Estate Planning Flashcards
What is Terminable Interest Property (TIP)?
- receiving income from a trust for life
- receiving income from a trust for a term of years
- receiving a life estate in real property
ALL have an “expiration date”
Will stop at some point
Does TIP qualify for marital deduction?
NO
When does TIP qualify for a marital deduction?
- GPOA
OR
- Qualifying the Terminable Interest Property (QTIP election)
QTIP qualifies the property for what?
marital deduction
Bypass Trust is known as
credit shelter trust, family trust, B trust
What is a bypass trust set up to do?
Receive the exemption amount ($12.06M) and transfer property into the trust
Surviving spouse can pull income from the trust and ultimately transfer to the beneficiaries without triggering a taxable event
When can a bypass trust be set up?
During one’s life
OR
At death with a testamentary bypass trust
Who is bypass trust set up by?
1st to die spouse, decedent wants the trust set up on their terms
Ascertainable standard
maintaining a standard of life that allows a person to live well
HEMS: health, education, maintenance, and support costs
Whose estate is the bypass trust included in?
B for BELOW GROUND
Included in Decedent/1st to die Spouse because…
BYPASSES the surviving spouses estate
1st to die spouse called the shots, had control over appointing people to the trust, wore the crown, and was taxed
BUT they do not pay real tax dollars because they used their lifetime exemption
Does a bypass trust qualify for a marital deduction?
NO, because income is TIP (interest stops at a certain point, stops at the death of the surviving spouse)
A-trust is known as
Power of Appointment trusts
With an A-trust who wears the tax crown?
A for ABOVE GROUND
The surviving spouse pays the tax and it is included in their estate
Why is the A-trust included in the surviving spouse’s estate?
Because of the TIP exception of general power of appointment
Is the decedent able to use the marital deduction in an A-trust?
YES, because the surviving spouse has general powers of appointment
With an A-trust does the surviving spouse take income?
YES, the surviving spouse MUST take income
A for ALL income MUST be paid out at least ANNUALLY
No ACCUMULATION!
How to use the AB Trusts?
1st to die spouse fills up the B trust with their lifetime exemption amount and is included in their estate
The additional property in the estate is used to fund the A trust
The surviving spouse has power of the A trust and income from the A trust and is included in the surviving spouse’s estate
Form 706
6 ft under
IRS form used to calculate estate and GST tax liability
*it will be turned in 9 months after the date of decedent’s death
What is DSUE?
If you have a spouse, their unused exemption amount carries over to you!
You can stack the unused exemption amount on top of the surviving spouses unused exemption amount
When are QTIP trusts especially useful?
When the grantor of the trust is on their second or third marriage and has children from a previous marriage
the grantor wants to take care of the current spouse and also wants to take care of the kids from the prior marriage
What does the QTIP trust do?
Allows 1st to die spouse to have control/right to set up the trust, but restricts the surviving spouses powers (LIMITED)
*surviving spouse does not have general POA because there is no guarantee that children from the prior marriage are going to get their share
Does a QTIP qualify for marital deduction?
YES
Q in front of TIP qualifies it for marital deduction!
Is a QTIP included in the surviving spouse’s estate?
YES
To minimize their total estate tax liability for their combined estates
estate equalization
Surviving spouse to receive all income annually
A Trust & QTIP
Surviving spouse to receive income if needed
B trust & Estate trust
Decedent spouse to receive a marital deduction
A trust, QTIP, Estate trust, or an outright gift to the spouse
Surviving spouse to choose trust beneficiaries
A trust or Estate trust
Surviving spouse to determine what portion of the decedent’s estate to transfer into a trust to use the decedent’s unified credit
Disclaimer trust
Surviving spouse to access trust income for health, education, maintenance, and support (HEMS) without including the assets in their estate
Ascertainable standard
A trust summary
-YES: qualifies for marital deduction
-YES: surviving spouse has POA
-NO: included in decedent’s estate
-YES: included in surviving spouse’s estate
QTIP sumamry
-YES: qualifies for marital deduction
-NO: surviving spouse has POA
-NO: included in decedent’s estate
-YES: included in surviving spouse’s estate
B trust summary
-NO: qualifies for marital deduction
-NO: surviving spouse has POA
-YES: included in decedent’s estate
-NO: included in surviving spouse’s estate
Qualified Domestic Trust (QDOT) exclusion amount
$164,000
Purpose of QDOT
Set up a trust to qualify the property for the marital deduction when it’s not really available
Ensure that the assets from a US citizen spouse transferred to a non-citizen spouse at death will not leave the US without being taxed
What is the estate tax formula?
Gross Estate
Minus: Expenses, debts, taxes, & losses
Adjusted Gross Estate
Minus: Marital Deduction
Minus: Charitable Deduction
Taxable Estate
The marital deduction is…
unlimited
Note: the unlimited marital deduction is not available with TIP
When you are transferring property from one citizen spouse to a non-citizen spouse what is the annual exclusion amount?
$164,000
Grantor receives a charitable income tax deduction for the PV of the charity’s income interest
Charitable Lead Trusts
What is designed to provide annual payment of a fixed amount to a qualified charity with the remainder going to a non-charitable beneficiary?
Charitable Lead Annuity Trust
*CLAT is when payments are ANCHORED, remain the same
What provides payment of a periodic sum, usually a percentage of the trust assets (revalued annually) to a qualified charity, with the remainder going to a noncharitable beneficiary?
Charitable Lead Unitrust
*CLUT is when income payments go up and down, vary year to year
**Can add additional assets
***Is an inflation hedge
Your client is risk-averse, seeks a tax deduction on fixed payments to a charity, and desires a lump sum what type of trust should they use?
CLAT
Your client is a moderate to aggressive investor, seeks a tax deduction and income stream that keeps pace with inflation, and desires a lump sum what type of trust should they use?
CLUT
What trust provides a payment of a fixed amount annually to a noncharitable beneficiary with the remainder going to charity?
Charitable Remainder Annuity Trust
CRAT
Income payments are ANCHORED, remain the same
What trust provides payment of a periodic sum, usually a percentage of the trust assets (revalued annually) to a noncharitable beneficiary, with the remainder going to charity?
Charitable Remainder Unitrust
CRUT income payments go up and down, vary year to year
*Can add additional assets
**Is an inflation hedge
The grantor receives a charitable income tax deduction for the PV of the charity’s remainder interest
Charitable Remainder Trusts
Your client is risk averse, desires a tax deduction, and predictable, fixed payments what type of trust should they use?
CRAT
Donor transfers cash or property to a charity & the charity pays the donor or other donees an annuity payment each year for life
Charitable Gift Annuities
Gift tax charitable deduction is the PV of the charity’s remainder interest
gift annuity payments to a spouse: a marital deduction is available if the spouse receives all annuity payments and has GPOA over payments after donor’s death
Gift annuity payments to others: gift tax is the PV of the annuity payments
A donor gifts property to a charity and receives an annual pro-rata share of income from the charity’s commingled funds for life
Pooled Income Funds
Additional gifts can be made to the fund to increase the donor’s income stream
The charity manages the fund which cannot invest in tax-exempt securities and receives the remainder when the donor’s income interest ends
Donor takes an income tax deduction for the PV of the charity’s remainder interest
The donor pays income taxes on the income received from the fund
A separate legal entity either a not for profit corporation or a tax-exempt trust
Private Foundation
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
The foundation MUST distribute a minimum of 5% of the assets to public charities every year
Maintained by charities, community foundations, or mutual fund companies
Donor Advised Funds
Sole Ownership Summary
of owners: 1 owner
Transferable: Yes, owner fully controls
Automatic Survivorship: No, transfers by will or laws of intestacy
Probate estate inclusion: Yes, 100% included in probate estate
Gross estate inclusion: Yes, 100% included in gross estate
JTWROS Summary
of owners: 2 or more
Transferable: Yes, without approval of JT
Automatic Survivorship: Yes, at death of JT
Probate estate inclusion: No
Gross estate inclusion: 50% for spouses & FMV x % of contribution for non-spouses
Tenancy by Entirety Summary
of owners: 2 (spouses)
Transferable: Yes, approval of JT required
Automatic Survivorship: Yes, at death of spouse
Probate estate inclusion: No
Gross estate inclusion: 50% of FMV
Tenancy in Common Summary
of owners: Several
Transferable: Yes, each owner, separately based on individual interest
Automatic Survivorship: No, transfers by will of laws of intestacy
Probate estate inclusion: Yes, FMV of interest
Gross estate inclusion: FMV of ownership %
Community Property Summary
of owners: 2 (spouses)
Transferable: with both spouse’s approval
Automatic Survivorship: Yes, if property is titled S1 & S2, community property WROS or is titled in a JT trust…otherwise NO
Probate estate inclusion: Only assets that do NOT transfer to someone else
Gross estate inclusion: 50% of the value of the decedent’s interest is includible
Tenancy by entirety and community property must…
be spouses to utilize this type of property titling
If you are passing items through a will…
it has to go through probate!
A will made in agreement with another person to dispose of certain property interests
mutual will
Each person’s will designates that all property be distributed to the other person
reciprocal will (looking glass will)
A handwritten will
holographic will
An oral will
nuncupative will
State law determines the beneficiaries for property in the absence of a will or will substitutes
intestacy
What type of clause states that named beneficiaries in the will cannot inherit unless they live for a specific amount of time after the will maker dies
Survivorship clause
*survivorship period ranges from 5-60 days
If you have a situation dealing with minors you want to ensure there is…
Guardianship
Process of proving a will in court
probate
What are the pros of probate?
-court supervised distribution of property
-protects creditors by ensuring that estate debts are paid
-bars future creditor claims against the estate
-documents the title and the transfer of property to others
What are the cons of probate?
-it takes a long time
-high costs (attorney, court fees, and the executor fee)
-probate is a PUBLIC proceeding
Are things that transfer via will included in probate estate?
Yes, they are included in the probate estate
What type of property is transferred via a will?
-solely owned property
-tenancy in common
-community property
-property passing from the will into a testamentary trust
-property transferred by a pour over will into a trust
-life insurance policy owned by the decedent who was NOT the insured
What is property NOT transferred via a will that goes through probate?
-intestate property (anything that does not have a will)
-life insurance policy proceeds or annuities payable to the decedent’s estate
How to avoid probate?
you need a little TLC…
Trusts: funded revocable trusts, irrevocable trusts, property in a trust
Law: operation of law (ie: JTWROS, tenancy by entirety, JT bank accounts, POD/TOD accounts, life estate)
Contract: named beneficiaries on life insurance, pension plans, IRAs, and annuities
What day can an executor elect to value an estate?
- Date of death
OR
- 6 months after date of death
Can you change the alternate valuation date (AVD)?
No, it is IRREVOCABLE & ALL assets have to be valued on that AVD
The AVD election is made on what form?
Form 706, which needs to be filed 9 months after date of death!
What are the exceptions for the AVD?
Depreciating assets whose value decline over time do NOT qualify for AVD
ie: cars, patents, life estates, remainder interests
Why would you make the AVD?
You would make the AVD election if it reduces the gross estate value OR reduces GST & estate tax
When something in the estate is sold between date of death and the AVD, when is it going to be valued?
on the date it was sold or the date of the transfer!
If something is sold after the AVD, what day is it valued at…
AVD
Grantor retained trusts are taxable to…
the grantor using their tax rates, NOT the trust tax rates!
What is the annual exclusion amount for 2022?
$16,000
tax free for the donor and tax free to the donee only if the gift is of PRESENT INTEREST!
What is gift splitting?
Gift splitting is the doubling up the maximum amount that can be transferred ($32,000)
*Only available to spouses
*if you elect this treatment to all the gifts in the calendar year, no exceptions
What form is gift splitting documented on?
Form 709
Tracks lifetime gifting
What are the qualified disclaimer requirements?
- refusal or rejection in WRITING
- The writing must be received no later than 9 months after the date on which the transfer creating interest is made
OR
the date the person disclaiming reaches age 21
- person disclaiming must NOT have accepted the property interest or any benefits of the property
- Someone other than the disclaimant receives the disclaimed property
*person making the disclaimer cannot in any way influence the potential recipient of the property
Written agreement that allows one individual (agent) to act on behalf of another (principal)
Power of attorney (POA)
All POAs end at…
Death
Non-durable POAs remain active until…
incapacitation
Springing POAs does not become active until…
the principal is legally incapacitated but the Dr. must confirm the incapacity!
Agent can act immediately on behalf of the principal. The agent’s POA does not lapse even if the principal become incapacitated or disabled
Durable POA
What happens if you gift loss property and the final sale price is above the adjusted basis of the donor?
*draw your floor and ceiling!
the donee (gift recipient) will use the donor’s original basis to calculate gains and inherits the donor’s holding period
*note this original basis is the ceiling and there is capital gain for the amount above the ceiling
What happens if you gift loss property and the final sale price is below the FMV on the date of the gift?
*draw your floor and ceiling!
The donee will use the FMV on the date of the gift as the basis AND THE HOLDING PERIOD WILL BEGIN ON DATE OF GIFT
*note this basis is the floor and there is a capital loss for the amount below the floor
What happens if you gift loss property and the final sale is in between the donor’s adjusted basis and the FMV on the date of the gift?
*draw your floor and ceiling
There will be no loss or gain! Holding period is a non-factor
*note this falls in between the floor and ceiling
Regardless of whether property is jointly owned between spouses and non-spouses, only the value of the asset included in the decedent’s estate receives…
A step up in basis!
What is the basis calculation for spousal JTWROS property?
50/50 regardless of what each spouse contributed towards the property
What is the basis calculation for non-spousal JTWROS property?
Use each party’s original basis (whatever %s they originally contributed)
Childhood friends, Chelsea & Chase, bought a plot of land for $80,000 and titled the property JTWROS. Chelsea paid 75% and Chase paid 25%. Chelsea dies when the lot was valued at $200,000. Chase received Chelsea’s share or the property. What is Chase’s current basis?
Chelsea contributed $60,000 and Chase contributed $20,000
When Chelsea dies her portion is evaluated at $150,000 and it is added to Chase’s original basis of $20,000
Chase’s current basis is $170,000 (150,000+20,000)
What is the step up in basis for community property?
A full step up in basis (100%) to the FMV for the surviving spouse. The property could be transferred on date of death and sold by surviving spouse without incurring any gains!
Who is a skip person for GST?
If the non-related person is 37.5 years younger, then they are classified as a skip person
If the related person is grand or great grand, then they are classified as a skip person
What if grandparents put money in a trust for their grandchildren can they avoid GST tax?
No, the grandparents are still going to have to pay GST
Which trust for minors must distribute all income to a beneficiary on at least an annual basis?
2503b trust
b for bring benes bucks!
can provide a beneficiary with a stream of income during which the bene is a minor
the trust must distribute income to the minor at least on an annual basis
Which trust for minors has no requirements for current income distributions but has to be distributed no later than the beneficiary attaining age 21?
2503c trust
c for accumulate and can cease current cash
income and principal must be available for distribution to or on behalf of the bene at any time, but the trust is fully distributable at age 21
trust is taxed not the beneficiary
What is distributable net income?
Maximum that can be taxed to the beneficiaries
*beneficiary will be responsible for taxes on the lesser of DNI
OR
the amount required to be distributed
What are the characteristics of a complex trust?
-may have a charitable beneficiary
-may distribute principal during the tax year
-have a personal exemption of $100
*they are NOT required to make distributions, they can accumulate income
What is a standby trust used for?
To manage a person’s assets if they become incapacitated
In a standby trust the grantor is the beneficiary and the trustee
The Crummey powers withdrawal amount is limited to…
the LESSER of:
- annual exclusion
- annual contribution made to the trust
- the greater of $5,000 or 5% of the amount transferred into the trust
What does an unfunded ILIT hold?
It holds the grantor’s life insurance policy
What does a funded ILIT hold?
It hold’s the grantor’s life insurance policy & income producing property
The principal interest in a 2503b trust may be withheld from the beneficiary…
until his or her death
Do non-citizen, US resident surviving spouses qualify for the lifetime and estate tax exemption?
Yes, they can receive assets from a deceased US citizen spouse up to the $12.06M lifetime and estate tax exemption amount (without paying taxes)
If the grantor does NOT survive the trust term on a QPRT, what amount is included in the grantor’s gross estate?
If a grantor does not survive past the trust term of a QPRT, then the FMV of the property on date of death is what is included in the gross estate!
Charitable remainder trusts terms cannot exceed…
20 years or life!
What are considered future interest gifts?
- Remainder interest in property
- Trust that accumulates income (exception is 2503c)
- Non-income producing property in trusts, unless the trustee can sell the property and buy income producing property
- Trust that has a sprinkle or spray provision
How is QDOT set up?
QDOT is set up as a QTIP trust or an estate trust
What form do you file when a taxable domestic trust has any taxable income for the year, gross income of $600 or more, or a beneficiary who is a non-resident alien?
Form 1041
What are the features of an installment note?
Duration: Fixed term
Secured: YES
Impact on gross estate: PV of unpaid installments may be includable
What are the features of SCINs?
Duration: Fixed term
Secured: YES
Impact on gross estate: Transferred property is removed from gross estate
*Remember SCINs cancel at death and removed from gross estate
What are the features of private annuities?
Duration: life of seller
Secured: NO
Impact of gross estate: If PMTs over joint lives, PV of remaining PMTs included in decedent’s estate
*NO collateral in private annuities
What is used to sell the business to a family member or a 3rd party and provide the seller with secured income?
Installment sale
What partially or fully cancels the installment note before the note matures?
SCIN
What allows a seller to receive a fixed annuity income stream for life and removes the business/property from their gross estate?
Private annuity
What is special about a SCIN?
The seller can cancel the installment note in the will and the unpaid balance of the note is NOT INCLUDED in the seller’s gross estate!
Also, the seller can cancel the note in increments of $16,000/year per buyer to avoid and reduce taxable gifts
What is unique about a private annuity?
Payments from the sale are unsecured and if the seller outlives their calculated life expectancy, the buyer must continue to pay the seller!
A sale or gift leaseback technique can structure a sale or gift of the business property to family members to provide them with…
- an income stream from lease payments
AND
- removal of business property from the owner’s estate
How to calculate income tax for income retained by a trust?
LOOK AT TAX FORMULA SHEET FOR ESTATE & NON-GRANTOR TRUSTS INCOME!
step 1: find retained income amount on the tax tables and determine what tax bracket it is for
step 2: retained income - lower taxable income threshold from table
step 3: multiply answer from step 2 by tax bracket %
step 4: add answer from step 3 to the pay amount
ie: $4,000 retained income
$4000-2750=1250
1250x.24=300
300+275=$575 in taxable income
How to calculate distributed income from a trust when the beneficiary is a minor?
DNI-$1150
1150 is child deduction
next 1150 taxed at kid’s tax rate (usually 10%)
remainder taxed at parent’s rate
How do you tax sale lease back payments?
Lease payments are taxed in the child’s lower tax bracket!
Do gifts distributed through a family limited partnership (FLP) receive a step up in basis?
No, gifts do NOT receive a step up in basis
The limited partnership shares transferred to younger family members will carry the original basis
Federal estate tax is a tax on…
the right to transfer property
When using a QPRT do the beneficiaries receive a step up in basis after the term is over?
No, the heirs acquire the carryover basis!
QPRT is ideal for heirs who want to hold on to the property for generations
What are depreciating assets that do NOT qualify for AVD treatment?
-cars
-patents
-life estates
-remainder interests
-intellectual property
What can grantors contribute to a special needs trust for funding?
-cash
-assets
-life insurance premiums
Pooled income funds cannot invest in…
TAX-EXEMPT securities!
If a taxable domestic trust has a gross income of ________ it is required to file a trust tax form.
$600
Income distributed from 2503c minor’s trusts are taxed using…
kiddie tax rules
In an unfunded ILIT beneficiaries are given…
Crummey powers
In a funded ILIT beneficiaries are…
NOT given Crummey powers
How do you calculate taxable income for a non-grantor trust?
Use the estate & non-grantor tax tables from the formula sheet!
calculate the same way you would calculate marginal taxes!
Spouses who receive TIP…
will NOT include the property in their gross estate at death
