Estate Planning Flashcards
Non-community property interest
- Income earned by spouse prior to marriage
- Property received as a gift by one spouse
- Property inherited by one spouse
- Interest earned on separate assets held by one spouse as a sole owner
Joint Tenancy With Right of Survivorship
(JTWROS)
- 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
Tenancy by the Entirety
(TBE)
- 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
Tenancy in Common
(TIC)
- 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
Assets not subject to probate
- 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
Assets subject to probate
- “singly” owned assets
- property held by TIC
- assets where the beneficiary is the “estate of the insured”
- community property (CP)
Assets included in gross estate
- 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)
Life insurance added to the estate
- 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
Valuation of a gift
For gift tax purposes is it’s FMV at the date of gift
Basis of gift
- 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
Deductible gifts (not taxable gifts)
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
Summary of rules regarding gifts and the donor’s estate
- 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
Traditional non-durable POA
Power ceases when the principal is no longer legally competent
Durable POA
Authority of agent continues when the principal becomes incompetent
Springing durable POA
Main strength is the agent has no authority over the principal’s assets until incompetency
Special power (trusts)
- 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
Ascertainable standard (trusts)
Relating to health, education, maintenance, or support (HEMS)
General power (trust)
- 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
Gift tax implications (general power)
- exercised, released or lapsed- taxed
- lapsed with a “5 or 5” power- not taxed
Estate tax implications (general power)
- exercised, released or lapsed- taxed
- exercised, released or lapsed with a “5 or 5” power- greater of the “5 or 5” is taxed
“5 or 5” power
Property subject to a general power will be included in a donee decedent’s estate (or considered a taxable gift) only to the extent that the property exceeds the greater of:
1. $5,000, or
2. 5% of the total value of the fund subject to the power as measured at the time of lapse
Grantor trust rules
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)
Elements of a trust
- 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
Grantor
Any person who transfers property to and dictates the terms of a trust
Must be legally competent