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CFP > Estate Planning > Flashcards

Estate Planning Flashcards

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1
Q

Non-community property interest

A
  1. Income earned by spouse prior to marriage
  2. Property received as a gift by one spouse
  3. Property inherited by one spouse
  4. Interest earned on separate assets held by one spouse as a sole owner
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2
Q

Joint Tenancy With Right of Survivorship
(JTWROS)

A
  • property can be held by husband and wife, parent and child or children, sibling, and business partners
  • control, ownership and enjoyment shared equally by all joint tenants
  • upon death of each tenant, property immediately passes to surviving joint tenants in equal shares
  • property not controlled by terms of the will
  • not subject to probate
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3
Q

Tenancy by the Entirety
(TBE)

A
  • ownership can only be held by a husband and wife
  • transfer of property can only occur with the mutual consent of both parties
  • in most states, property is protected from the claims of each spouse’s separate creditors, but not protected from the claims of both spouses’ joint creditors
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4
Q

Tenancy in Common
(TIC)

A
  • 2 or more owners each own an undivided interest in the property
  • any income is distributed according to each owner’s respective share in the property
  • owners are free to transfer their respective shares of the property to other individuals
  • ownerships stake goes through probate upon death
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5
Q

Assets not subject to probate

A
  • property conveyed by deeds of title (IRA)
  • property held JTWROS
  • government savings bonds- co-ownership
  • revocable living trusts
  • payable on death accounts (PODs)
  • totten trusts
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6
Q

Assets subject to probate

A
  • “singly” owned assets
  • property held by TIC
  • assets where the beneficiary is the “estate of the insured”
  • community property (CP)
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7
Q

Assets included in gross estate

A
  • singly owned assets
  • TIC
  • beneficiary is the estate
  • community property
  • JTWROS/entirety
  • life insurance
  • general powers
  • 3 year gross up on gift taxes paid (but not GST taxes paid)
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8
Q

Life insurance added to the estate

A
  • proceeds are paid to the executor of the decedent’s estate
  • decedent at death possesses an incident of ownership in the policy
  • decedent transferred a policy with an incident of ownership within 3 years of death
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9
Q

Valuation of a gift

A

For gift tax purposes is it’s FMV at the date of gift

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10
Q

Basis of gift

A
  • if FMV on the date of gift is greater than donor’s adjusted basis, use the donor’s adjusted basis
  • if FMV of the gift is less than the donor’s adjusted basis use below:
    a. If sale price is above substitute
    basis-gain
    b. If sale price is in range of below
    Substitute and above FMV on date
    of gift- there is no gain or loss
    c. If sale price is below FVM- loss
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11
Q

Deductible gifts (not taxable gifts)

A

Also called exempt gifts or qualified transfer

  • gifts to a spouse, provided they are not a terminal interest
  • gifts to qualified charities
  • qualified payments in any amount made directly to an educational institution for tuition
  • qualified payments in any amount made directly to a medical care provider on behalf of any individual
  • gifts to American political parties
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12
Q

Summary of rules regarding gifts and the donor’s estate

A
  • generally, gifts are given are simply “taxable gifts” to the extent such gifts exceed the annual exclusion
  • taxable gifts are added to the taxable estate
  • gift taxes paid (or payable) are generally allowed as a credit against the tentative tax
  • gift taxes paid on any gift within 3 years of death are added to the gross estate
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13
Q

Traditional non-durable POA

A

Power ceases when the principal is no longer legally competent

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14
Q

Durable POA

A

Authority of agent continues when the principal becomes incompetent

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15
Q

Springing durable POA

A

Main strength is the agent has no authority over the principal’s assets until incompetency

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16
Q

Special power (trusts)

A
  • Exercisable only with the consent of the creator of the power or a person having a substantial adverse interest
  • Limited
  • Not subject to gift tax or estate tax because the holder cannot appoint the property themselves
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17
Q

Ascertainable standard (trusts)

A

Relating to health, education, maintenance, or support (HEMS)

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18
Q

General power (trust)

A
  • Holder may exercise the power in any manner he/she wishes
  • Outright ownership
  • Subject to estate tax and gift tax because the holder can appoint property to themselves
  • In the gross estate
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19
Q

Gift tax implications (general power)

A
  • exercised, released or lapsed- taxed
  • lapsed with a “5 or 5” power- not taxed
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20
Q

Estate tax implications (general power)

A
  • exercised, released or lapsed- taxed
  • exercised, released or lapsed with a “5 or 5” power- greater of the “5 or 5” is taxed
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21
Q

“5 or 5” power

A

Property subject to a general power will be included in a donee decedent’s estate (or considered a taxable gift) only to the extent that the property exceeds the greater of:
1. $5,000, or
2. 5% of the total value of the fund subject to the power as measured at the time of lapse

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22
Q

Grantor trust rules

A

Trust may be defective/tainted for income tax and estate tax purposes if the grantor retains:
- a right to income or the right to use/enjoy trust property (beneficial enjoyment)
- a revisionary interest exceeds 5% (retained interest)

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23
Q

Elements of a trust

A
  • there must be property (also known as principal, re, or corpus)
  • must be a grantor
  • must be a trustee
  • must be a beneficiary
  • the grantor and trustee must be legally competent
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24
Q

Grantor

A

Any person who transfers property to and dictates the terms of a trust

Must be legally competent

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25
Q

Trustee

A

Receives legal title to the property placed in the trust, and who generally manages and distributes income according to the terms of the formal written agreement (trust instruments)

Must be legally competent

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26
Q

Beneficiary

A

Has equitable title to the property

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27
Q

Simple trusts

A
  • 2503b
  • marital
  • QTIP
  • considered merely a “conduit” for forwarding income to the beneficiaries (pass through)
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28
Q

Complex trusts

A

-2503c

Separate tax entities and taxes as such if it meets 2 requirements:
1. It is irrevocable and the grantor has not retained any control
2. Income is accumulated

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29
Q

Crummey trust

A
  • irrevocable trust with demand rights
  • demand right given to a minor through his/her guardian
  • beneficiary has temporary right to demand a withdrawal from the trust that is the lesser of the amount of the annual gift exclusion or the value of the gift transferred
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30
Q

Nonmarital “B” trust

A

Family, Bypass, Credit Shelter, Unified Credit Shelter

  • property transferred to the trust at time of decedent’s death
  • can be structured to provide a stream of income to surviving spouse or other individuals
  • decedent has postmortem control
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31
Q

QTIP “C” trust

A

Current Income Trust

  • provides surviving spouse with stream of income for life, but decedent has postmortem control of trust property
  • property qualified for marital deduction
  • mainly used for second marriages
  • key word is LAME
    L- lifetime income for spouse
    A- annual payments to spouse
    M- mandatory payments to spouse
    E- exclusively for spouse
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32
Q

Qualified domestic trust
(QDT/QDOT)

A
  • no unlimited marital deduction
  • however, no estate tax due
  • jointly held property between spouses is not considered 1/2 owned
  • limited gift between spouses of only $100k (indexed) per year
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33
Q

Present interest gift vehicles

A
  • UGMA
  • UTMA
  • 2503c trust
  • section 529 savings plan
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34
Q

Gifts of a Future interest

A
  • 2503b trust
  • Remainder interest
  • A trust in which income will be accumulated for a period of years
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35
Q

Income to donor until donor’s death- charitable contributions/transfers

A
  • charitable remainder annuity trust (CRAT)- 5%
  • charitable remainder trust (CRUT)- 5%
  • pooled income fund- no 5% requirement
  • charitable gift annuity- no 5% requirement
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36
Q

Income to charity- charitable contributions/transfers

A
  • charitable lead trust (CLAT/CLUT)- no 5% requirement
  • private foundation- 5%- can give money to individuals
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37
Q

Intrafamily transfers- property owner needs income

A

PIGS need income

  • Private annuity
  • Installment sale
  • Grantor annuity trusts (GRAT/GRUT)
  • Self canceling installment note (SCIN)
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38
Q

Intrafamily transfers- property owner wants to gift assets and/or income to a family member

A
  • partnership/S corp
  • family limited partnership (FLP)
  • gift leaseback
  • qualified personal residence trust (QPRT)
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39
Q

Disclaiming property requirements

A
  • disclaimer must be an irrevocable refusal to accept the interest
  • refusal must be in writing
  • refusal must be received within 9 months
  • intended donee cannot have accepted any interest in the benefits
  • as a result of refusal, the interest will pass, without the disclaiming person’s direction, to someone else
40
Q

Stock redemption
(Section 303)

A

Postmortem planning technique- estate liquidity

  1. Business must be incorporated (closely held)
  2. Value of business must exceed 35% of decedent’s adjusted gross estate
  3. Redemption cannot exceed the sum of the estate taxes plus administration expenses
41
Q

Installment payment of estate taxes
(Section 6166)

A

Postmortem planning technique- estate liquidity

  1. Value of business must exceed 35% of decedent’s adjusted gross estate
  2. During the first 4 years (of 14 years) can pay interest only on taxes due to
42
Q

Special use valuation
(Section 2032A)

A

Postmortem planning technique- estate tax reduction

  1. 25% of the gross estate consist of real property
  2. Must be in qualified use- 5 of out 8 year rule before death and 10 years after death
43
Q

Claim for income tax refund not received

A

can be in the gross estate

44
Q

Taxable gift

A

Is in the estate’s tax base but not gross estate

45
Q

Income tax already paid

A

Not a deductible item for gross estate to calculate adjusted gross estate

46
Q

Taxable gifts

A
  • not included in the gross estate
  • they are added to the taxable estate to get the tax base
47
Q

Death benefit

A

Is in the gross estate of the owner

48
Q

Lapse of a general power with no 5 or 5 limit

A

Will typically subject the holder to a gift tax liability

49
Q

Gifting amount to use to not cause a taxable gift

A

$17,000 single or $34,000 married

50
Q

Amount that can be given to one individual (donee) without causing a federal gift tax

A

$12,937,000

Annual exclusion ($17,000) + gift exemption ($12,920,000)

51
Q

Taxable gifts

A

Not included in the gross estate or taxable estate

Used to calculate the tentative tax base. It is added to the taxable estate to solve for the tentative tax base

52
Q

Disadvantage of durable power of attorney

A

Power ceases at death

53
Q

Included in grantor’s gross estate

A
  • pour over will assets
  • present value of survivor benefits from joint annuity
  • gift to a CRT at death for benefit of grantor’s spouse
  • assets in a revocable trust
54
Q

Revocable trust income taxation

A

Taxes to the grantor

55
Q

Section 2503(b) trust income distributions

A

Income distributions are mandatory

56
Q

Irrevocable trusts and present interest gifts

A

An irrevocable trust must have crummey provisions to be treated as a present interest gift and be eligible for the annual gift exclusion

57
Q

CLUT required minimum distribution

A

The trust’s annual income

There is no required minimum distribution

58
Q

Do not allow for charitable transfer distributions be paid for a term certain

A

Pooled income funds and gift annuity

Only on the actual life of the beneficiary

59
Q

CRAT

A

Pays a fixed income to a non-charitable beneficiary, typically the grantor

60
Q

CRUT

A

Pays a fixed percentage

The percentage is fixed but not the amount of annual income

61
Q

Premium payment

A

Is not an incident of ownership

62
Q

Gifts included in the donor’s gross estate

A
  • donor retains a life estate in the gift property
  • donor retains the power to revoke or amend the gift
63
Q

Minor child and life insurance

A

Set up trust as life insurance beneficiary with the children as the beneficiaries of the trust

64
Q

“Freezing” techniques for transfer tax purposes

A
  • GRAT
  • preferred stock recapitalization (recap)
  • QPRT
  • private annuity
  • SCIN
65
Q

Special use valuation can only be used for

A

Real property held in conjunction with a farm, ranch or closely held business

Needs to have an indication of having real property

66
Q

Can life insurance be disclaimed

A

Yes

67
Q

JTWROS step up

A

Even if not married, if property is held JTWROS you can get a half step up on basis

It is half of of the FMV

68
Q

Revisionary Interest

A

100% of trust value is in the grantor’s estate when the grantor’s revisionary interest exceeds 5% of the initial transfer

69
Q

Terminal Interest

A

Allows spouse to live in the home

70
Q

UTMAs in Donor’s Estate

A

If a donor dies before a child comes to age, the UTMA can be included in the donor’s gross estate

71
Q

Negatives of an installment sale

A
  • owner loses control
  • owner loses depreciation
  • would not share extra cash flow with children
  • outstanding balance would be in the gross estate
72
Q

CRUT/CRAT payments

A

CRUT- payments are revalued annually
CRAT- payments must be paid out at least annually

73
Q

Life insurance and the gross estate

A
  • own life insurance and it is on your life- death benefit included
  • own life insurance and it is on someone else’s life (other person is insured)- cash value included
74
Q

Jointly held property and the gross estate

A

Half of jointly held property is included in the gross estate

75
Q

Gifts of future interest

A

Don’t qualify for the annual exclusion ($17,000)

76
Q

Premium payments

A

Are not incident of ownership

They will not be the reason life insurance is included in the gross estate

77
Q

GSTT

A

An additional tax and can be due at time of gift or later

78
Q

Insurance coverage

A
  1. Replacement value✖️coinsurance = insurance needed
  2. If insurance already owned is greater than insurance needed then you just do damage - deductible

Ex: replacement cost is $175k, coverage is $150k with 80% coinsurance and $1000 deductible. Damage is $5,000
$175k x 80% = $140k.
$140k is less than $150k (coverage is enough) so
$5,000 - $1,000 = $4,000

79
Q

When are 303 stock redemption and 6166 installment sale used?

A

At death

80
Q

Preferred stock recap

A
  • freezes business value
  • allows beneficiaries to benefit from future growth of the common shares
81
Q

Entity purchase buy sell

A
  • amount you own = value of business in the estate and the amount the business will pay to the estate
  • stock gets full step up in basis so $0 will be subject to income tax
82
Q

Social security disability rider

A

Included in disability payments

83
Q

Child with earned income

A

Will have income tax withheld on their earnings

84
Q

Child who works for self employed parent

A

Still has income taxes withheld on their earnings

Not subject to FICA or self employment tax

85
Q

Investment that does not defer taxes

A

Buying muni bonds

Interest is federally tax exempt but not tax “deferred”

86
Q

Buying a building

A

Defers taxes because you can take depreciation

87
Q

QPRT

A

Used for large and expensive homes

Not needed for small homes

88
Q

Mortgages

A

Do not affect appreciation

89
Q

Pension plans and variable annuities

A

No step up in basis

90
Q

Summary of liability for payment of the GST tax

A
  • if transfer is a direct skip, the transferor (donor of estate) pays the GST
  • if the transfer is a taxable termination, the GST is paid by the trustee
  • if the transfer is a taxable distribution, the GST is paid by the transferee (recipient)
91
Q

Key Person Discount

A

May be allowed for a business that lost a key employee who was responsible for its goodwill or administrative and management skills
- i.e. owner

Used to reduce the size of the estate

92
Q

Gross Estate

A

All probate assets:
- singly owned (fee simple assets)
- TIC
- estate as beneficiary
- community property

All non- probate assets:
- JTWROS
- TBE
- life insurance
- general powers of appointment
- gift taxes paid within 3 years of death

93
Q

Adjusted Gross Estate (AGE)

A

Gross estate minus:
- funeral expenses
- administrative expenses
- debts
- taxes
- casualty losses
- interest due to

94
Q

Primary purpose of the pour over trust

A

To “catch” any assets that the client owns but are not controlled by the revocable trust

95
Q

GSTT Calculation

A
  1. Gift - $12,920,000 - $17,000 = taxable gift
  2. Taxable gift ✖️ 40% = gift tax (can be estate tax too)
  3. Taxable gift - gift tax

Ex: gift is $16,362,000
1. $16,362,000 - $12,920,000 - $17,000 = $3,425,000
2. $3,425,000 ✖️40% = $1,370,000
3. $3,425,000 - $1,370,000 GSTT

96
Q

Amount of Charitable Gift when under FMV

A

FMV - charity purchase price

97
Q

3 year rules

A
  1. Gift taxes paid on any gift within 3 years of death are added to the gross estate
  2. Claw back- if you had an incidence of ownership and you gifted it and died within 3 years

CFP (6 decks)

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