Estate Planning Flashcards
1
Q
Non-community property interest
A
- 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
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
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
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
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
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)
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)
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
9
Q
Valuation of a gift
A
For gift tax purposes is it’s FMV at the date of gift
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
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
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
13
Q
Traditional non-durable POA
A
Power ceases when the principal is no longer legally competent
14
Q
Durable POA
A
Authority of agent continues when the principal becomes incompetent
15
Q
Springing durable POA
A
Main strength is the agent has no authority over the principal’s assets until incompetency
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
17
Q
Ascertainable standard (trusts)
A
Relating to health, education, maintenance, or support (HEMS)
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
19
Q
Gift tax implications (general power)
A
- exercised, released or lapsed- taxed
- lapsed with a “5 or 5” power- not taxed
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
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
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)
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
24
Q
Grantor
A
Any person who transfers property to and dictates the terms of a trust
Must be legally competent
25
Trustee
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
26
Beneficiary
Has equitable title to the property
27
Simple trusts
- 2503b
- marital
- QTIP
- considered merely a “conduit” for forwarding income to the beneficiaries (pass through)
28
Complex trusts
-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
29
Crummey trust
- 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
30
Nonmarital “B” trust
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
31
QTIP “C” trust
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
32
Qualified domestic trust
(QDT/QDOT)
- 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
33
Present interest gift vehicles
- UGMA
- UTMA
- 2503c trust
- section 529 savings plan
34
Gifts of a Future interest
- 2503b trust
- Remainder interest
- A trust in which income will be accumulated for a period of years
35
Income to donor until donor’s death- charitable contributions/transfers
- charitable remainder annuity trust (CRAT)- 5%
- charitable remainder trust (CRUT)- 5%
- pooled income fund- no 5% requirement
- charitable gift annuity- no 5% requirement
36
Income to charity- charitable contributions/transfers
- charitable lead trust (CLAT/CLUT)- no 5% requirement
- private foundation- 5%- can give money to individuals
37
Intrafamily transfers- property owner needs income
PIGS need income
- Private annuity
- Installment sale
- Grantor annuity trusts (GRAT/GRUT)
- Self canceling installment note (SCIN)
38
Intrafamily transfers- property owner wants to gift assets and/or income to a family member
- partnership/S corp
- family limited partnership (FLP)
- gift leaseback
- qualified personal residence trust (QPRT)
39
Disclaiming property requirements
- 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
Stock redemption
(Section 303)
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
Installment payment of estate taxes
(Section 6166)
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
Special use valuation
(Section 2032A)
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
Claim for income tax refund not received
can be in the gross estate
44
Taxable gift
Is in the estate’s tax base but not gross estate
45
Income tax already paid
Not a deductible item for gross estate to calculate adjusted gross estate
46
Taxable gifts
- not included in the gross estate
- they are added to the taxable estate to get the tax base
47
Death benefit
Is in the gross estate of the owner
48
Lapse of a general power with no 5 or 5 limit
Will typically subject the holder to a gift tax liability
49
Gifting amount to use to not cause a taxable gift
$17,000 single or $34,000 married
50
Amount that can be given to one individual (donee) without causing a federal gift tax
$12,937,000
Annual exclusion ($17,000) + gift exemption ($12,920,000)
51
Taxable gifts
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
Disadvantage of durable power of attorney
Power ceases at death
53
Included in grantor’s gross estate
- 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
Revocable trust income taxation
Taxes to the grantor
55
Section 2503(b) trust income distributions
Income distributions are mandatory
56
Irrevocable trusts and present interest gifts
An irrevocable trust must have crummey provisions to be treated as a present interest gift and be eligible for the annual gift exclusion
57
CLUT required minimum distribution
The trust’s annual income
There is no required minimum distribution
58
Do not allow for charitable transfer distributions be paid for a term certain
Pooled income funds and gift annuity
Only on the actual life of the beneficiary
59
CRAT
Pays a fixed income to a non-charitable beneficiary, typically the grantor
60
CRUT
Pays a fixed percentage
The percentage is fixed but not the amount of annual income
61
Premium payment
Is not an incident of ownership
62
Gifts included in the donor’s gross estate
- donor retains a life estate in the gift property
- donor retains the power to revoke or amend the gift
63
Minor child and life insurance
Set up trust as life insurance beneficiary with the children as the beneficiaries of the trust
64
“Freezing” techniques for transfer tax purposes
- GRAT
- preferred stock recapitalization (recap)
- QPRT
- private annuity
- SCIN
65
Special use valuation can only be used for
Real property held in conjunction with a farm, ranch or closely held business
Needs to have an indication of having real property
66
Can life insurance be disclaimed
Yes
67
JTWROS step up
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
Revisionary Interest
100% of trust value is in the grantor’s estate when the grantor’s revisionary interest exceeds 5% of the initial transfer
69
Terminal Interest
Allows spouse to live in the home
70
UTMAs in Donor’s Estate
If a donor dies before a child comes to age, the UTMA can be included in the donor’s gross estate
71
Negatives of an installment sale
- owner loses control
- owner loses depreciation
- would not share extra cash flow with children
- outstanding balance would be in the gross estate
72
CRUT/CRAT payments
CRUT- payments are revalued annually
CRAT- payments must be paid out at least annually
73
Life insurance and the gross estate
- 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
Jointly held property and the gross estate
Half of jointly held property is included in the gross estate
75
Gifts of future interest
Don’t qualify for the annual exclusion ($17,000)
76
Premium payments
Are not incident of ownership
They will not be the reason life insurance is included in the gross estate
77
GSTT
An additional tax and can be due at time of gift or later
78
Insurance coverage
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
When are 303 stock redemption and 6166 installment sale used?
At death
80
Preferred stock recap
- freezes business value
- allows beneficiaries to benefit from future growth of the common shares
81
Entity purchase buy sell
- 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
Social security disability rider
Included in disability payments
83
Child with earned income
Will have income tax withheld on their earnings
84
Child who works for self employed parent
Still has income taxes withheld on their earnings
Not subject to FICA or self employment tax
85
Investment that does not defer taxes
Buying muni bonds
Interest is federally tax exempt but not tax “deferred”
86
Buying a building
Defers taxes because you can take depreciation
87
QPRT
Used for large and expensive homes
Not needed for small homes
88
Mortgages
Do not affect appreciation
89
Pension plans and variable annuities
No step up in basis
90
Summary of liability for payment of the GST tax
- 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
Key Person Discount
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
Gross Estate
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
Adjusted Gross Estate (AGE)
Gross estate minus:
- funeral expenses
- administrative expenses
- debts
- taxes
- casualty losses
- interest due to
94
Primary purpose of the pour over trust
To “catch” any assets that the client owns but are not controlled by the revocable trust
95
GSTT Calculation
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
Amount of Charitable Gift when under FMV
FMV - charity purchase price
97
3 year rules
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
