Estate Planning Flashcards
What is an irrevocable trust in which the grantor places assets and a right to a fixed payment of income for a period?
GRAT - Grantor retained annuity trust
What are 2 ways gift tax exposure is reduced in a GRAT?
- value of retained annuity increases
- remainder interest decreased
What are 3 advantages and 6 disadvantages of a GRAT?
ADV
1. estate tax reduction
2. Provides income to granter
3. Offers support for grantor and beneficiary
DIS
1. Initial gift taxable - income taxable
2. No additional assets permitted
3. beneficiary receive carryover basis
4. Grantor loses control of property
5. income subject to creditors
6.fixed annuity must be paid, even if from borrowed funds
What is an irrevocable trust into which the grantor places assets and right to payments fixed % of value of trust ( determined annually) ?
GRUT - Grantor retained Unitrust
What are the 3 purposes of a GRAT?
SAME AS GRUT
1. transfer property in trust at reduced gift tax
2. Pass appreciation in GRAT to bene without incurring additional gift tax
3. reduce value of gross estate
What is the purpose of a GRUT? 3 of them
SAME AS GRAT
1. Transfer property in trust reduced gift tax
2. Pass appreciate in GRUT to beneficiary without incurring additional Gift tax
3. Reduce value of granters gross estate
What are the 4 advantages and 5 disadvantages of a GRUT?
ADV
1. estate tax reduction
2. provides income to grantor
3. Additional assets permitted
4. Offer support for grantor and benes
Dis
1. Initial gift is taxable, so is income
2. Bene receives carryover basis
3. Grantor loses control of property
4. Income generated is subject to creditor claims
5.Payments must be paid, even if from burrow funds
What happens to the principal in a grantor retained trust (GRAT or GRUT) at end of period and what is the benefit?
Goes to non-charitable beneficiary
High value transferred using low valuation method, reduces gift or estate tax
What type of client is a GRAT and GRUT suitable for?
GRAT - fixed income, conservative
GRUT - Variable income, Moderate and aggressive, income to outpace inflation
What is an irrevocable trust that holds a persons residence, allowing people to live in the house rent- free for a period? (Passes gift tax free to bene)
QPRTs- qualified personal residence trust
What are the 3 advantages and 5 disadvantages of a QRPT?
Adv
1. Tax reduction - property removes high value
2. Property use - continue use during term
3. Support for bene
Dis
1. possible estate inclusion if you die during term
2. Taxes (income)
3. Bene sell - basis transferred incurs gift tax
4. Maintenance expenses
5.Grantor survives trust term, move out or rent
What allows a tester to control passing of property interest to others?
Will
Why would you make an ADV Election? 2 reasons
reduces gross estate and estate tax
What is the Gross estate inclusion of the 5 ownership titles?
SO- 100%
JTWRS- Spouse - 50% non-spouse - FMV x % of contribution
TBE- 50% of FMV
TIC- FMV of ownership %
CP- 50% of value of decedents interest is includible
What are the 4 invalid will provisions?
1.Fraud
2.undue influence by bene on testator
3. Mistakes in will clauses
4. Will not properly executed, signed, written according to state laws
What 2 choices of dates can the executor chose to value an estate?
- Date of death
- AVD( 6 months after DOD)
What are the 3 ways to transfer assets at death? ( Split between benes)
- Per capita - by head - 1/3 between 3, one dies with 2 kids, 1/4 between all
- per stripes - by roots - 1/3 between 3, one dies with 2 kids, 1/3 for the original 2 of 3, and 1/6 for the 2 kids
- per capita by generation - 2nd generation is set to receive % with all heirs in 3rd evenly
What are the 3 disadvantages of probate?
- Time ( can take 9 months to 2 years)
- Money - costly
- Privacy - public
What are the 4 advantages of probate?
- Court supervised distribution of property to heirs
- Protects creditors by ensuring debt paid
- Bars future creditor claims
- Documents title and transfer of property to others
What is the age limit to create a will and what capacity do you need?
18 and testamentary capacity
1.Must know you are executing a will
2. must be aware of assets they own
3.must know and remember relationships to bene
What is the point of a survivorship clause?
Ensures assets pass to intended bene
What is a survivorship clause?
named bene in will cannot inherit unless they live for a certain time after will maker dies
What is the probate estate inclusion of the 5 ownership titles?
SO - 100%
JTWROS - None
TBE - none
TIC - FMV of interest
CP- only assets that don’t transfer to someone else
What are the 2 step up basis calculations
JTWROS
1.Spousal
Original basis = 50% of purchase
Step up = decedent step up + survivorship 50% of FMV
2.non spouse
Original basis = % of contribution
Step up - Dec % FMV + survivors original basis
What are 3 rules of intestacy?
- Minor children receive equal shares of parents property
- Community property states - surviving spouse gets everything
- Decedents estate - gets marital deduction for % of property surviving spouse receives
What is the ability to refuse a gift called?
qualified disclaimer
What is the Automatic survivorship status of 5 ownership titles?
- SO - no, transfers by will or law of intestacy
- JTWROS - yes, At death of JT
- TBE - yes, at death of spouse
- TIC -no, by will or law of intestacy
5.CP - yes, if property is title CPWROS or in a joint trust. Otherwise no
What are the 5 steps at a high level for federal estate tax calculation?
- Determine value of gross estate
2.Arrive at adjusted gross estate - deterring taxable estate
- Calculate federal estate tax payable
- Apply credits to arrive at Net
What are the 4 differences between a SIMPLE and Complex trust?
Simple
1. Required to distribute income to bene in year
2. May not have charitable bene
3. Cannot distribute principal during tax year
4. Personal exemption of $300
Complex
1. Not required to make distribution
2. May have charitable bene
3. May distribute principal during year
4.Personal exemption of $100
What are the 3 differences between a revocable and irrevocable trust?
Revocable
1.Grantor has right to terminate
2. Transfer of asset not a gift
3. Assets in trust subject to estate tax -
Irrevocable
1. May not be revoked once created
2. transfer of assets is a gift
3. Assets in trust not subject to estate tax
What 3 things does a revocable trust offer?
- Estate planning
- Avoids probate fee
- Fully amendable
What 6 things does an irrevocable trust offer?
1.Estate planning
2. Asset protection
3. avoids probate
4. medical planning
5. tax deductions
6. Amendable with bene ok
What are the 4 grantor trust rules?
- revoke/modify trust
- retain beneficial enjoyment
- Retain admin powers
- Income distributed to grantor for support of kids
What are the 4 type of trusts?
- Living (inter-vivo)
- Testamentary
- Revocable
- irrevocable
What are the 3 details of a living trust?
- Established and funded during lifetime
- Funds pass outside will and probate
- Title to property held in name of trust
How is a testamentary trust created and when is it funded? Also, what are 3 possible purposes of it?
- Created through will, funded after death
- Purposes
reduce estate tax
professional investment management
estate ends up in right hand
What type of trust offers flexibility, grantor retains control, may be funded or unfunded, and becomes irrevocable at death?
Revocable trust
What type of trust offers asset protection, must be funded, trust is owner of property, and granter give up control?
irrevocable trust
If you make a revocable trust irrevocable and die within 3 year is it included in gross estate?
yes
What are the 5 elements to a trust?
Granter - person who transfers property to it
Trustee - person who manages the trust
Corpus - principal in trust
terms of trust - documents outlining provisions
Beneficiaries - receive benefits of trust
What rule of a trust allows fiduciaries to make distributions within 65 days of the new tax year?
65 day rule
What election allows the executer of an estate and trustee of a revocable trust to elect to treat estate and trust as one for tax purposes?
section 645 election
What are the different names for granters, trustee, and benes?
Granters- settler, trust makers, or trustor
trustee - fiduciary
benes - remaindermen
In a standby trust (used in case of medical issues) the granter also serves as what 2 things?
- Trustee
- Beneficiary
What form must the fiduciary file for taxable domestic trusts?
form 1041
What are the 3 reasons a form 1041 would be filed for a trust?
1.any taxable income for year
2. gross income of $600 or more (regardless of taxable income)
3. a bene who is a non-resident alien
For trust income, what is trust accounting income, trust taxable income, and distribution net income?
trust accounting income - items used to determine amount benes are entitled to
Trust taxable income - subtracting deduction from income and personal exemptions
Dis net income - taxable income between bene and trusts
Max that can be taxed to bene is lesser of these figures
What is the tax on the transfer of property when a person dies?
Federal Estate tax
What type of trust is a will substitute and goes around the probate estate?
Irrevocable trust
What type of trust has assets avoid gross estate? which type of trust is included?
Irrevocable trust excludes
revocable trust included
is federal estate tax a tax on the right to transfer or receive property?
Transfer property
What form is federal estate tax on and when is it due?
Form 706 and within 9 months of death
Is property gifted within 3 years of death included in gross estate?
no
What is a legal entity that holds property and allows the granter to coordinate, investment, use, and distribution of property?
Trust
When do you use FMV vs FMV - A.E in the appreciation factor formula?
No prior gifts = FMV - A.E
Prior gifts above Exclusion - FMV
What is the appreciation factor for the gift tax adjustments?
Appreciation/ taxable amount of gift
FMV- Basis/ FMV - A.E (or FM if prior gift)
What are the 3 types of generation skipping transfers?
- Direct Skip
- taxable distributions
- Taxable terminations
What is the gift tax adjustment added to the donee’s basis?
Appreciation factor x gift taxes paid
If the FMV of property at time of gift is greater than the donors basis, what basis and holding period is used?
Donors basis and holding period
What is a taxable termination for a GST?
termination by death, lapse of time, release of power, or interest in property held in trust results in skip person holding all interest in trust
GSTT Payer=trustee
What is a GST taxable distribution?
Distribution of income or corpus form a trust to skip person not subject to estate or gift tax
GSTT payer = skip person
What is a GST direct skip? What are the 2 relations?
Direct to skip person
Related persons - defined by family tree
Non-related = born between 37 1/2 and 62 1/2
GSTT payer = transferor
What is the GSTT amount?
40%
Is the generation skipping transfer tax part of the estate and gift exclusion (lifetime amount)
No, separate, but same numbers - $12,920,000
17k annual exclusion
but Also counted as a gift so applies to both exclusions
What is the person who is two or more generations below a transfer called?
skip person
What is transfer of property by gift or at death to a person who is two or more generations below the transferor called?
Generation skipping transfer - GST
What is the step-up for community property?
100% - could be sold for no gain
What is a step-up basis determined by?
FMV at Date of death
What property receives a step-up basis?
only the value of assets included in the decedent’s estate
What are the 3 scenarios of gifts of loss property?
1.Final sale> donors basis - takes on Donors basis and HP
2. Final sale < FMV on date of gift- takes on FMV and HP starts from DOD
3. final sale in-between adjusted basis and FMV - no loss or gain, hp non factor
What are the 4 requirements of a qualified disclaimer?
- Must be in writing
- Writing received no later than 9 months after later of date of transfer or date of person reaching 21
- Person disclaiming must not have accepted
- Someone else receives, no influence
What are two items of a grantor trust?
- revocable trust all income taxed to grantor
- Any trust that allows granter spouse, or 3rd party without bene interest any rights or powers specific in grantors trust rule, taxed as grantor trust
What is the lifetime tax exemption dollar amount?
$12,920,000
What is the dollar amount of the unified credit?
$5,113,800
What form do married couples use for selecting gift splitting?
Form 709
Separate if annual exclusion greater than 17k
36k/2 = 18k
Donor spouse files if less - consent of other
20k/2 = 10k
No return needed if total value is less
12k gift
What are the 4 present interest gifts for minors?
1.UGMA or UTMA
2.529 plans - 85k super funding 5 years
3. 2503 (b) trust - multi benes, income to at least one bene annually
4. 2503 (c) trust - one bene, income accumulates until 21, the one exception for accumulation
What are the two types of present interests in an irrevocable trust?
- Bene receives income for life
- Bene receives income for a term
What are the two present interest categories where the annual gift exclusion applies?
- Present interest in trusts
- Present interest gifts for minors
What type of interest does annual exclusions for gifts only apply to?
Present interest gifts
What is the annual gift exclusion dollar amount?
$17,000
What are 4 future interest gifts?
- Remainder interest in a property
- Trust that accumulates income (2503(c) exception
- Non-income producing trusts - unless trustee can sell and buy income producing
- trust has a sprinkle or spray provision
What is 529 forward funding?
can fund 529 with 5 years existing exclusion - 85k
can add more if exclusion increases
What are 3 reasons to use a qualified disclaimer?
1.Transfer involving large gifts
2. tax free gift to contingent donor
3. Spouse is Donee, does not want/need
What 4 CORE goals of estate planning can gift splitting achieve?
- Tax reduction
- tax avoidance
- philanthropy
- support
What are the 4 gifts not considered taxable gifts?
1.Gifts to IRS approved charities
2. Gifts to U.S. citizen spouse
3. Payments for medical expenses directly to medical providers
4. Payment for tuition directly to educational institution
What is the portability of being able to transfer leftover lifetime exempt gift amount to surviving spouse?
Deceased spouse unused exclusion
DSUE
What is the rule of thumb for update POA documents
Every 3 years or whenever substantial changes occur
What are the 5 types of POAs?
- General - grants broad authority - lapses at disability
- Specific - only acts on specific action, then expires
- Non-durable - remains active until incapacitation
- Springing - not active until incapacitation
- Durable - immediately and does not lapse
What is a written agreement that allows one individual to act on behalf of another?
Power of attorney
What is the purpose of the unified credit?
used to offset taxes on lifetime tax exemption
What are the 4 types of wills?
- Mutual - agreement with another to dispose of property interest
2.Reciprocal - all property distributed to the other person - Holographic - handwritten
- nuncupative - oral will
When is each party of a trust taxed?
Grantor = income from grantor trust
Trustee = retained income (trust)
Beneficiary = distributed income, non-grantor trust
How long do you have to make an AVD election (estate tax return filing)?
1 year? maybe 9 months
If an item is sold within 6 months of death, what is it valued at?
FMV on date of sale
On what form is an AVD election made and is it irrevocable?
706 and yes
What assets are the exception to the AVD election?
Assets that depreciate - must use FMV or DOD
Example : cars, patents, life state, remainder interest
What is the timeframe for the alternate valuation date?
6 months after DOD
What is the transferable status of the 5 ownership titles?
SO - Transferable
JTWROS - Transfer without approval
TBE - Transfer with approval of JT
TIC - transfer each owner % separately
CP - Transfer with both spouses approval
What is it called when state law determines ben of property in absence of a will?
Intestacy
What is the typical period on a survivorship clause?
5 to 60 days
What are the 3 will substitutes that avoid probate?
TLC
1. Trust - funded rev, irrev, and property
2. LAW - JTWROS, TBE, TOD accounts LIfe estates
3. Contract - bene on life insurance, pension plans, iras, annuities
In what state is real property probated?
State it is locate
Subject to ancillary probate
In what state is personal property probated?
The state of domicile - permanent home
What is the process of proving a will in court called?
probate
What 3 things does a disclaimer trust do?
- Limits estate taxes
- Moves assets in irrevocable trust
- Keeps assets away from creditors
What are 3 estate planning priorities to consider first?
- Protecting income - (disability/life insurance)
Higher priority if 1 income earner - Dependents - guardianship in will
high priority - Standard of living - life insurance
High priority with children
high to protect income replacement
What are the 8 core estate planning objectives?
TTCCPPPS
1. Tax reduction
2. Tax avoidance
3. Care
4. Control
5. Protection
6. Philanthropy
7.Privacy
8.Support
Will substitutes address all of these
What are the 4 estate planning items for everyone?
- Durable power of attorney
- Will
- Living will
- Revocable funded living trust
What are the 5 property ownership titling options?
- Sole owner - 1
- Joint tenants with rights of survivorship - 2 or more
- Tenants by entirety 2 spouse
- Tenants in common - several
- Community property - 2, spouses
By what law is a will regulated?
state law
What 5 core estate planning goals can lifetime gifting achieve?
- Philanthropy
- Support
- Tax reduction
- Tax avoidance
- Control
What happens in a granter trust when the granter dies/survives the trust term in regards to gross estate?
Dies - included in gross estate- FMV on DOD
Survives - excluded
What are 3 reasons to use a granter trust?
1.Reduce - gross estate value
2. Retain - income interest
3. Remove - financial burden on loved ones
Grantor pays income tax , assets in trust grow tax free
What are the 6 common vehicles for gift tax charitable deductions?
- Charitable lead trust
- Charitable remainder trust
- Charitable gift annuities
- pooled income funds
- Private foundation
- Donor - advised funds
What is the limit for a Non-U.S spouse for martial deduction?
$175,000
What is the deduction to a charitable lead trust?
PV of the charities income interest
What is the deduction to the grantor in a charitable remainder trust?
PV of the charities remainder interest
What is a charitable gift annuity?
Donor transfer cash or property to a charity and charity pays donor or other annuity payments for life
What are the 3 taxation of a chartable gift annuity?
- Deduction is PV of charities remainder interest
- To spouse: Marital deduction if receives all payments and has POA over payments after death of donor
- To others: gift tax is PV of annuity payments
In regards to a charitable gift, what are pooled income funds?
Donor gifts property to charity and receive annual pro-rata share of income from charity commingled funds
Tax deduction on PV of remainder interest
income tax on income received
charity can not invest in tax free funds
What are private foundations and 3 common elements of them?
separate legal entities, non profit or tax exempt trust.
- funded and controlled by families - high fees
- income tax deduction to family members who gift - 30% cash 20% LTCG
- Foundation must distribute a minimum of 5% of assets to public charities
What are donor advised funds?
donate, select charity to receive the grants, receive income tax deduction
What types of trust pays an income stream to a qualified charity for a period and at expiration remainder interest passes to noncharitable beneficiary?
Charitable Lead trust (CLT)
What type of CLT provides annual payments of a fixed amount to a qualified charity?
Charitable Lead annuity trust (CLAT)
What are 4 advantages and 3 disadvantages of a charitable lead annuity trust?
Adv
1. Qualify for income, gift and estate tax deduction
2. Front load tax deduction for Granter CLT
3. Flexibility- can be inter- vivo or testamentary trust
4. means to support philanthropic goals and bene distributions
Dis
1. Trust principal used in insufficient to pay charity, leaves less for bene
2. income tax deduction only for grantor,
3. Lead trust is non-tax exempt - (income earned by trust is taxed to grantor)
When would you use a CLAT?
interest rates are lower.
Smaller payments = greater value to bene
What type of trust provides a payment as a % of trust assets (annually reviewed) to a qualified charity?
Charitable lead unitrust ( CLUT)
What are the 6 advantages of a CLUT and 3 disadvantages?
Advantages
1. Income tax, gift, and estate tax deduction
2. grantor - GLT, large front loaded tax deduction
3. flexibility - intervivos or testamentary
4. support phil and support bene
5. Additional assets permitted
6. Income stream services as inflation hedge
Disadvantages
1.trust principal invades income less for bene
2.income tax deduction only available for grantor trust
3. lead trust are non tax exempt, income is taxable to grantor
For a CLAT and CLUT, what does the charity receive, tax deduction, valuation, allowable additions, inflation hedge, and client suitability?
1.CLAT
Fixed income
PV of charity lead interest for deduction - grantor trust only
Valued once
No additional assets
not an inflation hedge
for risk averse need tax deduction and large lump sum later
- CLUT
Variable income
PV of charity lead interest for deduction - grantor trust only
Valuation annually
Additional assets allowed
inflation hedge
for moderate to aggressive tax deduction and lump sum. Keep up with inflation
What type of trust permits payment of a fixed amount annually to a noncharitable bene with the remainder going to charity?
Charitable remainder annuity trust ( CRAT)
fixed amount
no additional amounts
what are the 5 advantages and 3 disadvantages of a CRAT?
Advantages
1.Current income tax deduction = PV of remainder interest
2. income to grantor or non-charity bene
3. Support for grantor or bene
4. Giving to charity
5. Assets within trust accumulate tax free
disadvantages
1. contributions to trust irrevocable
2. Purchasing power of income reduced by inflation
3. Income received subject to ordinary income or cap gain tax
What type of trust is useful for a grantor with highly appreciated assets and is seeking diversification without triggering capital gains tax?
CRUT
What type of trust provides payment of a periodic sum, as a % of assets to non-charitable bene with remainder going to charity?
Charitable remainder unitrust (CRUT)
can add assets
What are 5 advantages and 3 disadvantages of a CRUT?
Advantages
1. Current income tax deduction
2. Income to grantor or bene
3. Support
4. giving to charity
5. Assets in trust accumulates free of taxation
Disadvantages
1. Irrevocable
2. annual revaluation could result in lower amount
3. Income received ordinary income tax or capital gains
What is the cost/complexity and income matrix for private foundations, charitable trusts, donor advised funds, and pooled income funds?
Cost complexity- provides income
1. Private Foundations: High - No
2. Charitable trusts: High - yes
3. Donor advised funds: low - no
4. Pooled income funds: Low - yes
What is the estate tax formula G.A.T?
Gross estate
minus: Expenses, debts, taxes, losses
=Adjusted gross estate
minus marital deduction
minus charitable deduction
= taxable estate
What is the marital deduction limit for a donee’s spouse?
Unlimited
What is a martial deduction not available for?
Terminable interest property
What type of trust is designed to receive property not allocated to A-trust, estate trust, or QTIP that avoids over qualifying martial deductions and provides income?
Bypass trust
AKA credit shelter, family, or B-trust
For the B-Trust, what is the income interest known as and can the spouse receive a martial deduction on estate tax returns?
terminable interest property (TIP) and no
What is the purpose of a Bypass trust?
avoids over qualifying decedent spouse estate for marital deduction ( uses lifetime exclusion)
allows surviving spouse income as needed
trust assets are not included in surviving spouses estate at death
What kind of power can a surviving spouse have in a B trust and what can they do with it?
Limited power of appointment and 5 x 5 power of appointment (trust corpus)
Receive distributions from income
distributes assets to beneficiaries
What is 5 x 5 power in a trust?
Lets beneficiaries make withdraws from trust on yearly basis
Greater of
5k or 5% trust FMV each year
What trust is known as the marital trust, qualifies for unlimited marital deduction for decedent, and included in surviving spouse estate?
A-Trust power of appointment trust
For an A-trust, what amount of income must the surviving spouse receive?
all income paid at least annually, no accumulation of income in trust
Who determines the beneficiary of trust assets in an A-trust?
the surviving spouse
What is a trust arrangement designed to give surviving spouse full use of families economic wealth, while minimizing total federal estate tax payable at deaths of both spouse?
A-B Trust
For A-B trust what does the surviving spouse have the right to and what is included in their estate?
Right to all income and corpus from A-trust, income if needed from B -trust
Only property from A-trust is included in surviving spouses estate
For an A-B trust what are the 3 benefits to the decedent spouse?
1.Marital deduction on A-trust
2.lifetime exemption, unified credit used for B-trust
3. Estate tax liability is zero
What type of trust provides the spouse with income for life, receive estate tax marital deduction and give trust corpus to children of previous marriages?
QTIP
Qualified terminable interest property trust
What are the 3 provisions of a QTIP Trust?
- Surviving spouse must receive all income annually ( may receive corpus at trustees discretion)
- Corpus passes to remainder beneficiary - terminable interest income
3.- qualifies decedents estate for marital dedcutions
What type of trust might a grantor who is in a second marriage and wants to provide support for current spouse and children of previous marriage?
QTIP trust
What are the top 2 reasons people use a Q-TIP?
- Concern of surviving spouses ability to manage assets in future years
- Possibility that surviving spouse might change plans who gets remaining assets
What is an estate planning technique under which an estate is divided into 2 parts and taxed at a lower rate rather than remaining as a whole and taxed higher?
estate equalization
What is added to a trust to say when and how to make distributions of benefits?
Ascertainable standard
HEMS standard - health, education, maintenance, support
What type of trust qualifies for marital deductions and is used when beneficiary spouse has substantially wealth and doesn’t need income?
Estate trust
What would be an estate planning solution to minimize estate tax liability for combined estates?
estate equalization
What is the estate planning solution for wanting surviving spouse to receive all income annually?
A or QTIP
For estate planning solutions, what would be used to allow surviving spouse receive income if needed?
B or estate trust
What estate planning solution is used to have decedent spouse receive marital deduction?
A, QTIP, Estate trust, outright gift
What estate planning solution is used for the surviving spouse to choose the beneficiary?
A or estate trust
What estate planning solution allows surviving spouse to determine portion of deceased estate to transfer into trust to use unified credit?
disclaimer trust
What estate planning solution allows surviving spouse to access trust income for health, education, maintenance, support, without including assets in their estate?
ascertainable standard - added to trusts
What is the spousal transfer trust summary for A, B, and QTIP trusts? (qualified martial deductions, surviving spouse power of appointment, included in decedents estate, included in surviving spouses estate)
A-B-Q
Qualified for martial deduction
Y-N-Y
Surviving spouse power of appointment
Y-N-N
included in decedent estate
N-Y-N
Included in surviving spouses estate
Y-N-Y
What type of martial trust is used to qualify a non-citizen spouse for unlimited marital deduction? (ensures assets don’t leave U.S> without taxation)
Qualified domestic trusts (QDOTS)
What is the matrix for estate exclusions/deductions for citizen/resident estates?
Dec-survivior
- US_US = 12.92 mm exclusion with unlimited MD
- US-NC = 12.92 mm, no MD
- NC-US = 12.92mm, unlimited MD
- NC-NC = 12.92 mm, no MD
- NRNC - US = 175k exclusion, Unlimited MD
- NRNC - NC = 175k exclusion, no MD
What are 2 types of trusts for minors?
2503 (b)
2503 (c)
What type of trust is irrevocable and requires distributions of income on an annual basis to minors?
2503 (b)
What type of trust enables a grantor to make a gift to a minor in trust and still obtain the annual gift tax exclusion?
2503 (c)
For the 2 trusts to minors, what is the required for income distributions, principal distributions, and what amount is eligible for annual exclusions?
2503 (b)
Income- annually
Principal - may be withheld until bene death
Amount eligible - actuarial value of the income interest
2503 (c)
income - not required to distribute
Principal - Must be distributed no later than 21
Amount eligible - entire gift to trust
What type of trust preserves eligibility for government benefits and pays for extra services not covered by public assistance programs?
Special needs trust
What 4 extra services does a special needs trust cover?
- Medical expenses not covered by Medicaid
- Supplement attendant and custodial care
- Additional therapies
- Respite care for family caregivers
What 5 things do special needs trusts pay for?
1.Telephones
2. Computers and internet access
3. Cable TV
4. Basic household furnishings
5. Travel and a companion
What are the 3 types of special needs trusts?
- Pooled- managed by non profit organization instead of a single trustee
- First party - designed to help individual dealing with a disability caused by some type of injury - funded by the personal with special needs
- third party - holds assets that never belonged to beneficiary - set up as part of donors estate plan to aid special needs
What is income from a third party specials needs trust taxed at?
The special needs personal tax bracket
What is undistributed income from a special needs trust taxed at?
Higher non-grantor trust rates
What 3 governmental benefits does a special needs trust allow you to maintain?
- Medicaid
- Social security disability income
3.Supplement security income
What type of trust provides estate with liquidity to pay death taxes with life insurance without subjecting the proceeds themselves to depletion by estate taxes?
irrevocable life insurance trust (ILIT)
For an ILIT, what is the difference between new life insurance purchases and existing transferred into the trust?
New - excluded from estate
Existing - subject to 3 year rule
must survive transfer by 3 years for it to not be included in owners estate
What is the 3 year rule for an owner of a policy who is not the insurned?
policy gifted within 3 years of owners death will not be brought back into owners estate
What does an unfunded ILIT include?
Only grantors life insurance policy
What must an owner do each year for an unfunded ILIT?
transfer money in to pay life insurance premiums
What power are beneficiaries given in an Unfunded ILIT?
Crummey powers - the right to withdrawal some or all of the grantors contribution to an Irrevocable trust each year.
What does Crummey powers do to the gift interest of a trust?
Future interest gift into present interest gift, qualifying for annual gift exclusion
withdrawals limited to lesser of
Annual exclusion
annual contribution to trust
greater of 5k or 5% transferred into trust
What does a funded ILIT have? (transfers)
Transfer life insurance policy and income producing property into ILIT
income pays policy premiums
bene no crummey powers
grantor taxed on income
What is a pass-through entity established under state law which works as a partnership consisting entirely of family members?
Family limited partnership (FLP)
What does a FLP allow senior family members to do?
transfer property junior family members at a significant reduce transfer cost
lowers estates and keeps property in family
What are the 2 valuation discounts for FLPs?
- Lack of marketability - investors are not interested in closely held stock or FLP shares - very expensive to take public
- Minority interest - applied when transferring business interest to minority shareholders because no influence or control over business
What is the tax advantage and disadvantage of a FLP?
Advantage -reduces current tax liability (junior family members in lower tax brackets
disadvantages - may be limited by kiddie tax
Do gifts receive a step up basis in FLP?
no
What technique can structure a sale or gift or business property to family members to provide income from lease payments and remove property from estate?
Sale or gift leaseback
What are the 4 steps under a sale leaseback?
- Business owner sells business and leases back from child
- Owner receives lump sum payment or installment payment from child
- Owner deducts monthly lease payment to child as business expense
- Lease payments are taxed in the Childs lower tax bracket
What 3 things must a sale/gift leaseback have to avoid problems with the IRs/
1.irrevoable
2.FMV
3. Reasonable lease payments for lease agreement
What are the 4 steps of a gift leaseback?
- Owner gifts property to an irrevocable trust then leases back
- Owner receives business deduction for lease payments to trust
- trustee distribution lease payment to family members
- Family beneficiaries are taxed in lower bracket
For intra-family transfer, what are 3 ways to generate a stream of income while transferrin assets out of ones estate?
- Installment sales
- Self cancelling installment note (SCINs)
- Private annuities
What intra family transfer is used to sell business to a Family member or 3rd party and provide secured income?
Installment sale
For an installment sale, what is included in the sellers gross estate?
PV of any outstanding installment payments
What type of intra-family transfer partially or fully cancels the installment note before it matures? (auto does so at death as well)
SCIN- self cancelling installment note
Is the unpaid balance of a SCIN included in sellers gross estate?
No
What happens when a seller cancels a SCIN?
Subject to capital gains and gift taxes
What amount can a seller cancel on a SCIN per year per buyer to avoided or reduce taxable gifts?
$16,000
For an installment sale, does the buyer need a down payment and can payments vary?
No and yes
For intra-family transfer what strategy does a seller receive a fixed annuity income stream for life and removes business/property from gross estate?
Private annuity
What are the treatment of payments in regards to the sellers estate for single and joint life private annuity?
single - remaining payments not included in sellers estate
Joint - PV of survivors future annuity payments included in sellers estate martial deduction available to offset tax
What section of the IRC allows the purchase of a portion of a decedent shareholder’s stock by the shareholder’s corporation to be treated as a sale or exchange rather than as a dividend?
Section 303
What are the 3 appropriate uses of an IRC 303 redemption?
- When decedents shareholders family wants to keep control of closely held or family corporation
- When corporation stock is a major estate asset and there is a threat of a forced sale or liquidation of the business to pay death taxes and other estate administration costs
- Where a tax favored withdrawal of funds front he corporation at the death of the stockholder would be useful.
What are the requirements for a section 303 redemption?
redeemed stock must be included in gross estate
value for federal estate tax purposes of all stock of the corporation is included in determining the value of the decedents gross estate must be more than 35% of the excess of the value of the gross estate over expenses and losses
What IRC section allows an executor to value qualifying real property based on its actual special use rather than its highest and best use?
IRC section 2032A
What is interest in property that may terminate on the happening or failure of some event or contingency?
terminable interest property
What are the gift tax consequences of TIP?
Cannot take marital deduction and spouse can take an annual exclusion for the present interest gift
What is the estate tax consequences of TIP?
Spouse who receives TIP will not include property in their gross estate at death
spouse who gift TIP will remove the property from their estate
What are the two exceptions to terminable interest rule that allow for a martialed deduction?
Exemption 1
spouse is given a life estate in trust and is given a general power of appointment over the trust corpus
exemption 2
donor spouse qualifies the terminable interest property given to the spouse for the marital deduction
QTIP
What three transfers does the three year rule?
1
2.
3.
What IRC section lets a personal representative defer payment of estate taxes if the interest in a closely held business exceeds 35% of the decedents adjusted gross estate?
IRC section 6166
