Estate Planning Flashcards
Testamentary capacity
Must understand nature of the will
Must understand general nature of property owned
Must understand who will be receiving the property
General power of appointment
Exercise of power is not subject to ascertainable standard
Grant of power limited to 5&5
General power of appointment with limitation
Greater of 5% or $5,000, withdrawal per year
QTIP
Qualified terminal interest trust
- Spouse is NOT given general power of appointment
- spouse is only income beneficiary
- remainder beneficiaries named by grantor
- grantor will be entitled to marital deduction for % of trust asset value for which qtip election is made
Gross up rule
If decedent paid gift tax out of pocket on gifts made within 3 years of death, then gift taxes paid are included in gross estate
Tenancy by entirety
Must be between 2 spouses
Survivorship rights exist, will substitute
Can only terminate with the consent of both spouses
Interest in property is equally
Special power of appointment
Exercise of power is limited
Prior consent of creator or a party with adverse to that of the holder ( beneficiary)
Must meet ascertainable standard HEMS, health, education, maintenance , support
Income in respect of the decedent IRD
- Income earned but not yet received is INCLUDED in the decadents gross estate
- NO step up in basis
- pension, IRA, royalty benefits
Abatement
A statute that specifies the order in which the shares of the beneficiaries inheritence will be reduced to satisfy debts against the estate
Tendency in common
A form of property ownership that exists between 2 or more individuals.
- NO rights of survivorship.
- Interests may be disproportionate
Family allowance statute
Gives the surviving spouse and dependent children a stipend to live on during the period of probate administration
Deferral of estate tax 6166
Extension of time to pay estate tax
- decedent a GE, must include closely held business
- the value of the closely held business must exceed 35% of the decedent’s adjusted gross estate
- taxes may be paid over approximately 15 yr period following death
- allows business to generate income needed to pay the tax
- *** several businesses can be aggregated to meet 35% requirement
Non-exoneration clause
A clause in a will that states that the beneficiary of property from an estate can NOT compel the estate to pay any secured lien against the property
Spousal elective share
A surviving spouse is entitled to a % of the deceased spouse estate, unless specified in a prenuptial
Valuation of gross estate discounts
- minority interest, discount resulting from inability of closely held business to control business decisions
- lack of marketability, discount for restrictions on marketability and taking public a closely held business
- blockage discount, valuation method used for selling large block of publicly traded stock, which can effect market price
Devise clause
A clause in a will that disposes of real property
3 year inclusionary rule
Property that must be included in gross estate, because it accrued within 3 years of death
1) Gross up rule
2) transfers incidents of ownership on life insurance on own life
3) release a retained right of control of property ( section 2036-2038)
Ancillary probate
When probate must be conducted in state other then state of deceased domicile
Marital deduction from gross estate, exception
Spouse must not be given a terminally interest or the terminally interest must be deductible
Charitable deduction, exception
Transfer cannot be of a partial interest , unless it is a form authorized by the code
Ademption
Occurs when property specifically bequeathed in a will is not available at death, lost or disposed of
Taxable estate calculation
Start with adjusted gross estate - marital deduction - state death taxes actually paid - charitable deduction = equals taxable estate
IRS form 706
“6 feet under”
Estate tax filing form
- due 9 months after date of death ; automatic 6 month extension is available
1) must be filed if gross estate > exclusion amount for year of death
2) must be filed if gross estate + adjusted taxable gifts> exclusion amount in year of death
Prior transfer credit PTC
1) The current decedent must have received the property from another decedent who dies < 10 years prior or < 2 years after the current decedent. And the current decedent must have estate tax liability that exceeds the applicable tax credit
2) the property must have been taxable in the estate of the other decedent
3) prior decadents estate must have paid estate tax out of pocket
Estate tax credit amount
$1,772,800
$5,120,000 - $500,000= $4,620,000 x 35%= $1,627,000
Up to $500,000 = $155,800
$1,627,000 + $155,800= $1,772,800
Estate tax exclusion amount
$5,120,000
C trust
Qtip trust, qualified terminable interest trust
- spouse is given a qualified income interest
- grantor names remainder beneficiaries
- qtip is an election were the IRS accepts terminable interest
- marital deduction will apply if qtip election is made
- qtip election can be made for some or all assets in C trust
B trust
Bypass trust
- designed to shelter the federal estate tax credit
- utilizes 2 tax shields
1) marital deduction
2) federal estate tax exemption - assets are NOT included in surviving spouse estate, because they bypass the SS estate
- surviving spouse is usually one of many income beneficiaries
- spouse must not be given general power of appointment
- grantor names remainder beneficiaries, which should be someone other than surviving spouse
Annual gift tax exclusion amount
$13,000
Direct skip
ONLY skip parties have current beneficial interest in the transferred property
GSTT tax rate
- Taxed at top regular tax rate of the transferor
- NOT tiered
- GSTT in addition to gift or estate tax
Charitable remainder trusts
CRUT, unitrust
CRAT, annuity trust
- decedent gives charity a vested remainder interest
- decedent chooses non-beneficiary to receive income
- present value of remainder interest gets charitable deduction
- term lasts for 20 years or life
Charitable lead trusts
CLUT, charitable lead uni trust
CLAT, charitable lead annuity trust
- grantor gives charity an income interest
- income must be paid annually
- grantor gets deduction for present value of income interest
- grantor name non charitable beneficiary to receive remainder
PIF
Pooled income fund
- can only be established by 50% charity
- donor transfers property to the fund, but retains life income interest
- non contingent remainder interest given to charity
- fund managed by charity
- income beneficiary gets income annually until death
Charitable gift annuities
- donor gives cash or property to charity in exchange for charity’s promise to pay an annual amount to the donor
- donor receives a charitable gift tax deduction of the difference of value of property given and the present value of annuity payments
- if annuity interest is given to anyone other than donor or donor spouse, gift tax will result
Section 2503(c)
Minor’s trust
- property given to irrevocable trust, minor under 21 is both sole income and remainder beneficiary
- upon reaching 21 minor must be allowed to remove property
- if minor dies prior to age 21, trust property must be paid to the minors estate
- kiddie tax rules apply
Support trust/ supplemental trust / special needs trust
Irrevocable trust established and funded by grantor who has obligation or desire to provide support for other individuals
- grantor can act as trustee , this may cause inclusion in GE if grantor dies
- trustee usually given discretion over income with SPRAY power, if more than one beneficiary
- remainder beneficiaries are named by the grantor
Section 2503(b)
Mandatory income trust
- title to property in placed in the name of an irrevocable trust
- trust is required to pay income at least annually
- trust may have a number of income and remainder beneficiaries who can be minors or adults
- income taxed to beneficiaries wether distributed or not
- FMV of property given to trust is subject to gift tax, grantor entitled to annual exclusion x number of income beneficiaries
Net gift
Gift is conditioned on donee assuming a legal obligation of the donor; mortgage
- gift tax is only paid on net amount of gift
- if the debt obligation exceeds the donors cost basis, the donor realizes gain
Reverse gift
Appreciated property is given to a donee expected to Predecease the donor, with the expectation that donee will give property back by will
- purpose, donee wants stepped up cost basis
- donor achieves stepped up cost basis, ONLY if more than 1 year elapses between completion of the gift and donee’s death
Definition & Tax implications to holder of Crummey power
- Crummey power is given to create a present interest, so that the donor can use the annual exclusion.
- Crummey power is a general power of appointment
- Holder of Crummey power is liable for trust income to the extent of the power, wether exercised or not
- lapse of Crummey power will subject holder to gift tax on lapsed amount that exceeds 5 and 5 power
- any amounts subject to exercise of power at death must be included in holders GE
Complex trust definition
A trust that has the ability to accumulate income, make distributions on corpus/ principle during its term, or make distributions to charities
Codicil
A separate supplementary written document that amends or supplements an existing will
Rule against perpetuities
A common law rule that most states have adopted
- it establishes the maximum time that assets may be held in trust
- it usually does NOT apply to trusts for pets or charitable trusts
Special use valuation 2032
- decedent must be US citizen at death
- real property must be used for a qualified use by decedent or family member at time of death for a total of 5 out of 8 year
- must be owned by decedent for total of 5 of the 8 years prior to death
- 50% test: value of real estate and personal property employed in qualified use must be at least 50% of decedent’s gross estate
- 25% test: value of real estate must be at lest 25% of decedent’s gross estate
- value of qualified real & personal property from different business may be combined to meet this test
Indirect skip
At least ONE non-skip party has a current beneficial interest in the property & at least one skip party also has interest
- GSTT will be due upon taxable terminable interest or distribution
Qualified interest trusts/ grantor retained trusts
GRAT, annuity interest
GRIT, income interest
GRUT, unitrust interest
QPRT, right to use personal residence
Assets are removed from grantors gross estate, UNLESS grantor dies during trust term
Assets are given to an irrevocable trust to last for a certain term
Grantor retains an income stream for specified # of years
Non-skip person
- a transferee of property who is less than 2 generations younger than the transferor
- if the transferor has a retained interest in the property, the transferor is a non-skip party
- the transferor spouse or former spouse is ALWAYS considered a nonskip person
Recapitalization transaction
Purpose: to allow additional owners/family members into the business to eventually purchase the owners interest and run the business
- allows present owner to maintain control
- freeze value of business for estate tax purposes
- may need to change business entity, sole proprietor to s-corp, 2 classes of ownership
Ch 14 , 2701gift tax rules
Apples to transfer of closely held business
- transferor retains interest in the business
- income must be fixed in both time and amount to be deemed qualified
A trust
Power of appointment trust
- leaves everything to surviving spouse
- income interest to surviving spouse
- marital deduction applies to assets in trust
- assets in trust included in gross estate of surviving spouse
ILIT
Ownership of a life insurance policy is given to an irrevocable trust
- if other property is given to the trust it is said to be funded
- policy death benefits are removed from the grantors gross estate unless the 3 year rule applies, if other asses are given to the trust the 3 year rule does NOT apply for these assets
- future contributions of premium payments are considered gifts, but can be covered under annual exclusions IF the beneficiaries are given Crummey power
- trusts are usually written as bypass trust so that rusts assets are NOT included in spouses gross estate
Corporate stock redemptions 303
- Can be used in the event that corp stock needs to be liquidated to pay estate tax
- value of stock must be greater than 35% of decedent’s adjusted gross estate after including all taxable gifts within 3 yr period
- amount redeemed can NOT exceed death taxes plus funeral and admin expenses
- section 303 allows for more favorable tax rates for sale of corp stock, capital gains rates vs ordinary income or dividend rates
Postmortem tax elections
Unreimbursed medical expenses
Estate administrative expenses
Gifts where a return is not due at death
Personal representative fee
Adjusted gross estate calculation
Total gross estate Subtract deductions - Funeral and admin expenses - debt of the decedent, mortgage, and liens - theft and casualty losses = Equals adjusted gross estate
Postmortem tax elections
Unreimbursed medical expenses
Estate administrative expenses
Gifts where a return is not due at death
Personal representative fee
Unitrust
Payments are based on a percentage of the trust assets as revalued each year
