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CFP Exam Prep > Estate Planning > Flashcards

Estate Planning Flashcards

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1
Q

Community Property
-Occurs in 9 states (CA is most well-known)
-What is each spouse entitled to?
-Applies to what property for a couple?
-What are the survivorship rights?
-Adjustments to basis at death of one spouse

A

-Each spouse owns a separate, undivided, equal interest in the property (i.e. each spouse owns 1/2).
-Applies to all property acquired by the spouses during the marriage.
-No survivorship rights…property will be subject to probate.
-Surviving spouse gets full step up in basis (but only for LTCG property) if at least 50% of whole property was includable in deceased spouse’s gross estate.
-Note: Life Insurance can be community property if paid for by community property assets.

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2
Q

Non-Community Property Interests
-Income earned when?
-Property received as a _____ by one spouse.
-Property _____ by one spouse.
-Interest earned on separate assets held by one spouse as sole owner.

A

-Income earned by spouses prior to marriage.
-Property received as a gift…
-Property inherited…

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3
Q

JTWROS
-Property (control, ownership, and enjoyment) shared by multiple owners.
-Income split equally by joint tenants if income-producing.
-What happens if one tenant dies?

A

-If one tenant dies, property immediately passes to the surviving joint tenant(s) in equal shares (i.e. not controlled by a will and excluded from probate estate of decedent).

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4
Q

Tenancy by Entirety
-Only applies to _____.
-Transfer of property can only occur with _____.
-For EP purposes, property is divided between spouses equally.
-Helpful for _____.

A

-Only applies to spouses.
-Transfer of property can only occur with consent of both spouses.
-For EP purposes, property is divided between spouses equally.
-Helpful for protecting property from each spouse’s separate creditors.

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5
Q

Tenancy in Common
-Examples
-Each tenant holds a _____ interest in the property.
-Rights re: income-producing property?
-Transferable?
-Survivorship rights?

A

-Examples: partner who is not a spouse
-Each tenant holds a undivided interest in the property.
-Rights re: income-producing property? Entitled to percent of income based on their percent of interest.
-Transferable? Yes, free to transfer to others.
-Survivorship rights? No; it will go through probate process & be included as asset in holder’s gross estate at death.

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6
Q

Advantages of Probate

A

-Court-supervised administration of the estate
-Marshall all assets (inventory and valuation)
-Pay bills and resolve credit issues
-Oversee distribution of the estate as directed

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7
Q

Disadvantages of Probate

A

-loss of privacy
-possibility of a will contest
-court and other costs (and delays)
-possible multiple state proceedings (ancillary probate)

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8
Q

Assets subject to Probate

A

-Singly owned assets
-Property held by Tenancy in Common
-Community Property
-Assets where the beneficiary is designated as the estate of the insured.
-Insurance policy owned by the decedent in which his/her spouse is insured.

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9
Q

Best Probate Avoidance Strategy

A

A revocable or inter-vivos (living) trust

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10
Q

When does ancillary probate apply?

A

If the decedent has property in a state other than the state of residence

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11
Q

Elective Share

A

A surviving spouse who has not inherited a certain minimum amount determined by state law has a right to take a share of the deceased spouse’s estate.

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12
Q

Examples of Ordinary Income Property

A

IRAs, CDs, automobiles, annuities

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13
Q

Relevant Tax Forms at Death

A

-Final 1040: for any income earned in the year of death.

-1041: Income tax return for an estate (not necessary if the deceased person’s estate receives no income or realizes no capital gains)

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14
Q

What is included in the Gross Estate?

A

All Probate Assets: singly owned assets, TIC, estate as beneficiary, community property

All Non-Probate Assets: JTWROS/Entirety, Life Insurance, General Powers, Gift taxes paid within last 3 years

NOTE: JTWROS with a spouse would be 1/2 includable.

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15
Q

Three-Year Rule: Life Insurance
(3 circumstances that cause LI to be included in decedent’s estate)

A

1) proceeds of LI were paid to the estate executor
2) at death, the decedent possessed an incident of ownership
3) decedent gifted his/her policy within 3 years of death

NOTE: the three year rule does not apply to the sale of an insurance policy!

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16
Q

Examples of Incidents of Ownership

A

right to assign, terminate, borrow against cash reserves, name and change beneficiaries

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17
Q

Three-Year Rule: Gift Tax Paid

A

Any gift tax paid out of pocket on gifts within 3 years of death is included in the estate of the transferor.

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18
Q

How are one’s annuities figured in their gross estate?

A

Most survivorship annuities are includable.

Annuity is fully includable if survivor has a right to take a lump sum. If survivor receives periodic payments, the PV of future payments is included in the gross estate.

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19
Q

The Adjusted Gross Estate is the Gross Estate less _____.

A

Funeral Expenses
Administrative Expenses
Debts (Ex: mortgage)
Taxes
Income Taxes (including CPA’s prep fee)
State Death Taxes
Casualty Losses

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20
Q

Two Deductions from the Adjusted Gross Estate

A

(1) Marital Deduction: allows unlimited amount of property to pass to surviving spouse estate tax free if (a) property included in decedent’s gross estate, (b) property actually passes to surviving spouse, and (c) recipient spouse is US Citizen.

(2) Charitable Deduction: Outright transfers to qualified charities are 100% deductible for both estate and gift tax purposes.

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21
Q

Property Gift Recommendation:
Highly Appreciated Property

A

Donate to charity or donee in a lower tax bracket.

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22
Q

Property Gift Recommendation:
Property likely to appreciate in value

A

Donate to remove future value from donor’s estate.

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23
Q

Property Gift Recommendation:
Income-Producing Property

A

Good to gift only if donee is in a lower tax bracket.

24
Q

Property Gift Recommendation:
Loss Property

A

Always sell to take the loss and then gift the cash from the sale

25
Q

Property Gift Recommendation:
Out of State Property

A

Gift to avoid ancillary probate

26
Q

Property Gift Recommendation:
Property subject to depreciation

A

Keep property to get the full depreciation

27
Q

Property Gift Recommendation:
Life Insurance

A

Excellent to Gift

28
Q

Gifts of Present Interest

A

The first $18k of the total annual value of gifts of a present interest to each donee is excluded from the donor’s taxable gifts.

29
Q

Present vs. Future Interest Gifts

A

Present: those in which enjoyment can start immediately. Qualify for the annual exclusion.

Future: Possession and enjoyment are delayed. Do not qualify for the annual exclusion.

30
Q

Net Gift Technique
-Who pays the gift tax?
-What are the limitations?
-When is this normally used?

A

-Donee pays the gift tax.

-Limitations: (1) donor’s $13.61 million exemption must first be exhausted; (2) decedent’s gross estate includes the amount of gift tax paid by donees on net gifts made by decedent within 3 years of death.

-Normally used when donor has liquidity problem and cannot afford to pay the gift tax.

31
Q

Valuation of Gift when Gift FMV is Greater than Donor’s Adjusted Basis (Appreciated Property):

The value of a gift for gift tax purposes = ?

The basis for income tax purposes = ?

A

The value of a gift for gift tax purposes =
the FMV at date of gift less the annual exclusion.

The basis for income tax purposes = the donor’s adjusted basis.

32
Q

Valuation of Gift when Gift FMV is Less than Donor’s Adjusted Basis (Depreciated Basis):

-When do you have gain?
-When do you have loss?
-When do you have no gain or loss?

A

Gain occurs when sold property exceeds donor’s original basis.

Loss occurs when sold property is less than FMV at date of gift.

No gain or loss occurs when sold property is between these two amounts.

NOTE: this scenario is aka “dual basis” or “double basis.”

33
Q

Exempt Gifts/Deductible Gifts/Qualified Transfers

Gifts that are fully exempt for gift tax purposes include…

A

-Gifts to US citizen spouse or qualified charities

-Qualified payments made directly to education institutions (tuition only; including private K-12 and grad school) or to medical care provider on behalf of any individual.

-Gifts to American political parties

34
Q

Gift of a life insurance policy:
If further premiums are payable, the value is established by adding the _____ and the value of _____.

PS- don’t forget to deduct _____.

A

ITR: Interpolated Terminal Reserve (reserve adjusted to the date of gift)

UP: Value of the unearned portion of the last premium

Don’t forget to deduct the $18k annual exclusion.

NOTE: the ITR+UP applies for gifts of life insurance during life and for determining how much of a policy to include in the deceased’s estate if the deceased owned a policy on someone else.

35
Q

Crummey Trust
-Type of trust
-What’s unique about it?

A

-Irrevocable Trust
-It includes demand (withdrawal) rights where the beneficiary can demand a withdrawal each time a contribution is made (right is for lesser of annual exclusion amount or value of gift transferred).

36
Q

Gift Tax Filing: what form is required and for what circumstances?

A

Form 709 is required for any individual donor who in any calendar year gives the following:
-More than $18k to non-spouse donee
-Gift of a future interest
-Gift for which spouses want to elect gift splitting

37
Q

Exempt/Fully-Deductible Gifts

A

-Qualified payments (any amount) directly to education institution for tuition
-Qualified payments (any amount) directly to provider of medical care
-Gift to a spouse
-Gift to qualified charity
-Gift to political organization

38
Q

UGMA
-who owns?
-what gift property is permissible?

A

Ownership: custodian for a minor

Permissible Gift Property: securities, cash, life insurance, annuities

39
Q

Elements of a Trust
-Person who transfers property (aka _____)
-Party to whom property is transferred (aka _____; holds _____ title)
-Party for whose benefit trust is created (aka _____; holds _____ title)

A

Person who transfers property (aka Grantor/settlor/trustor)

Party to whom property is transferred (aka trustee; holds LEGAL title)

Party for whose benefit trust is created (aka beneficiary; holds EQUITABLE title)

40
Q

Differences between Simple and Complex Trusts:
-Income distribution
-Income taxes
-Distribution of corpus
-Charitable Gifts

A

SIMPLE:
-Income is distributed
-Income taxed to the beneficiary
-Normally, no distribution of corpus
-No Charitable Gifts

COMPLEX:
-Income must or may be accumulated
-Income accumulated is taxed to the trust; income distributed is taxed to the beneficiary
-Corpus can be distributed
-May make Charitable Gifts

41
Q

Inter-Vivos Trust
-literally means _____
-aka _____
-gift tax consequences?
-advantages
-disadvantages

A

-literally means “among the living”
-aka revocable living trust
-gift tax consequences? usually has no gift tax consequences during the grantor’s lifetime
-advantages: organization of property, potentially lower cost than probate, avoidance of probate, greater privacy, speed if disposal of property
-disadvantages: legal fees to prepare, funding burden, longer creditor period

42
Q

Testamentary Trusts are created in accordance with what?

A

Instructions in a person’s will

43
Q

Spendthrift Trust is a provision that prohibits what?

A

Prohibits the transfer of beneficiary’s interest (i.e. mortgaging, selling a future interest, etc.) and stipulates that it is not subject to the claims of the beneficiary’s creditors.

44
Q

ABCs of Trusts
-A:
-B:
-C:

A

A: Martial Trust (aka power of appointment trust)

B: Bypass Trust (aka nonmarital, family, applicable credit amount, applicable credit shelter trust)

C: Qualified Terminal Interest Property (QTIP; aka current income trust)

45
Q

Nonmarital “B”/Family Trust/Credit Shelter/Unified Credit/Bypass Trust

-Primary Characteristic
-Amount of property transferred often equals what?
-Income stream options
-Inclusion is surviving spouse’s estate?

A

-Primary Characteristic: Gives the decedent postmortem control over the property.

-Amount of property transferred: usually equals the exemption.

-Stream of income to surviving spouse or split amount spouse and other individuals.

-No inclusion in surviving spouse’s estate as long as spouse is not given more than 5 or 5 provision or HEMS withdrawal right.

46
Q

DSUE/Portability
-What can be transferred?
-What are the stipulations?

A

Deceased spouse’s unused exemption can be transferred to surviving spouse.

Unused exemption amount is frozen and is not adjusted for inflation.

47
Q

Marital “A”/Power of Appointment/Spousal Trust

-Primary Characteristic
-Amount of property transferred often equals what?
-Income stream options
-Inclusion is surviving spouse’s estate?

A

-Primary Characteristic: surviving spouse has post mortem control over the property in the trust.
-Inclusion in surviving spouse’s estate? Yes.

48
Q

QTIP/”C” Trust
-Primary Characteristic
-Amount of property transferred often equals what?
-Income stream options
-Inclusion is surviving spouse’s estate?

A

-Primary Characteristic: Allows decedent to have postmortem control over the property when the surviving spouse dies.
-Income stream options: provides surviving spouse with income stream paid for life while also qualifying the property for the marital deduction.
-Inclusion in surviving spouse’s estate? Yes.

I think this is the one ushered in during the Reagan era (the first president with an ex-wife).
**Executor must make an election on decedent’s federal tax return to treat property as QTIP property.
**Trust must pay income to the surviving spouse using LAME provisions…Lifetime income interest, Annual payments, Mandatory payments, and Exclusively for spouse’s benefit.

49
Q

Installment Sale
-Sale of property at _____ in exchange for _____.
-If seller dies during installment period, what is included in seller’s estate?
-Do not use if property is subject to _____.
-If property is sold by related party within _____ years of installment date, seller is deemed _____.

A

-Sale of property at FMV in exchange for payments.
-If seller dies during installment period, PV of remaining payments is included in seller’s estate.
-Do not use if property is subject to recapture.
-If property is sold by related party within two (2) years of installment sale date, seller is deemed to have been paid in full for income tax purposes.

50
Q

Powers of Attorney
-Non-Durable
-Durable
-Springing
-At Death

A

Non-Durable: ceases when principal is no longer legally competent.

Durable: not affected by principal’s incompetency.

Springing: Springs into effect when principal becomes incompetent.

At Death: all powers of attorney are terminated.

51
Q

Difference between HEMS and “5 or 5”

A

HEMS: Ascertainable (measurable) standard; covers health, education, maintenance, and support; can de denied by the trustee; distributions for HEMS are not subject to estate or gift tax

5 or 5: allows beneficiary to withdraw the greater of $5k or 5% if the trust’s corpus each year (only this amount can be included in the beneficiary’s estate for estate tax purposes); it’s a demand right that cannot be denied.

Both HEMS and 5 or 5 are about accessing the corpus (not the income) of the trust.

52
Q

Limits on Non-citizen spouses
-marital deduction?
-$13.6 million exemption available?
-what about JTWROS property?
-limited gift amount?
-how to get around this?

A

-No estate tax marital deduction
-$13.6 million exemption is available if the spouse is a resident alien
-Jointly held property between spouses is not considered 1/2 owned (other spouse must prove ownership)
-Limited gift between spouses of $185,000 (2024).

How do you qualify a post-death transfer to a non-citizen spouse for the marital deduction? Property must pass to qualified domestic trust (QDOT).

53
Q

Dynasty Trusts
-what type of trust?
-how long can it last, and who dictates this?

A

-B trust
-can pass free of estate, gift, and GST taxes, for the lives in being plus 21 years and 9 months -OR- as long as state law allows (state law dictates).

54
Q

IRD: Income in Respect of Decedent
-when does this apply?
-what’s important to remember?

A

-Applies when estate is over $13.6 million and has inherited IRA, ER retirement plan, inherited non-qualified annuities, ER non-qualified stock options, deferred comp, or ER NUA stock.
-REMEMBER: if there’s no estate tax paid, then there’s no IRD deduction!

55
Q

Alternative Valuation Date (AVD)
-what is the date?
-what conditions must be met?
-when can it not be used?

A

Date: 6 months after decedent’s death

Conditions:
-Must cause reduction in total value of gross estate
-Amount of federal tax liability must be reduced as a result of filing the election.

Can’t be used:
-Assets pass to spouse using unlimited marital deduction
-Assets pass to other heirs and are less than $13.6 million

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