Estate Planning

Question 1

Non-community property interest

Answer 1

1. ​Income earned by spouses prior to marriage
2. Property received as a gift by one spouse
3. Property inherited by one spouse
4. Interest earned on seperate assets helfd by one spouse as a sole owner

Question 2

Joint tenancy with

right of survivorship

(JTWROS)

Answer 2

• Property can be held by husband and wife, parent and child or children, siblings, and business partners
• Control, ownership and enjoyment shared equally by all joint tenants
• Upon death of each tenant, property immediately passes to surviving joint tenants in equal shares.
• Property NOT controlled by terms of the will
• NOT subject to probate

Question 3

Tenancy by the entirety

Answer 3

• Ownership can only be held by a husband and wife
• Transfer of property can only occur with the mutual consent of both parties
• In most states, property is protected from the claims of each spouse’s seperate creditors, but NOT protected from the claims of both spouse’s joint creditors

Question 4

Tenancy in common

Answer 4

• Two or more owners each own an undivided interest in the property
• Any income is distributed according to each owner’s respective share in the property
• Owners are free to transfer their respective share of property to other individuals
• Ownership stake goes through probate upon death

Question 5

Assets NOT subject to probate

Answer 5

• Property conveyed by deeds of title (IRA)
• Property held by joint tenancy with rights of survivorhsip
• Government savings bonds - co-ownership
• Revocable living trusts
• Payable on death accounts (PODs)
• Totten trust

Question 6

Assets subject to probate

Answer 6

• “Singly” owned assets
• Property held by tenancy in common
• Assets where the beneficiary is the “estate of the insured”
• Community Property (CP)

Question 7

Assets Included in Gross Estate

Answer 7

• Singly owned assets
• Tenancy in common
• Beneficiary is the estate
• Community property
• JTWROS/Entirety
• Life Insureance
• General Powers
• 3-year gross-up on gift taxes paid (but NOT GST taxes paid)

Question 8

Life Insurance

added to the estate

Answer 8

• Proceeds are paid to the executor of the decedent’s estate
• Decedent at death possesses an incident of ownership in the policy
• Decedent transferred a policy with an incident of ownership within three years of death

Question 9

Valuation of a gift

Answer 9

• The value of a gift for gift tax purposes is its fair market value (FMV) at the date of gift

Question 10

Basis of a gift

Answer 10

• If FMV on the date of gift is greater than the donor’s adjusted basis, use the donor’s adjusted basis
• If the FMV of the gift us less than the donor’s adjusted basis, use the chart below

Client’s substituted basis $2,015,000 Gain

between $2,0150, 000 and no gain or loss

$1,515,000

FMV date of gift $1,515,000 Loss

Question 11

Deductible Gifts

(not taxable gifts)

also called exempt gifts or

qualified transfer

Answer 11

• Gifts to a spouse, provided they are not a terminal interest
• Gifts to qualified charities
• Qualified payments in any amount msde directly to an educational institution for tuition
• Qualified payments in any amount made directly to a medical care provider on behalf of any individual
• Gifts to American political parties

Question 12

Summary of rules regarding

gifts and the donor’s estate

Answer 12

• Generally, gifts are given are simply “taxable gifts” to the extent such gifts exceed the annual exclusion
• Taxable gifts are added to the taxable estate
• Gift taxes paid (or payable) are generally allowed as a credit against the tentative tax
• Gift taxes paid on any gifts within three years of death are added to the gross estate

Question 13

Powers of Attorney

Answer 13

Traditional, non-durable power of attorn__ey - Power ceases when the principal is no longer legally competent

Durable power of attorney - Authority of agent continues when principal becomes incompetent

Springing durable power of attorney - Main strength is the agent has no authority over the principal’s assets until incompetency

Question 14

Power of Appointment

(Trusts)

Answer 14

• Special Power: Exercisable only with the consent of the creator of the power or a person having a substantial adverse interest
• Ascertainable standard: Relating to health, education, maintenance or support (HEMS)
• General Power: Holder may exercise the power in any manner he/she wishes

Question 15

Gifts & Estate Tax Implications

(General Power)

Answer 15

Gift Tax Implications (General Power)

• Exercised, released or lapsed - taxed
• Lapsed with a “5 or 5” power - not taxed

Estate Tax Implications (General Power)

• Exercised, released or lapsed - taxed
• Exercised, released or lapsed with a “5 or 5” power - greater of the “5 or 5” is taxed

Question 16

“5 or 5” Power

Answer 16

• Property subject to a general power will be included in a donee decedent’s estate (or considered a taxable gift) only to the extent that the property exceeds the greater of:

1. $5,000 or
2. 5% of the total value of the fund subject to the power as measured at the time of lapse

Question 17

Grantor Trust Rules

(Tainted / Defective Trusts)

Income Tax & Estate

Answer 17

• Trust may be defective / tainted for Income Tax and Estate Tax purposes if the grantor retains:

1. A right to income or the right to use/enjoy trust property (beneficial enjoyment)
2. A reversionary interest exceeding 5% (retained interest)

Question 18

Elements of a Trust

Answer 18

• In order for a trust to exist, there must be property (also known as principal, re, or corpus)
• There must be a grantor. This is any person who transfers property to and dictates the term of the trust.
• There must be a trustee, who receives legal title to the property placed in the trust, and who generally manages and distributes income according to the terms of a formal written agreement (trust instrument)
• There must be a beneficiary, who has equitable title to the property.
• The grantor and trustee must be legally competent

Question 19

Simple vs. Complex Trusts

Answer 19

• Siple trusts (2502(b), Marital, QTIP) are considered merely a “conduit” for forwarding income to the beneficiaries (pass-through)
• Comples trusts (2503(c)), are seperate tax entities and taxed as such if it meets two requirements

→It is irrevocable, and the grantor has not rertained any control

→Income is accumulated

Question 20

Crummey Trust

Answer 20

• Irrevocable trust with demand rights
• Demand right given to a minor through his/her guardian
• Beneficiary has temporary right to demand a withdrawal from the trust that is the lesser of the amount of the anual gift exclusion or the value of the gift transferred

Question 21

Nonmarital “B” Trust

(Family, Bypass, Credit Shelter, Unified Credit

Shelter)

Answer 21

• Property transferred to the trust at time of decdent’s death
• Can be structured to provide a stream of income to surviving spouse or other individuals
• Decedent has postmortem control

Question 22

QTIP “C” Trust

(Current Income Trust)

Answer 22

• Provides surving spouse with a stream of income for life, but decedent has postmortem control of trust property
• Property qualifies for marital deduction
• Mainly used for second marriages
• Key word for QTIP - LAME

L​ifetime income for the spouse

Annual payments to spouse

Mandatory payments to spouse

Exclusively fopr spouse

Question 23

Qualified Domestic Trust

(QDT/QDOT)

Answer 23

• No unlimited marital deduction
• However, no estate tax due
• Jointly held property between spouses is not considered one-half owned
• Limited gift between spouses of only 100k (indexed) per year

Question 24

Present Interest Gift Vehicles

Answer 24

• UGMA
• UTMA
• 2503(c)trust
• Section 529 college savings plan

Gift to a 2503(b) trust is a gift of future interest

Question 25

**Charitable** **Contributions/Transfers**

Answer 25

**_Income to donor until donor's death:_** * Charitable Remainder Annuity Trust (CRAT) - 5% * Charitable Remainder Unitrust (CRUT) - 5% * Pooled Income Fund - no 5% required * Charitable Gift Annuity - no 5% required **_Income to charity_** * Charitable Lead Trust (CLAT/CLUT) - no 5% required * Private Foundation - 5% - can give money to individuals

Question 26

**Intrafamily Transfers** **(Property owner needs income)**

Answer 26

**PIGS need income** * **P**rivate Annuity * **I**nstallment Sale * **G**rantor Annuity Trusts(GRAT/GRUT) * **S**elf-canceling installemt note (SCIN)

Question 27

**Intrafamily Transfers** **(Property owner wants to gift assets** **and/or income to family members)**

Answer 27

* Partnership / S-corp * Family Limited Partnership (FLP) * Gift Leaseback * Qualified Personal Residence Trust (QPRT)

Question 28

**Disclaimer**

Answer 28

* In order to disclaim property, the following requirements must be met: 1. Disclaimer must be an irrevocable refusal to accept the interest 2. Refusal must be in writing 3. Refusal must be received within nine months 4. Intended donee cannot have accepted any interest in the benefits 5. As a result of refusal, the interest will pass, without the disclaiming person's direction, to someone else

Question 29

**Psotmortem Planning Techniques** **(Estate Liquidity)**

Answer 29

**_Stock Redemption (Section 303)_** 1. Business must be incorporated (closely held) 2. Value of business must exceed 35% of decedent's adjusted gross estate 3. Redemption cannot exceed the sum of the estate taxes plus administration expenses **_Installment payment of estate taxes (Section 6166)_** 1. Value of business must exceed 25% of decedent's adjusted gross estate 2. During the first 4 years (of 14 years) can pay interest only on taxes due

Question 30

**Postmortem Planning Techniques** **(Estate tax Reduction)**

Answer 30

**_Special Use Valuation (section 2032A):_** 1. 25% of the gross estate consits of real property 2. Must be in qualified use - 5 out-of-8 year rule before death and 10 years after death