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CFP > Estate Planning > Flashcards

Estate Planning Flashcards

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0
Q

Non-community property interest

A

1) Income earned by spouses PRIOR to marriage
2) Property received as a GIFT by one spouse
3) Property INHERITED by one spouse

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1
Q

QTIP only if ALL , TQ will give you a few but not all

A

Lifetime
Annual
Married
Exclusive

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2
Q

Joint tenancy with right of survivorship JTWROS

A
  • property can be held by husband and wife, parent and child or children, siblings, and business partners
  • control, ownership and enjoyment share 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 f the will
  • NOT subject to probate
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3
Q

Tenancy by the entirety

A
  • 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 joint creditors
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4
Q

Tenancy in Common

A
  • 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 the property to the other individuals
  • ownership stake goes through probate upon death
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5
Q

Assets subject to probate

A
  • Singly owned assets
  • property held by tenancy in common
  • assets where the beneficiary is the estate of the insured
  • common property (CP)
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6
Q

Assets NOT subject to probate

A
  • property conveyed by deeds of title (IRA)
  • property held by joint tenancy with right of survivorship
  • Government savings bonds - co-ownership
  • Revocable living trusts
  • Payable on death accounts (PODs)
  • Totten trust
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7
Q

Totten Trust

A
  • Totten trust is a revocable trust in a bank accoutn in which the depositor is named “trustee” for another’s benefit
  • the depositor retains the right of withdrawal until death
  • when the depositor dies, the balance passes to the beneficiary
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8
Q

Payable on Death Accounts PODs

A

funds are deposited for the benefit of another. The depositor has complete control over the funds. The funds are transferred to the other person at the death of the original depositor.

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9
Q

Modifying / Revoking a Will

A
  • Can be amended or revoked at any time
  • minor changes can made by writing a codicil
  • to revoke existing will, the new will must state that it is intended to revoke the former document
  • will can be revoked if it is intentionally destroyed by shredding
  • divorce may or may not revoke the will
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10
Q

Powers of Attorney

A
  • Traditional, non-durable power of attorney - 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
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11
Q

Tax-Related Powers

A

The power to the following.

  • make gifts to the spouse and to children, grandchildren, etc.
  • make disclaimers
  • make living trust to benefit principal, spouse, and heirs
  • complete transfers to a living trust, if the principal becomes incompetent
  • join the competent spouse in signing income and gift tax returns
  • exercise special powers of appointment
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12
Q

Revocable Trust

A

If a revocable trust is funded, (ether before incompetency or by the attrney-in-fact), the grantor can also write provisions that specify management by the trustee in the event of the grantor’s incompetency.

  • Two advantages:
    • trustee’s authority to act in managing assets may be recognized, and
    • can be enforced while a durable power of attorney may not be
  • Revocable trust continues after death while a durable power dies at death
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13
Q

Life Insurance added to the estate

A

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

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14
Q

Assets Included in Gross Estate

A
  • singly owned assets
  • tenancy in common
  • beneficiary is the estate
  • community property
  • JTWROS/Entirety
  • Life Insurance
  • General Powers
  • 3-year gross-up on gift taxes paid (but NOT GST taxes paid)
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15
Q

Testamentary Trust

A
  • Trust created by a will
  • will-created trust designated a person to serve as trustee, names the beneficiaries of the trust, and includes directions on how assets are to the administered in the trust.
  • key feature of the trust: does not automatically take effect upon the death of a decedent; it can become effective only if the will creating the trust is admitted to probate
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16
Q

Adjusted Gross Estate Deductions

A
  • Material Deduction:
  • an “unlimited” amount of property passing to the surviving spouse can pass estate-tax free if these requirements are met.
  • property must be included in the decedent’s gross estate
  • property must actually pass to the surviving spouse

Charitable Deduction:
compared to the various rules limiting the deductions amount for income taxes, the charitable deduction is quite simple. outright transfers to qualified charities are 100% deductible for both estate and gift tax purposes

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17
Q

Marital Deduction Requirement Transfers

A

Spousal Qualifying Requirement

  • property included in the decedent’s gross estates
  • property actually passes to the surviving spouse
  • interest passing to spouse that is not a terminal interest

Qualifying Transfers

  • property transfers outright
  • property passes to marital trust, estate trust, or QTIP
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18
Q

Powers of Appointment (Trusts)

A

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

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19
Q

General Power of Appointment vs. Special Power of Appointment

A

General - Power entitles the holder to transfer the property subject to the holder, the holder’s estate, the holder’s creditors, or the creditors of the holder’s estates

Special- Power limits the class of individuals who may receive the property. The holder of the special power can transfer the property only to specifically designated individuals (children of the holder or someone other than the holder) or only under specific circumstances.

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20
Q

5 or 5 Power

A

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

1) $5000 or
2) 5% of the total value of the fund subject to the power as measured at the time of lapse

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21
Q

Inter-vivos Gifting

A

Transfer of property is made while the transfer is alive

For gift purposes, a gift can be broadly defined to include a sale, exchange, or other transfer of property from one person (donor0 to another (donee) without adequate and full consideration in money or money’s worth

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22
Q

Appropriate Gift Property

A

Highly appreciated property - donee = charity or donee in a lower tax bracket - may want to keep until death

Property likely to appreciate - good to gift to remove future value from donor’s estate

Income-producing property - good to only if in a lower tax bracket

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23
Q

Present Interest Gift Vehicles

A 
UGMA
UTMA
2503 c Trust
section 529 college saving plan
Gift to a 2503B trust is a gift of future interest
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24
Q

Valuation of a gift

A

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

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25
Q

Basis of a gift

A

if FMV on the date of gift is great than the donor’s adjusted basis, use the donor’s adjusted basis

if the FMV of the gift is less than the donor’s adjusted basis, use the chart below

—————-gain (client’s substituted basis clients substitute basis 1.2 million)

no gain or loss

—————loss (FMV date of gift = 660,000)

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26
Q

Gifts an Donor’s Estate Summary

A
  • Generally gifts given are simply “adjusted taxable gifts” to the extent such gifts exceed the annual exclusion
  • Adjusted taxable gifts are added to the taxable estate
  • gifts taxes paid (or payable) are generally allowed as a credit against the tentative tax
  • Gifts tax paid on any gifts within three years of death are added to the gross estate
27
Q

Gift Tax Filing Requirements

A

In general a gift tax return (form 709) must be filed by any individual donor who, in any calendar year, gives the following.

  • more than $10K indexed $14,000 - 2013 to any non spouse donee,
  • a gift of a future interest in any amount
  • a gift for which spouses want to elect gift splitting
28
Q

Gift Splitting

A

splitting treats a gift of the property owned by one spouse as if it were made one-half by each spouse. To make the split gift election, the consent of the non-donor spouse is required, and tw gift tax returns (one by each spouse) must be filed by spouses if, after the split the value exceed the annual exclusion. Only the donor spouse needs to file a gift tax return if the split brings the gift below the annual exclusion. however, there is a place on the donor spouse’s tax return for the non-donor to sign, affirming his/her consent to the election

29
Q

Deductible Gifts (not taxable gifts) also called exempt gifts or qualified transfer

A
  • gifts to a spouse, provided they are not a terminal interest
  • gifts to qualified charities
  • qualified payments in any amount made 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 political parties
30
Q

Requirements for a Valid Gift

A

valid under local law, gift must ordinarily meet following requirements
*the donor must be capable of transferring property
*the donee must be capable of receiving and processing the property
the must be delivery to, and some form of acceptance by, the donee or the donee’s agent
a valid gift ordinarily requires donative intent on the part of the donor

31
Q

Definition of Incapacity

A

Define: The lack of physical or intellectual power or of legal qualification; the quality or state of being incapable.
What is incompetent?
*not legally qualified
*lacking the qualities needed for effective action
*unable to function properly

32
Q

Living Wills

Advance Medical Directives

A

Legal document which directs the client’s physician to discontinue life-sustaining procedures if the client is in a terminal condition or permanently unconscious state.
It is considered a final expression of the client’s right to refuse medical treatment which should be followed by the client’s physician. The living will expresses the client’s wishes regarding life–sustaining issues.
*ex: if major surgery or long-term treatment is propsed and the client is too ill or weak to make decisions, the client’s surrogate would invoke the power of attorney to facilitate the client’s wishes

33
Q

Special Needs Trust SNT

A

the underlying concept os a special needs trust is that the client wants to make private sources of funding available for a disabled individual while preserving the public benefits.

EX: trusts can protect a disabled person from being exploited by people looking for money. trust allows the beneficiary to continue receiving public benefits. trust can pay for only supplemental needs not covered by those programs.

34
Q

Elements of a Trust

A

in order for a trust to exist, there must be property (also known as principal, or corpus)
there must be GRANTOR. This is any person who transfers property to an dictates the term of a 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

35
Q

Simple vs. Complex Trusts

A

Simple trusts (2503 (b)), Marital, QTIP) are considered merely a “conduit” for forwarding income to the beneficiaries (pass-through)

Complex trusts (2503 c), are separate tax entities and taxed as such if it meets the following two requirements

* it is irrevocable, and the grantor has not retained any control
* income is accumulated
36
Q

Crummey Trust

A

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 annual gift exclusion or the value of the gift transferred

37
Q

inter-vivos trust advantage vs. disadvantages

A 
adv:
organization of property during lifetime
potentially lower cost than probate
alternative to guardianship or conservatorship
greater privacy 
speed of disposal or property 
avoidance to probate

Disadvantage
legal fees to prepare
funding burden
longer creditor period

38
Q

normal “b” trust (family, bypass, credit shelter, unified credit shelter)

A

property transferred to the trust as the time of decedent’s death

can by structured to provide a stream of income to surviving spouse or other individuals

Decedent has postmortem control

39
Q

QTIP “C” Trust (Current Income Trust)

A 
Lifetime income for the spouse
Annual payments to spouse
Mandatory payments to spouse
Exclusively for spouse
property qualifies for martial deduction, mainly used for second marriage,
40
Q

Qualified Domestic Trust (QDT/QDOT)

A

No unlimited marital deduction
The exemption amount is available unless the spouse is a non-resident alien
jointly held property between spouses is not considered one-half owned
leimited gift between spouses of only 100K (indexed) per year

41
Q

Components of UGMA

A

must be funded with cash-type assets (EEs, securities, mutual funds)
normally distributed at age 18
can be included in the custodian’s estate

42
Q

Components of UTMA

A

can be funded with any type of asset including real estate
normally distributed at age 21
can be included in custodian’s estate

43
Q

Section 2503(b) Trust

A

can be used for minor
provides a minor with stream of income
can be disadvantage due to kiddie tax
two parts: income interest and remainder or reversion interest
tax law considers income to be a gift of present interest and the remainder interest (corpus) to be a gift of a future interest with only income needing to be distributed

44
Q

Section 2503 (c) Trust

A

enables a grantor to make a gift to a minor in trust and still obtain the annual gift tax exclusion

gift will not be considered a gift of a future interest if these conditions are met

45
Q

Section 529

College Savings Plan

A

donor can contribute max. 65K in a year per beneficiary (130K married) with consequences.
donor can take the $13 exclusion for the next 5 years
*if death occurs before the end of that period, the portion of the gift that would have been allocated in ensuing years whould be included in the estate.
*Donor retains control of the qualified state tuition plan account and has option of taking the money back at any time

46
Q

CRAT

5%

A

No Additions
payments fixed (lifetime or term certain)
payable to any charity
10% ending value

47
Q

CRUT

5%

A

additions allowed
payments variable (assets revalued annually)
can be lifetime to term certain like a CRAT
payable to any charity
10% ending value

48
Q

CLAT/CLUT

0%

A

IF trust is established at death, there is no income tax deduction

Aftern a period of time paid to a non-charitable beneficiary

49
Q

Charitable

Contribution/Transfers

A 
Income to donor until donor's death:
Charitable Remainder Annuity (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% required - can give money to individuals

50
Q

Private Foundations

Advantages / Disadvantages

A

Advantages
individual has complete control over amounts and recipients
only restriction is 5% must be distributed annually
can distribute gifts to non-charitable beneficiaries

Disadvantages
exempt from federal income tax, they are subject to excise taxes
15% penalty is applies if annual 5% of the average fair market asset values is not distributed

51
Q

Supporting Organizations

Advantages / Disadvantages

A

Adv
Larger amounts will be available to fund grants because no 2% excise tax is imposed on a supporting organization nor are there any minimum distribution requirements

Disadvantage
neither the donor nor his or her family may control the organization functions

52
Q 
Valuation Discounts 
(business interests)
A
  • minority - recognizes the inability of a small share holder to influence corporate policy makes the shares worth less
  • Marketability- can rage from 15% to as high as 50%
  • Blockage- if the decedent held a large block of listed stock, selling it all at once could have a depressing effect on the market price
  • Key Person - may be allowed for a business that lost a key employee who was responsible for it goodwill or administrative and management skills
53
Q

Reverse Gift

A

Appealing strategy when one spouse possesses most of the family wealth and the less affluent spouse is about to die.

Then, the wealthier spouse makes a gift of low basis assets to the dying spouse. The inclusion steps up the basis of the property and better utilizes the dying spouse’s applicable credit

54
Q

Intrafamily Transfers

Property owner needs income

A

PIGS need income

private annuity
investment sales
grantor annuity trust (GRAT/GRUT)
self-canceling installment note(SCIN)

55
Q

Intrafamily Transfers

Property owner wants to gift assets and / or Inocme to family members

A

partnership / S-corp
family limited partnership (FLP)
gift leaseback
qualified personal residence trust (QPRT)

56
Q

Family Limited Partnership

FLP

A

Requirements

  • Income and tax benefits must be distributed are allocated according to each owner’s percentage in the partnership
  • The general partners may be paid for their personal service to the partnership
  • Capital must be a material income-producing factor. Income cannot come from personal services of the general partner.
57
Q

Grantor Trust Rules
(tainted / defective trusts)
income tax & estate

A

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 (beneficiary enjoyment)
2) a reversionary interest exceeding 5% (retained interest)

58
Q

QPRT

A

Irrevocable trust in which a person (grantor) transfers his/her personal residence, retaining an interest for his/her personal occupancy and use for a period of years, after which the residence passes to the beneficiaries of the trust, the either outright or in trust.

59
Q

Summary of Liability for Payment of the GST tax

A

1)If the transfer is a direct skip, the transferor pays it

2) If the transfer is a taxable termination, the GST is paid by the trustee
3) If the transfer is a taxable distribution, the GST is paid by the transferee

60
Q

Fiduciaries

A

Person or entity that occupies a position of special trust in relation to the other person. The often involves holding legal title to the property that must be handled for the sole benefit of the other person (the beneficial owner). It may also involve making personal decisions for the person, just as a guardian does. Beside personal representative, fiduciaries include trustees, guardian, and agents.

61
Q

Postmortem Planning Techniques

Estate Liquidity

A

Stock Redemption (Section 303)

  • business must be incorporated (closely held)
  • value of business must exceed 35% of decedent’s adjusted gross estate
  • redemption cannot exceed the sum of the estate taxes plus administration expenses

Installment payment of estate taxes (section 6166)

  • value of business must exceed 35% of decedent’s adjusted gross estate
  • during the first 4 years (of 14 years) can pay interest only on taxes due
62
Q

Postmortem Planning Techniques

Estate Tax Reduction

A

Special use valuation - (section 2032A)
*25% of the gross estate consists of real property used in the business

*must be in qualified use - 5 out-of-8 year rule before death and 10years after death; 50% of the gross estate must consist of real and personal property used in the business

63
Q

Alternate Valuation Date

A
  • using it must cause a reduction in the total value of the gross estate
  • the amount of federal tax liability must be reduced as a result of filing the election
  • it must be applied t all properties included in the gross estate
  • in cannot be used on assets that have a value that decreases with the mere passing of time
64
Q

Disclaimer

A

In order to disclaim property, the following requirements must be met:

  • disclaimer must be an irrevocable refusal to accept the interest
  • refusal must be a writing
  • refusal must be received within nine months
  • intended donee cannot have accepted any interest in the benefits
  • as a result of refusal, the interest will pass, without the disclaiming person’s direction, to someone else.

CFP (13 decks)

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