
Private Foundation and the Donor Advised Fund
PRIVATE FOUNDATIONS
Anyone can contribute or donate
Assets needs to be invested and overseen
Charitable Distributions must generally be at least 5% of the foundation’s assets
DONOR-ADVISED FUNDS
Donor can recommend but not direct grants
7520 rate
120% Federal Midterm Rate
GRIT vs GRAT
Annuity vs Income; remainder beneficiaries are generally family for GRAT
