ESTATE PLANNING Flashcards
COMMUNITY PROPERTY:
CHARACTERISTICS
ADVANTAGE: SURVIVING SPOUSE GETS A FULL STEP UP IN BASIS (ONLY LTGC PROPERTY - NOT ORDINARY INCOME PROPERTY) IN THE ENTIRE PROPERTY IF AT LEAST ONE-HALF OF THE WHOLE PROPERTY IS INCLUDABLE IN THE DECEASED SPOUSE’S GROSS ESTATE.
NO SURVIVORSHIP RIGHTS: A WILL IS NEEDED AND THE PROPERTY WILL BE SUBJECT TO PROBATE.
QUASI-COMMUNITY PROPERTY
PROPERTY THAT WOULD HAVE BEEN COMMUNITY PROPERTY EXCEPT FOR THE FAVT IT WAS ACQUIRED WHILE THE COUPLE WAS LIVING IN A NONCOMMUNITY PROPERTY STATE
COMMUNITY PROPERTY
INCLUDED:
TERM INSURANCE ♦IRAS ♦CDS ♦CARS/HOUSES/
PROBATE (EXCLUDED)
- IRA’S PASS BY BENEFICIARY
- TERM LIFE INSURANCE POLICY
PROBATE (INCLUDED)
- 50% WHOLE LIFE (CV*)
STEP UP AT DEATH
HOME♦STOCK♦LIFE INSURANCE
COMMUNITY PROPERTY - STEP UP
LTCG PROPERTY VS ORDINARY INCOME
LTCG PROPERTY
- CORPORATE STOCK (C CORP)
- HOMES
- STOCK PORTFOLIOS
ORDINARY INCOME PROPERTY
- PROFIT SHARING PLAN
- CDS
ESTATE TAX FILING REQUIREMENTS
FEDERAL ESTATE TAX FORM 706 (6 FT UNDER) MUST BE FILED FOR ALL DECENDENTS WHO ARE CITIZNES OR RESIDENT A TOTAL GROSS ESTATE + ADJ TAX GIFTS EQUALING OR EXCEEDING THE AMT OF THE EXEMPTION AMT FOR THE YR OF DEATH.
ALSO REQUIRED WHEN “PORTABILITY” IS ELECTED.
EXECUTOR RESPONSIBLE FOR PAYING TAX.
FORM 706
(FEDERAL ESTATE TAX)
GROSS ESTATE ⇒ (LESS funeral exp, admin exp, debts, taxes casualty losses) (PLUS: Gift taxes pd on any gifts w/in 3 yrs of death, all probate assets and all non-probate assets, life insurance, general powers & retained interests) =
ADJUSTED GROSS ESTATE (AGE)⇒ (LESS marital deduction and charitable dedduction =
TAXABLE ESTATE ⇒ (PLUS taxable gifts over $14k/$28k,Cash) =
TAX BASE ⇒ (LESS exemption amount 5.34m excess times the tax rate) =
TENTATIVE TAX (LESS gift taxes paid) =
NET ESTATE TAX
GIFT GIVING TECHNIQUES & STRATEGIES
PROPERTY TO GIFT OR SELL
HIGHLY APPRECIATED PROPERTY - Good to gift to a charity or donee in a lower tax bracket. NOTE: May want to keep this property until death to get a step up in basis (compare estate tax to capital gains rate)
PROPERTY LIKELY TO APPRECIATE - Good to gift to remove future value from donor’s estate.
INCOME PRODUCING PROPERTY - Gift only if donee is in a lower tax bracket.
LOSS PROERPTY - Always sell to take the loss then gift the cash on the sale.
OUT OF STATE PROPERTY - Gift to avoide ancillary probate.
PROPERTY SUBJECT TO DEPRECIATION: Keep property to get full depreciation.
FULLY DEPRECIATED PROPERTY: Can be an excellent gift using the gift-leaseback technique.
LIFE INSURANCE - excellent to gift.
LIFE INSURANCE INCLUDED IN DECEDENT’S ESTATE
- PROCEEDS ARE PAID TO THE EXECUTOR OF THE DECENDENT’S ESTATE
- THE DECEDENT AT DEATH POSSESSED AN INCIDENT OF OWNERSHIP IN THE POLICY
- THE INSURED TRANSFERRED A POLICY WITH AN INCIDENT OF OWNERSHIP WITHIN THREE YEARS OF DEATH
YOU OWN THE POLICY ON YOUR SPOUSE AND YOU DIE: REPLACEMENT COST IS INCLUDED IN YOUR PROBATE ESTATE (TERM - UNUSED PREMIUM): (WHOLE LIFE - TERMINAL RESERVE (NOT CASH VALUE) + UNEARNED PREMIUM) NO 3 YR RULE.
YOU GIFTED YOUR SPOUSE’S POLICY TO YOUR DAUGHTER. NOTHING INCLUDED IN YOUR ESTATE (NO 3 YR RULE)
IF YOU ARE THE INSURED
YOU OWN THE POLICY - YOU ARE THE INSURED - OU DIE - DEATH BENEFIT INCLUDED IN YOUR ESTATE.
YOUR SPOUSE IS THE OWNER:
YOU GIFTED TO HIM W/IN 3 YRS OF TRANFER - DEATH BENEFIT INCLUDED IN YOUR ESTATE.
YOU GIFTED IT TO HIM AND NEVER CHANGED THE BENEFICIARY (YOUR ESTATE) DB INCLUDED IN YOUR PROBATE ESTATE.
YOU SOLD THE POLICY TO SOMEONE ELSE - NOTHING INCLUDED IN YOUR ESTATE (NO 3 YR RULE).
ESTATE TAX - NON-SPOUSE JOINT TENANT
THE FULL VALUE OF JOINTLY HELD PROPERTY IS INCLUDED IN THE GROSS ESTATE OF THE FIRST TENANT TO DIE UNLESS THE SURVIVOR CAN ESTABLIUSH OWNERSHIP (CONSIDERATION) OF SOME PORTION OF THE PROPERTY BEFORE JOINT TENANCY WAS CREATED.
A GIFT OF PROPERTY DOESN’T COUNT AS A CONTRIBUTION.
PROBATE VS GROSS ESTATE
**PROBATE: **
- PROP HELD TEN IN COM
- COMMUNITY PROPERTY
- 401K/IRA - NO BENE
- BUSINESS PROPERTY OWNED BY DECEDE
- A LIFE POLICY OWNED BY DEC ON SPOUSE
- 50% COMMUNITY PROPERTY
- WILL GOES THRU PROBATE - NOT A TESTAMENTARY TRUST
GROSS ESTATE:
SECTION 121 EXEMPTION
WHEN A HOUSE IS SOLD - IF YOU HAVE LIVED IN THE HOUSE 2 OUT OF THE LAST 5 YEARS:
$250,000/$500,000 CG EXEMPTION
TENANCY BY THE ENTIRETY
(TBE)
NO PROBATE
CANNOT BE DISCLAIMED
CAN ONLY BE HELD BY HUSBAND AND WIFE
TRANSFER OF PROPERTY MUST HAVE MUTUAL CONSENT OF BOTH PARTIES.
FOR ESTATE TAX PURPOSES, THE PROPERTY IS DIVIDED BETWEEN THE SPOUSES EQUALLY.
ASSETS ARE PROTECTED FROM THE CLAIMS OF EACH SOUSE’S SEPARATE CREDITORS BUT NOT FROM THE CLAIMS OF BOTH SPOUSE’S JOINT CREDITORS.
NOT AVAILABLE IN COMMUNITY PROPERTY STATES.
VALUE OF TAXABLE GIFT
IF GIFT FMV IS GREATER THAN THE DONOR’S ADJ BASIS (APPRECIATED PROPERTY):
- The value of the gift for gift tax purposes is its fair market value at the date of the gift.
- If the gift FMV is greater than the donor’s adj basis (appreciated) use the donor’s adj basis for income tax purposes.
- To calculate the amount of the taxable gift - MAKE SURE to deduct $14,000/$28,000 as applicable.
COST BASIS OF GIFT OF PROPERTY - WHEN PROPERTY HAS APPRECIATED
If no gift tax has been paid - donor’s cost carries over.
If gift tax paid AND property has appreciated:
Father gifted property worth $214,000 Basis: $76,000. Paid gift tax: $80,000. (40% gift tax bracket after using $5,340,000 exemption. Claimed $14,000 an exclusion) What is basis? Basis of $76,000 is increased by the gift tax paid that is attributable to the appreciation. ($55,200)
(Appreciation) (gift tax)
(($214,000-$76,000) ÷ ($200,000*)) x $80,000 = $55,200 (Attributable) Value of tax gift=$131,200
*(200,000-$14,000)
