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CFP Exam: March 2013 > Estate Planning > Flashcards

Estate Planning Flashcards

1
Q

What are the Basic Estate Planning Documents?

A

Wills
Side Letters of Instruction
Powers of Attorney for property
Durable power of attorney for health care
Living wills or advance medical directives
Do not resuscitate orders

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2
Q

What is Ancillary Probate?

A

When a decedent dies intestate with real property in another state than their state of domicile

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3
Q

What is a Holographic Will?

A

When one handwrites their own will. Must sign and date it. Valid in most states.

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4
Q

What is a Nuncupative Will?

A

An oral, dying declaration made before a sufficient number of witnesses. Usually only good for personal property and may be limited by a dollar amount. Not valid in most states.

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5
Q

What is a Statutory Will?

A

A will drawn by an attorney, follows the statutes of the state, signed and dated, and witnessed.

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6
Q

What is a Reciprocal Will?

A

Two identical wills by two individuals that leave all assets to each other.

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7
Q

What is a Joint Will?

A

Two or more individuals execute one will for their common interest property

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8
Q

What Does a Bequest Clause Accomplish?

A

Leaves specific assets to specific people

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9
Q

What Does a Residuary Clause Accomplish?

A

Covers anything that is not named in a bequest clause to avoid being partially intestate

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10
Q

What Does an Attestation Clause Accomplish?

A

Witnesses who authenticate the testator’s signature, competence, and was not under duress

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11
Q

What Does a Self-Proving Clause Accomplish?

A

A Notary declaring that he witnessed the testator and witnesses sign the will.

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12
Q

What Does a Disclaimer Clause Accomplish?

A

Reminds any heirs that they can disclaim a bequest

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13
Q

What are the Requirements for a Disclaimer Clause to be Valid?

A
  1. The disclaiming property cannot benefit from the property (except the surviving spouse)
  2. Cannot benefit from any future interests
  3. Must disclaim within 9 months of decedent’s death
  4. Disclaimer must be in writing
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14
Q

What Does a Contingent Legatee Clause Accomplish?

A

Determines how to divide proceeds to deceased heirs descendents

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15
Q

What is Per Stirpes and Per Capita?

A

Per stirpes distributes a deceased heir’s inheritance to its decendents
Per Capita distributes assets evenly among all heirs and descendents of deceased heirs

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16
Q

How Can a Will be Revoked?

A

Testator can destroy it by shredding or burining it
The testator can create a new will and revoke the previous will
The testator can write “CANCEL” across the will in some states

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17
Q

How Can a Will be Changed?

A 
By codicil (Supplement)
May be executed like a statutory will
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18
Q

What is a Side Instruction Letter?

A

Exists separately from the will and names the testator’s wishes regarding specific tangible possessions and funeral/burial wishes

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19
Q

What is a Felonious Homicide Statute?

A

Many states use this statute to disinherit any legatees if they kill the decedent

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20
Q

What is Power of Appointment?

A

The power to direct assets to another

If a general power holder dies before the grantor, the assets will be included in the power holder’s estate

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21
Q

What is a Durable Power of Attorney?

A

The power lasts when the grantor becomes incapacitated and expires at the grantors death

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22
Q

What is a Springing Power of Attorney?

A

Powers aren’t effective until a defined event has taken place

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23
Q

What are the Community Property States?

A 
Arizona
California
Idaho
Louisiana
Nevada
New Mexico
Texas
Washington
Wisconsin
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24
Q

What Property is Considered Separate in a Community Property State?

A

Property acquired before marriage, inherited, or gifted

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25
Q

What are the Basis Considerations for Community Property?

A

When one spouse dies, both halves get a step up in basis of FMV

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26
Q

What Value is Included in the Gross Estate of Fee Simple Property?

A

100%

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27
Q

What Value is Included in the Gross Estate of Tenancy in Common Property?

A

% Owned

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28
Q

What Value is Included in the Gross Estate of JTWROS Property?

A

If between spouses, then 50% deemed contribution rule applies
If not spouses, then the % contributed

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29
Q

What Value is Included in the Gross Estate of Tenancy in Entirety Property?

A

50% deemed contribution

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30
Q

What Value is Included in the Gross Estate of Community Property?

A

50% deemed contribution

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31
Q

What is Included in probate of Fee Simple Property?

A

100%

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32
Q

What is Included in probate of Tenancy in Common Property?

A

% Owned

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33
Q

What is Included in probate of JTWROS Property?

A

None

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34
Q

What is Included in probate of Tenancy by the Entirety Property?

A

None

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35
Q

What is Included in probate of Community Property?

A

50%

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36
Q

Does Fee Simple Have Automatic Survivorship?

A

No

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37
Q

Does Tenancy in Common Have Automatic Survivorship?

A

No

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38
Q

Does JTWROS Have Automatic Survivorship?

A

Yes

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39
Q

Does Tenancy of the Entirety Have Automatic Survivorship?

A

Yes

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40
Q

Does Community Property Have Automatic Survivorship?

A

No

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41
Q

Is Fee Simple Property Partitionable Without Consent?

A

Not Applicable; only one owner

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42
Q

Is Tenancy in Common Property Partitionable Without Consent?

A

Yes

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43
Q

Is JTWROS Property Partitionable Without Consent?

A

Yes

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44
Q

Is Tenancy by the Entirety Property Partitionable Without Consent?

A

No

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45
Q

Is Community Property Partitionable Without Consent?

A

No

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46
Q

Which Types of Property are Transferred Via State Contract Law?

A 
Contracts with named beneficiaries:
Life insurance policies
Annuities
POD/TODs
Qualified plans
IRAs
SEPs
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47
Q

Which Types of Property are Transferred Via State Titling Law?

A

Property with survivorship features:
JTWROS
Tenants by the entirety

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48
Q

Which Types of Property are Transferred Via State Trust Law?

A

All assets already retitled into trusts

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49
Q

Which Types of Property are Transferred Via State Probate Law?

A 
Fee simple
Tenancy in common
1/2 community property
Automobiles
Household goods
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50
Q

what is the Difference Between Administrators and Executors?

A

Executors are named in a will

Administrators are named by the probate court

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51
Q

What is Abatement?

A

When insufficient assets remain to satisfy the legatee provisions causing a reduction in in amounts given to legatees

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52
Q

What are the Tax Implications for an Indirect Gift in the form of an Interest Free or Below Market Loan?

A

The lender must recognize “phantom interest” in their income

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53
Q

What is the Imputed Interest on Interest Free or Below Market Loans?

A

$0 to $10k = none
$10k to $100k = lesser of borrower’s net investment income or the Fed rate - State rate
(If borrower’s net investment income < $1k, then no imputed interest)
> $100k = Fed rate - State rate

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54
Q

What is a Net Gift?

A

When the donee has to pay the gift tax

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55
Q

What is the Donor’s Tax Liability in a Net Gift?

A

If the gift tax exceeds the donor’s basis, the amount in excess must be recognized as income to the donor

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56
Q

What is the Non-Citizen Spouse Deduction?

A

$139k

Unlimited for citizen spouses

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57
Q

What is Gift Splitting?

A

When one donor makes a gift of their own property, and the donor’s spouse agrees to use their annual exclusion

58
Q

What Must be Filed for a Gift Split?

A

The donor files form 709 (Gift Tax Return)

Both spouses must sign

59
Q

Which Types of Transfers are Excluded from the Gift Tax?

A

Gifts to political organizations
Qualified transfers (direct payments to schools or medical facilities)
Payments of legal support
Payments to an ex-spouse pursuant to a divorce decree within a year
Transfers within business settings
Spousal transfers (limited to $139k for non-citizen spouse)
Charitable gifts

60
Q

Which Types of Assets are Best to Gift If Trying to Reduce the Gross Estate?

A

Appreciating assets

61
Q

How Should Property with FMV < Basis Be Gifted?

A

Property should be sold so the donor can recognize a loss, then proceeds should be given to the donee to buy the property

62
Q

Which Types of Properties are Best to Donate to Charities Taxwise?

A

The most appreciated properties so you can avoid capital gains and possibly deduct the FMV

63
Q

Who Is the Best Candidate to Gift Income Producing Property?

A

The ones with the lowest tax bracket, so the income produced is taxed at the lowest possible rate

64
Q

What is IRC Section 2035 in Regard to the Gift Tax?

A

Any gift tax paid within three years of death is included in the gross estate. Not the gift itself though.

65
Q

What is IRC Section 2035 in Regard to Property?

A

Any property gifted, but maintained an interest, within three years is includable in the gross estate

66
Q

What is IRC Section 2035 in Regard to Life Insurance?

A

If the decedent gifts a life insurance policy on his life within three years, the death benefit and gift tax is included in his gross estate

67
Q

How are Single and Survivorship Annuities Included in the Gross Estate?

A

Single annuities are not included
Survivor annuities value at time of death are included up to the decedent’s portion of the cost basis
value at death x (decedent’s basis / total basis)

68
Q

How is Jointly Owned Property Included in the Gross Estate?

A

The full FMV at death is included unless the executor can show the property was not acquired entirely by the decedent, or that the property was jointly inherited or gifted

69
Q

What Types of Power of Appointment are Included in the Gross Estate?

A

Only general powers of appointment

70
Q

What is the 5 and 5 Rule for Powers of Appointment?

A

$5,000 or 5% of the property’s value

If limited to that amount and lapses before death, not included in gross estate

71
Q

When are Life Insurance Proceeds Included in the Decedents Gross Estate?

A

When the Decedent either owns the policy or when the decedent’s estate is the beneficiary.
If the beneficiary opts for an annuity payout, the gross amount would be the available lump sum option

72
Q

What are the Discounts to Hard-to-Value Assets?

A

Minority ownership discount (15% - 50%)
Lack of Marketability (15% - 50%)
Blockage (Too many stocks to sell at once)

73
Q

How are Financial Securities Valuated for the Purposes of Gross Estate?

A

The average of the securities highs and lows on the date of death (If dies on a weekend, the average of the previous and next trading days)

74
Q

How are Financial Securities Valuated for the Purposes of Gross Estate if it is Not Traded Regularly and Was not Traded on the Date of Death?

A

(Price on next trading day x number of days between death and previous trading day) + (Price on previous trading day x number of days between death and next trading day) / total number of days between previous and next trading days

75
Q

What are the Qualifications for an Alternative Valuation Date?

A

The total value of the gross estate must depreciate after death and the total estate tax must be less than if calculated using date of death values

76
Q

What are the Rules for Using an Alternative Valuation Date?

A

All assets valued must use the alternate date except:
Assets distributed or sold within 6 months of death are valued at date of sale or distribution and wasting assets (annuitized annuities, patents, royalties, installment notes, lease income) must be valued at date of death

77
Q

What are the 6 Deductions from Gross Estate to Determine Adjusted Gross Estate?

A
  1. Funeral expenses
  2. Last medical expenses
  3. Administrative expenses
  4. Debts to decedent
  5. Losses during estate administration
  6. State death tax
78
Q

What are the Deductions from the Adjusted Gross Estate to Determine the Taxable Estate?

A

Charitable deduction

Unlimited Marital deduction

79
Q

What is the Tentative Tax Base?

A

The sum of the taxable estate and all gifts after 1976

80
Q

What is the Tentative Tax?

A

Tax on the total transfers during the decedents life and at death. Use the unified tax table.
Then reduced by total gift tax paid during life.

81
Q

What are the Credits from the Tentative Tax?

A

The applicable estate tax credit ($5,120,000)
Credit for tax on prior transfers
Foreign death tax

82
Q

When is the Estate Tax Return (706) Due?

A

9 months after the date of death
May extend the file deadline by 6 months
May extend the payment deadline by 12 months for reasonable cause

83
Q

What is the Penalty for Failure to File an Estate Tax Return?

A

5% per month up to 25%

If fraudulent, then 15% per month up to 75%

84
Q

What is the Penalty for Failure to Pay the Estate Tax?

A

0.05% per month up to 25%

85
Q

What is a Reverse Gift?

A

If a donor gifts property, then the donee dies and the donor inherits the property back within one year, the adjusted basis stays the same and no step up is allowed

86
Q

What are the Estate Consequences for a Private Annuity?

A

The property sold is not included in the gross estate of the annuitant, the payments are included unless the annuitant to the extent they are not consumed

87
Q

When is a Private Annuity Particularly Effective?

A

When the annuitants actual life expectancy is much less than the IRS table life expectancy

88
Q

What is the Adjusted Basis for the Buyer of a Private Annuity?

A

The total amount of annuity payments made

89
Q

What is a Self Canceling Installment Note?

A

Installment payments for FMV of the property, but if the seller dies before the term end the buyer no longer makes payments, but the buyer must pay the SCIN premium for this feature

90
Q

What is the Adjusted Basis for the Buyer in a SCIN Arrangement?

A

The purchase price regardless of the amount of payments actually paid

91
Q

What is a Grantor Retained Annuity Trust (GRAT)?

A

The grantor transfers property into an irrevocable trust that pays a fixed annuity, then the remainder is paid to a non charitable beneficiary

92
Q

What Portion of a GRAT is Subject to the Gift Tax?

A

The present value of the expected remainder interest for the beneficiary
(FMV - PV of all annuity payments = Remainder interest subject to gift tax)

93
Q

What if the Grantor Dies During the GRAT Term?

A

The FMV as of date of death of the property is included in the grantors gross estate

94
Q

What is a Grantor Retained UniTrust (GRUT)?

A

Same a a GRAT, but the annual payment is based on a fixed percentage of the trust’s assets each year

95
Q

Which Types of Property Aren’t Suitable for a GRUT?

A

Hard to value properties because they would have to be appraised annually

96
Q

What is a Qualified Personal Residence Trust (QPRT)?

A

A form of GRAT where the grantor transfers their personal residence into the trust and instead of an annuity of cash, the grantor is allowed to lived there for the term

97
Q

What if the Grantor of a QPRT Dies or Outlives the Term?

A

If dies during the term, FMV at death is included in gross estate
If outlives the term, grantor may lease the property from the beneficiary at a FMV rate.

98
Q

What is a Tangible Personal Property Trust (TPPT)?

A

Same as a QPRT except the assets are personal property, not real estate

99
Q

What is the Prudent Man Rule?

A

The law requires trustees act in the same way for the beneficiaries as they would act for themselves for their own benefit

100
Q

What are the Two Types of Beneficiaries in a Trust?

A

The income beneficiary and the remainder beneficiary

101
Q

What is a Spendthrift Clause?

A

The beneficiary may not assign, pledge, hypothecate, or promise to give distributions from the trust

102
Q

What is a Trust Called if the Grantor is also the Beneficiary and How Does the Spendthrift Clause Change?

A

Self-settled trust

Spendthrift protection doesn’t apply

103
Q

In What Four Ways Can a Trust Reduce Taxes?

A
  1. The transfer of future appreciation
  2. Minimization of transfer taxes
  3. Reduction is size of gross estate
  4. Grantor must pay taxes on income from trust, which minimizes gross estate
104
Q

What is the Rule of Perpetuities?

A

Places a limit on how long assets can be held in a trust to the lives of the participants plus 21 years

105
Q

When Must Beneficiaries Pay Tax on the Income of the Trust?

A

Beneficiaries pay taxes on trust income that is distributed to them. The trust may deduct distributions from it’s own liability.

106
Q

What is the Difference Between a Simple and Complex Trust?

A

Simple requires all income is distributed

Complex allows accumulation on income, benefit to charity, or distribution of income

107
Q

When Must the Grantor Pay Income Tax on Trust Income?

A

When the trust is revocable

108
Q

When are Gift Taxes Due on a Transfer to a Trust?

A

No gift tax for transfers to revocable trust

Gift tax is due for transfers to irrevocable trust

109
Q

What is a Totten Trust?

A

Not really trusts, but accounts with POD clauses

110
Q

What are the Two Test to be Classified as a Public Charity?

A
  1. > 1/3 of support must come from combination of gifts, grants, contributions, membership fees, and gross receipts from sales (related trade/business)
  2. No more than 1/3 of support can come from gross investment income plus unrelated business taxable income
111
Q

What is the Requirement for a Private Charity to be Classified as Operating?

A

> = 85% of adjusted net income is from excempt activities

112
Q

How Do Gifts of Service Affect Taxes?

A

The service itself is not deductible, but expenses incurred are

113
Q

What is the Deduction for Gifts of Ordinary Income Property?

A

FMV - any ordinary income that would have resulted from its sale

114
Q

What is Ordinary Income Property?

A

Property that if sold would result in ordinary income (inventory, short term assets, works of art, etc.)

115
Q

How do Gifts of Capital Gain Property Affect Taxes?

A

Generally Deductible at FMV
Adjusted basis if:
To a private non-op charity
Tangible property put to an unrelated use

116
Q

How is a Deduction From a Bargain Sale Handled?

A

The adjusted basis is divided up into a sale element and charitable contribution element. Divide the sell price into the FMV, then multiply that percentage by the adjusted basis to get the capital gain from the sale.

117
Q

How is a CRAT Different From a GRAT?

A
  1. The beneficiary of a CRAT is a charity
  2. Minium of 5% and maximum of 50% of Initial FMV annuity
  3. May be for life expectancy or no more than 20 year term
  4. Donor may change the charitable beneficiary
  5. No additional principal contributions
118
Q

How is a CRUT Different From a CRAT?

A
  1. Annuity is a fixed percentage of asset’s FMV recalculated annually
  2. Annuity can be limited to income only and make it up in subsequent years
  3. Can contribute addition principal
119
Q

What is a Charitable Lead Trust?

A

A trust that pays income to a charity and the remainder goes to noncharitable organizations

120
Q

Who and What Assets Work Best with a CLT?

A

High net worth individuals who don’t need the income and highly appreciating assets to remove from estate

121
Q

What is the Total Value that Qualifies for the Unlimited Marital Deduction?

A

The net value = Gross value - taxes, debt, admin expenses

122
Q

What are the Three Property Interest Requirements to Qualify for the Unlimited Marital Deduction?

A
  1. The property must be included in the decedent’s gross estate
  2. The property must be transferred to and for the benefit of the surviving spouse
  3. The property must not be a terminable interest (exceptions apply)
123
Q

What are the Exceptions to the Terminable Interest Rule?

A

A six month survival contingency
A terminal interest where the surviving spouse has a general power of appointment
QTIP
CRT

124
Q

How Can a Non Citizen Spouse Qualify for the Unlimited Marital Deduction?

A

Become a US citizen before the decedent’s estate tax return is due and reside in the US after the death of the citizen spouse
Or use a QDOT?

125
Q

What is a QDOT and What are the Requirements for the Unlimited Marital Deduction?

A

Qualified Domestic Trust
Requirements:
1. At least 1 trustee must be a US citizen or domestic corporation
2. Prohibits distribution of principle unless withholding estate tax
3. Trustee must keep a sufficient amount of assets in US for payment of estate taxes, or have sufficient net worth to pay estate taxes upon death of non citizen spouse
4. The executor of citizen spouse must elect to have marital deduction apply to the trust

126
Q

What are the Requirements for the Applicable Estate Tax Exclusion to be Portable?

A

Both spouses must die after Dec 31 2010

The surviving spouse cannot remarry

127
Q

What are the Five Most Common Uses for Life Insurance?

A
  1. Protect income stream for beneficiaries
  2. Source of funds for education
  3. Provide liquidity
  4. Source for retirement income
  5. Create or sustain family wealth
128
Q

What are the Two Types of Buy-Sell Agreements?

A
  1. Cross-Purchase agreement

2. Stock redemption (Entity purchase)

129
Q

What is a Cross-Purchase Agreement?

A

Each owner owns a life insurance policy on each of the other owner’s lives and agree to have their estate sell the other owners their share of the business.

130
Q

What are the Advantages to a Cross-Purchase Agreement?

A

Step up in basis

Life insurance cannot be attached to company’s creditors

131
Q

What is the Disadvantage to a Cross-Purchase Agreement?

A 
If many owners, there could be a lot of policies required
N x (N-1)
132
Q

What is a Stock Redemption Agreement?

A

The company owns life insurance policies on each owner and each owner agrees to have their estate sell their shares back to the company

133
Q

What are the Advantages/Disadvantages to a Stock Redemption Agreement?

A

Advantages: Potentially less policies needed
Disadvantages: No step up in basis and the policies could be attached to the company by it’s creditors

134
Q

What are the Requirements for Valuations of a Business in a Cross Purchase Agreement to be Recognized By the IRS?

A
  1. The agreement must be a legitimate business arrangement
  2. Cannot be a device to transfer the property to members of the decedent’s family at a less than adequate price
  3. Terms must be comparable to an arms length transaction
135
Q

Which Tax Returns May Unpaid Medical Expense Deductions Be Applied After the Decedent’s Death?

A 
1040
706 (estate income tax return)
136
Q

Which Tax Returns May Casualty Loss Deductions Be Applied After the Decedent’s Death?

A 
1040
1041 (estate income tax return)
706 (estate tax return)
137
Q

Which Tax Returns May Executor Fee Deductions Be Applied After the Decedent’s Death?

A

1041 (estate income tax return)

706 (estate tax return)

138
Q

How is a Lineal Skip Person Determined?

A

2 or more generations:
Grandchild
Grand niece/nephew
1st cousin twice removed (cousin’s grandkids)

139
Q

How is a Non-Lineal Skip Person Determined?

A

37.5 years younger

140
Q

When is a Trust Considered a Skip Person?

A

When all interests in the trust are held by a skip person and if trust distributions can only be made by a skip person

CFP Exam: March 2013 (7 decks)

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