Estate Planning Flashcards
What are the Basic Estate Planning Documents?
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
What is Ancillary Probate?
When a decedent dies intestate with real property in another state than their state of domicile
What is a Holographic Will?
When one handwrites their own will. Must sign and date it. Valid in most states.
What is a Nuncupative Will?
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.
What is a Statutory Will?
A will drawn by an attorney, follows the statutes of the state, signed and dated, and witnessed.
What is a Reciprocal Will?
Two identical wills by two individuals that leave all assets to each other.
What is a Joint Will?
Two or more individuals execute one will for their common interest property
What Does a Bequest Clause Accomplish?
Leaves specific assets to specific people
What Does a Residuary Clause Accomplish?
Covers anything that is not named in a bequest clause to avoid being partially intestate
What Does an Attestation Clause Accomplish?
Witnesses who authenticate the testator’s signature, competence, and was not under duress
What Does a Self-Proving Clause Accomplish?
A Notary declaring that he witnessed the testator and witnesses sign the will.
What Does a Disclaimer Clause Accomplish?
Reminds any heirs that they can disclaim a bequest
What are the Requirements for a Disclaimer Clause to be Valid?
- The disclaiming property cannot benefit from the property (except the surviving spouse)
- Cannot benefit from any future interests
- Must disclaim within 9 months of decedent’s death
- Disclaimer must be in writing
What Does a Contingent Legatee Clause Accomplish?
Determines how to divide proceeds to deceased heirs descendents
What is Per Stirpes and Per Capita?
Per stirpes distributes a deceased heir’s inheritance to its decendents
Per Capita distributes assets evenly among all heirs and descendents of deceased heirs
How Can a Will be Revoked?
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
How Can a Will be Changed?
By codicil (Supplement) May be executed like a statutory will
What is a Side Instruction Letter?
Exists separately from the will and names the testator’s wishes regarding specific tangible possessions and funeral/burial wishes
What is a Felonious Homicide Statute?
Many states use this statute to disinherit any legatees if they kill the decedent
What is Power of Appointment?
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
What is a Durable Power of Attorney?
The power lasts when the grantor becomes incapacitated and expires at the grantors death
What is a Springing Power of Attorney?
Powers aren’t effective until a defined event has taken place
What are the Community Property States?
Arizona California Idaho Louisiana Nevada New Mexico Texas Washington Wisconsin
What Property is Considered Separate in a Community Property State?
Property acquired before marriage, inherited, or gifted
What are the Basis Considerations for Community Property?
When one spouse dies, both halves get a step up in basis of FMV
What Value is Included in the Gross Estate of Fee Simple Property?
100%
What Value is Included in the Gross Estate of Tenancy in Common Property?
% Owned
What Value is Included in the Gross Estate of JTWROS Property?
If between spouses, then 50% deemed contribution rule applies
If not spouses, then the % contributed
What Value is Included in the Gross Estate of Tenancy in Entirety Property?
50% deemed contribution
What Value is Included in the Gross Estate of Community Property?
50% deemed contribution
What is Included in probate of Fee Simple Property?
100%
What is Included in probate of Tenancy in Common Property?
% Owned
What is Included in probate of JTWROS Property?
None
What is Included in probate of Tenancy by the Entirety Property?
None
What is Included in probate of Community Property?
50%
Does Fee Simple Have Automatic Survivorship?
No
Does Tenancy in Common Have Automatic Survivorship?
No
Does JTWROS Have Automatic Survivorship?
Yes
Does Tenancy of the Entirety Have Automatic Survivorship?
Yes
Does Community Property Have Automatic Survivorship?
No
Is Fee Simple Property Partitionable Without Consent?
Not Applicable; only one owner
Is Tenancy in Common Property Partitionable Without Consent?
Yes
Is JTWROS Property Partitionable Without Consent?
Yes
Is Tenancy by the Entirety Property Partitionable Without Consent?
No
Is Community Property Partitionable Without Consent?
No
Which Types of Property are Transferred Via State Contract Law?
Contracts with named beneficiaries: Life insurance policies Annuities POD/TODs Qualified plans IRAs SEPs
Which Types of Property are Transferred Via State Titling Law?
Property with survivorship features:
JTWROS
Tenants by the entirety
Which Types of Property are Transferred Via State Trust Law?
All assets already retitled into trusts
Which Types of Property are Transferred Via State Probate Law?
Fee simple Tenancy in common 1/2 community property Automobiles Household goods
what is the Difference Between Administrators and Executors?
Executors are named in a will
Administrators are named by the probate court
What is Abatement?
When insufficient assets remain to satisfy the legatee provisions causing a reduction in in amounts given to legatees
What are the Tax Implications for an Indirect Gift in the form of an Interest Free or Below Market Loan?
The lender must recognize “phantom interest” in their income
What is the Imputed Interest on Interest Free or Below Market Loans?
$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
What is a Net Gift?
When the donee has to pay the gift tax
What is the Donor’s Tax Liability in a Net Gift?
If the gift tax exceeds the donor’s basis, the amount in excess must be recognized as income to the donor
What is the Non-Citizen Spouse Deduction?
$139k
Unlimited for citizen spouses
What is Gift Splitting?
When one donor makes a gift of their own property, and the donor’s spouse agrees to use their annual exclusion
What Must be Filed for a Gift Split?
The donor files form 709 (Gift Tax Return)
Both spouses must sign
Which Types of Transfers are Excluded from the Gift Tax?
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
Which Types of Assets are Best to Gift If Trying to Reduce the Gross Estate?
Appreciating assets
How Should Property with FMV < Basis Be Gifted?
Property should be sold so the donor can recognize a loss, then proceeds should be given to the donee to buy the property
Which Types of Properties are Best to Donate to Charities Taxwise?
The most appreciated properties so you can avoid capital gains and possibly deduct the FMV
Who Is the Best Candidate to Gift Income Producing Property?
The ones with the lowest tax bracket, so the income produced is taxed at the lowest possible rate
What is IRC Section 2035 in Regard to the Gift Tax?
Any gift tax paid within three years of death is included in the gross estate. Not the gift itself though.
What is IRC Section 2035 in Regard to Property?
Any property gifted, but maintained an interest, within three years is includable in the gross estate
What is IRC Section 2035 in Regard to Life Insurance?
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
How are Single and Survivorship Annuities Included in the Gross Estate?
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)
How is Jointly Owned Property Included in the Gross Estate?
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
What Types of Power of Appointment are Included in the Gross Estate?
Only general powers of appointment
What is the 5 and 5 Rule for Powers of Appointment?
$5,000 or 5% of the property’s value
If limited to that amount and lapses before death, not included in gross estate
When are Life Insurance Proceeds Included in the Decedents Gross Estate?
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
What are the Discounts to Hard-to-Value Assets?
Minority ownership discount (15% - 50%)
Lack of Marketability (15% - 50%)
Blockage (Too many stocks to sell at once)
How are Financial Securities Valuated for the Purposes of Gross Estate?
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)
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?
(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
What are the Qualifications for an Alternative Valuation Date?
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
What are the Rules for Using an Alternative Valuation Date?
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
What are the 6 Deductions from Gross Estate to Determine Adjusted Gross Estate?
- Funeral expenses
- Last medical expenses
- Administrative expenses
- Debts to decedent
- Losses during estate administration
- State death tax
What are the Deductions from the Adjusted Gross Estate to Determine the Taxable Estate?
Charitable deduction
Unlimited Marital deduction
What is the Tentative Tax Base?
The sum of the taxable estate and all gifts after 1976
What is the Tentative Tax?
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.
What are the Credits from the Tentative Tax?
The applicable estate tax credit ($5,120,000)
Credit for tax on prior transfers
Foreign death tax
When is the Estate Tax Return (706) Due?
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
What is the Penalty for Failure to File an Estate Tax Return?
5% per month up to 25%
If fraudulent, then 15% per month up to 75%
What is the Penalty for Failure to Pay the Estate Tax?
0.05% per month up to 25%
What is a Reverse Gift?
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
What are the Estate Consequences for a Private Annuity?
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
When is a Private Annuity Particularly Effective?
When the annuitants actual life expectancy is much less than the IRS table life expectancy
What is the Adjusted Basis for the Buyer of a Private Annuity?
The total amount of annuity payments made
What is a Self Canceling Installment Note?
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
What is the Adjusted Basis for the Buyer in a SCIN Arrangement?
The purchase price regardless of the amount of payments actually paid
What is a Grantor Retained Annuity Trust (GRAT)?
The grantor transfers property into an irrevocable trust that pays a fixed annuity, then the remainder is paid to a non charitable beneficiary
What Portion of a GRAT is Subject to the Gift Tax?
The present value of the expected remainder interest for the beneficiary
(FMV - PV of all annuity payments = Remainder interest subject to gift tax)
What if the Grantor Dies During the GRAT Term?
The FMV as of date of death of the property is included in the grantors gross estate
What is a Grantor Retained UniTrust (GRUT)?
Same a a GRAT, but the annual payment is based on a fixed percentage of the trust’s assets each year
Which Types of Property Aren’t Suitable for a GRUT?
Hard to value properties because they would have to be appraised annually
What is a Qualified Personal Residence Trust (QPRT)?
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
What if the Grantor of a QPRT Dies or Outlives the Term?
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.
What is a Tangible Personal Property Trust (TPPT)?
Same as a QPRT except the assets are personal property, not real estate
What is the Prudent Man Rule?
The law requires trustees act in the same way for the beneficiaries as they would act for themselves for their own benefit
What are the Two Types of Beneficiaries in a Trust?
The income beneficiary and the remainder beneficiary
What is a Spendthrift Clause?
The beneficiary may not assign, pledge, hypothecate, or promise to give distributions from the trust
What is a Trust Called if the Grantor is also the Beneficiary and How Does the Spendthrift Clause Change?
Self-settled trust
Spendthrift protection doesn’t apply
In What Four Ways Can a Trust Reduce Taxes?
- The transfer of future appreciation
- Minimization of transfer taxes
- Reduction is size of gross estate
- Grantor must pay taxes on income from trust, which minimizes gross estate
What is the Rule of Perpetuities?
Places a limit on how long assets can be held in a trust to the lives of the participants plus 21 years
When Must Beneficiaries Pay Tax on the Income of the Trust?
Beneficiaries pay taxes on trust income that is distributed to them. The trust may deduct distributions from it’s own liability.
What is the Difference Between a Simple and Complex Trust?
Simple requires all income is distributed
Complex allows accumulation on income, benefit to charity, or distribution of income
When Must the Grantor Pay Income Tax on Trust Income?
When the trust is revocable
When are Gift Taxes Due on a Transfer to a Trust?
No gift tax for transfers to revocable trust
Gift tax is due for transfers to irrevocable trust
What is a Totten Trust?
Not really trusts, but accounts with POD clauses
What are the Two Test to be Classified as a Public Charity?
- > 1/3 of support must come from combination of gifts, grants, contributions, membership fees, and gross receipts from sales (related trade/business)
- No more than 1/3 of support can come from gross investment income plus unrelated business taxable income
What is the Requirement for a Private Charity to be Classified as Operating?
> = 85% of adjusted net income is from excempt activities
How Do Gifts of Service Affect Taxes?
The service itself is not deductible, but expenses incurred are
What is the Deduction for Gifts of Ordinary Income Property?
FMV - any ordinary income that would have resulted from its sale
What is Ordinary Income Property?
Property that if sold would result in ordinary income (inventory, short term assets, works of art, etc.)
How do Gifts of Capital Gain Property Affect Taxes?
Generally Deductible at FMV
Adjusted basis if:
To a private non-op charity
Tangible property put to an unrelated use
How is a Deduction From a Bargain Sale Handled?
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.
How is a CRAT Different From a GRAT?
- The beneficiary of a CRAT is a charity
- Minium of 5% and maximum of 50% of Initial FMV annuity
- May be for life expectancy or no more than 20 year term
- Donor may change the charitable beneficiary
- No additional principal contributions
How is a CRUT Different From a CRAT?
- Annuity is a fixed percentage of asset’s FMV recalculated annually
- Annuity can be limited to income only and make it up in subsequent years
- Can contribute addition principal
What is a Charitable Lead Trust?
A trust that pays income to a charity and the remainder goes to noncharitable organizations
Who and What Assets Work Best with a CLT?
High net worth individuals who don’t need the income and highly appreciating assets to remove from estate
What is the Total Value that Qualifies for the Unlimited Marital Deduction?
The net value = Gross value - taxes, debt, admin expenses
What are the Three Property Interest Requirements to Qualify for the Unlimited Marital Deduction?
- The property must be included in the decedent’s gross estate
- The property must be transferred to and for the benefit of the surviving spouse
- The property must not be a terminable interest (exceptions apply)
What are the Exceptions to the Terminable Interest Rule?
A six month survival contingency
A terminal interest where the surviving spouse has a general power of appointment
QTIP
CRT
How Can a Non Citizen Spouse Qualify for the Unlimited Marital Deduction?
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?
What is a QDOT and What are the Requirements for the Unlimited Marital Deduction?
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
What are the Requirements for the Applicable Estate Tax Exclusion to be Portable?
Both spouses must die after Dec 31 2010
The surviving spouse cannot remarry
What are the Five Most Common Uses for Life Insurance?
- Protect income stream for beneficiaries
- Source of funds for education
- Provide liquidity
- Source for retirement income
- Create or sustain family wealth
What are the Two Types of Buy-Sell Agreements?
- Cross-Purchase agreement
2. Stock redemption (Entity purchase)
What is a Cross-Purchase Agreement?
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.
What are the Advantages to a Cross-Purchase Agreement?
Step up in basis
Life insurance cannot be attached to company’s creditors
What is the Disadvantage to a Cross-Purchase Agreement?
If many owners, there could be a lot of policies required N x (N-1)
What is a Stock Redemption Agreement?
The company owns life insurance policies on each owner and each owner agrees to have their estate sell their shares back to the company
What are the Advantages/Disadvantages to a Stock Redemption Agreement?
Advantages: Potentially less policies needed
Disadvantages: No step up in basis and the policies could be attached to the company by it’s creditors
What are the Requirements for Valuations of a Business in a Cross Purchase Agreement to be Recognized By the IRS?
- The agreement must be a legitimate business arrangement
- Cannot be a device to transfer the property to members of the decedent’s family at a less than adequate price
- Terms must be comparable to an arms length transaction
Which Tax Returns May Unpaid Medical Expense Deductions Be Applied After the Decedent’s Death?
1040 706 (estate income tax return)
Which Tax Returns May Casualty Loss Deductions Be Applied After the Decedent’s Death?
1040 1041 (estate income tax return) 706 (estate tax return)
Which Tax Returns May Executor Fee Deductions Be Applied After the Decedent’s Death?
1041 (estate income tax return)
706 (estate tax return)
How is a Lineal Skip Person Determined?
2 or more generations:
Grandchild
Grand niece/nephew
1st cousin twice removed (cousin’s grandkids)
How is a Non-Lineal Skip Person Determined?
37.5 years younger
When is a Trust Considered a Skip Person?
When all interests in the trust are held by a skip person and if trust distributions can only be made by a skip person
