Estate Planning Flashcards
What are some assets that pass by contract?
- Life Insurance proceeds
- retirement plans/IRA’s
- annuities
• all with valid named beneficiaries - POD / TOD accounts
Pass outside of probate
What are some assets that pass by operation of law?
- JTWROS property
- tenancy by entirety
- trust property (transferred before grantors death)
Pass outside of probate
What are some assets that pass by will?
- fee simple ownership
- decedents share of TIC/comm prop ownership
Doesn’t avoid probate
Real estate probated in states where it’s located
Personal property is probated in the state of the decedents domicile
How are property settlements between divorcing spouses treated?
Prop settlements pursuant to a written divorce agreement are deemed to be full and adequate compensation are not subject to gift tax
applies to transfers up to 3 years AFTER the divorce
How is interest on gift loans (below market loans) of $10,000 or less treated for gift tax purposes?
Interest isn’t subject to gift tax unless loan proceeds are used by donee to purchase income producing property
How is interest on gift loans (below market loans) of $100,000 or less treated for gift tax purposes?
If donees NII doesn’t exceed $1,000
- not subject to gift tax
If donees unearned income exceeds $1,000
- the imputed interest (gift) is the difference between the federal rate and interest charges, not to exceed borrowers NII
- if there is no imputed interest -> no gift
- if there is imputed interest -> gift is the imputed interest
*if loan was purely for tax avoidance -> loan loses all tax benefits
How is interest on gift loans (below market loans) of $10,000 or more treated for gift tax purposes?
The imputed interest is the interest of the federal rate - the interest charged
How is interest on gift loans (below market loans) between ER/EE’s and Corps/Shareholders treated?
ER/EE loans
- the imputed interest is considered compensation
Corp/Shareholder loans
- imputed interest is characterized as a dividend and no gift has been made
What’s the gift tax exclusion for a noncitizen spouse?
The first $159,000 of present interest gifts in 2021 to a noncitizen spouse are not subject to gift tax
What’s the valuation of gift real estate?
Generally FMV
Could be % of ownership depending on the titling of asset
What is the valuation of gifted stock?
Generally the average of high and low prices on date of gift/bequest
Discounts
- lack of marketability discount
- minority interest discount
What is the value of gift life insurance?
The REPLACEMENT VALUE
NEVER THE FACE AMOUNT
What’s a 5x5 power?
A provision that limits withdrawals from trust shouldn’t exceed either the GREATER OF;
- $5,000; or
- 5% of the value of the trusts property
Exceeding those numbers creates a taxable gift to the remainderman
What’s the equation to determine a donees basis when the donor pays gift tax on appreciates property?
Donors adjust basis + (unrealized appreciation/(FMV - annual exclusion used by donor if any) * any gift tax paid) = Donee’s basis
ex) donor gives asset with A/B of $20k and FMV of $60k to donee, paying $15k in gift taxes after using their annual exclusion. What’s the donees basis?
• $20k + ($40k/(60k-15k) * $15k)
• Donee’s basis in the asset is $33,333.33
What are Net Gifts and how are they treated re: gift taxes?
Net gifts are when the donor and donee agree that the donee pays the gift tax on a gift from the donor
- usually when the donor doesn’t have enough cash to pay the tax
- can’t be used until the lifetime credit is all used up
Treatment
- part sale and part gift
- donor realizes taxable income to extent gift tax paid by donee exceeds donors adjusted basis
- if the annual exclusion is available if is deducted from the FMV of the gift BEFORE calculating the tax due
What’s the estate tax calculation?
1) Gross Estate - ABCD’s = AGE • A - Admin/Accounting • B - Burial costs • C - casualty and theft losses • D - Debts
2) AGE - Unlimited’s = Taxable Estate
• Unltd Charitable Deduction
• Unltd Marital Deduction
• State estate tax
3) Taxable Estate + Adj. Taxable GIFTS = Tentative Tax Base
4) compute tentative tax
5) subtract gift taxes paid on gifts included in tax base = estate tax before reductions
6) subtract applicable credit amount = taxable estate
What’s a QPRT?
Qual. Pers. Residence Trust
Grantor retains right to live in a home during term, trust pays grantor income
- one home per trust
- home passes to non charitable at end of term
Asset is removed from GE if trust holder lives beyond term (can lease @ market rate from bennys if they do)
Value of the gift is FMV discounted by years of trust term
Term holder can covert to a GRAT
Term holder may sell QPRT residence to someone else and reinvest $ in another home, also can hold cash in the trust
- PRT’s are basically the same as QPRT except for this
What’s an installment sale/SCIN?
Seller sells an asset and receives a series of payments over time
Inst Sale
- asset removed from GE
- if seller dies before repayment -> amount of unpaid balance plus accrued interest included in their GE
SCIN
- installment sale that cancels at death
- any remaining unrecognized gain from sale at sellers death must be reported on their ET return
- payments and asset value removed from GE
What are the different types of Buy/Sell agreements and how are they treated re: estate tax?
Cross purchase
- each person buys a policy on the other
- more expensive
- premiums not deductible, proceeds not taxable
Entity purchase
- entity buys a policy on all owners
- premiums not deductible, proceeds not taxable
Wait & See
- hybrid of x-purchase and entity purchase
- owners wait until someone dies before deciding if they want to buy their interest
- entity has right of first refusal
What is a business recapitalization?
Biz succession technique
SR FM trades common stock for preferred stock and nonvoting common stock
- preferred stock allows them to control biz
- future appreciation is attributed to non voting common stock
- zero valuation rules value their preferred at $0 generally, freezes value for estate tax
SR FM makes gifts of stock over time
- present interest, gift taxable w/ Ann exclusion
Allowed to use the
- valuation discounts
- lack of marketability discounts
What’s a FLP?
Family Ltd Partnership
SR FM transfers partnership into a FLP in exchange for 1% GP / 99% LP
- SR FM retains 1% GP and control of biz
- gifts LP % to family members over time
- gift taxable, Ann exclusion available
FLP is a separate asset, not marital asset
NO ANCILLARY PROBATE IF FLP HOLDS RE IN OTHER STATES
Discounts for minority interest
What’s a bargain sale?
A sale for less than full consideration
- part sale and part gift
Sellers tax consequence
• FMV - sale price = gift (Ann. Excl. available)
• sale price - basis = taxable gain
Buys basis, the GREATER of;
• amount paid by the buyer; OR
• sellers basis in asset @ time of transfer + any GT paid
Property removed from GE of seller, but any GR paid will be added back when calculation the taxable estate
What are gift and sale leasebacks?
When one person gifts/sells fully depreciated asset/equipment to someone, usually family, who then leases it back to them at a reasonable rate
GIFT LB
- tax deductible to biz / taxable income to recipient
- removed from donors GE
SALE LB
- helps buyer eventually buy biz from seller
- seller gets income and removes asset from GE
- buyer buys biz w/o paying full consideration all at once
What is a private annuity?
The sale of an asset in exchange for an UNSECURED PROMISE to pay an annuity for life
NOT A GIFT
Tax implications
- interest component is ordinary income
- return of basis calc’d w/ exclusion ratio
- cap gain calc’d w/ INCLUSION ratio
Asset removed from sellers GE
Usually used when seller is in poor health and isn’t expected to live beyond actuarial life expectancy
What are GRAT/GRUTs
Grantor Retained Annuity/Unitrust Trusts
Irrevocable trust
Grantor retains interest in assets, income is taxed to them. If G lives beyond the term, the asset is removed from their GE
Value of gift @ creation is FMV - value of G’s retained interest
- future interest gift, no Ann. Exclusion
Passes to non charitable bennys at end of income term
Income stream
• GRAT - pays fixed amount
• GRUT - pays % of net FMV
What is a QDOT and what are its requirements?
A QDOT allows a decedent spouse to leave assets to a noncitizen spouse and still qualify for the unlimited marginal deduction
Requirements
- at least one trustee has to be a us citizen/corporation
- trustee has the right to withhold estate tax on the distribution of the corpus
- executor must make irrevocable election on Form 706
What’s an A Trust?
An A trust/POA Trust is a trust for a spouse that qualifies for the Unltd Marital Deduction
Req’s
- spouse gets a G. POA (total control of all trust assets)
- gets income payed for life at least annually
- assets included in their GE to extent it isn’t spent/consumed/given away
What’s a B Trust?
A bypass trust is a trust used to bypass the marital deduction so the surviving spouse can use all of the decedent spouses exclusion/credit amount
Req’s
- no Unltd MD, but assets are NOT included in surviving spouses GE when they die
- surviving spouse may have HEMS provision
Can be good for rapidly appreciating property to freeze the value
What’s the C/QTIP Trust?
A C trust or QTIP trust is a trust of terminally interest that qualifies for the MD but doesn’t allow surviving spouse to direct corpus
Good for families where the parents remarried and want to ensure kids from prior marriage are taken care of
Req’s
- surv sp gets income for life
- surv sp doesn’t get a G POA
- first spouse to die generally determines who the remaindermen are
Can property interests be present and future interests?
Yes, they can be either
What is the current gift value on trusts structured as GRATs/GRUTs?
The current gift value would be the FMV of trust assets - the PV of the income interest retained by the grantor
The gift tax would be based on that amount
How is basis on JTWROS property determined when one spouse dies?
One half keeps the original basis, the other half gets a step up on basis
Ex) married couple buys prop worth $200k as JTWROS, one dies when prop is $500k
• surviving spouse has a new basis of $350k
— original basis of $100k, and decedents step up in basis of $250k (500k * .5)
What is a holographic will?
A handwritten will
- not recognized in all states
- doesn’t need a witness
- signed and dated by testator
What is a noncupative will?
An oral will, aka a “dying declaration”
- not recognized in all states
- can be used only to pass personal property
What is a per stirpes distribution?
Asset % pass by class, with heirs of deceased members of that class inheriting their %
Ex) 4 kids inherit property per stirpes (25% each), one kid predeceases the grantor, their kids inherit deceased members 25% split equally
What is per capita distribution?
Each surviving heir gets an equal amount
Ex) 4 kids, one predeceased grantor and has 2 kids. 3 surviving kids and 2 heirs to deceased kid get equal % of inheritance
What are similarities and differences between conservators and guardians?
Similarities
- both fiduciaries of a ward
Differences
- conservator manages the finances and assets of the ward
- guardian cares for the ward themself
How much of your AGE must a closely held business be to qualify for S. 2032A treatment?
The business must be least 50% of the taxpayers AGE to qualify for S. 2032A treatment
How much of AGE must a business be to qualify for S. 6166 treatment?
At least 35% of the taxpayers AGE
What must a company be to qualify for S. 303 stock redemption treatment?
A corporation
What type of POA is included in the gross estate of a decedent?
A general POA
Also, a lapsed G. POA within 3 years of the decedents death remains in the estate
What are IRD assets and how are they treated re: inheritance?
“RAINS”
- R -> retirement plans
- A -> annuities
- I -> installment sale payments
- N -> net unrealized appreciation (NUA)
- S -> savings bonds
IRD assets inherited are given
- carryover basis
- income retains character to recipient (ordinary, cap gain, etc)
How is a step up basis calculated for jointly held property by NONspouses
% includable in GE receives a step up in basis
% included in GE depends on % originally contributed by decedent
How is step up in basis calculated by jointly held property between SPOUSES?
50% of property receives a step up in basis, regardless of how much $ any spouses contributed
How is step up in basis calculated for COMMUNITY PROPERTY?
Both halves receive a step up in basis
How do you determine your ADJUSTED GROSS ESTATE
Gross estate - “your ABCD’s” = AGE
A - administrative & accounting costs
B - burial fees
C - casualty loss and theft loss
D - state death tax / debts (remember ownership %)
How do you determine your TAXABLE estate?
AGE - any Unlimited Deductions - state estate taxes = taxable estate
Unlimited deductions
- charitable & mar total deductions
What happens when a client dies between ex-dividend date and payment date?
The dividend declared is part of the gross estate
What’s a simple trust?
A trust that must distribute all income to beneficiaries annually
What’s a complex trust?
Any trust that isn’t a simple trust
Not required to distribute all income annually
What is a testamentary trust?
A trust created by a decedents will
- included in gross estate
- loss of privacy due to probate
- revocable and unfunded until death
- gift tax doesn’t apply
- pour-over trust often goes hand in an (a pourover trust is a trust “poured” from another source)
What are the differences between a funded and unfunded ILIT?
Funded ILIT
- removes proceeds from gross and probate estate
- GT exclusion available
- funded w/ cash and other assets gifted to trust;l
— may cause a large GT liability to grantor
Unfunded ILIT
- gift cash to the trust to pay premiums, often used with a crummey provision to use GT exclusion
What is estate shrinkage?
Estate shrinkage is caused by administrative expenses and estate liquidity problems reducing the value of a decedent estate
How would a general POA be included/excluded in/from the gross estate?
Included in GE
- held a G.POA at death
- let a G. POA lapse within 3 years prior to death
Excluded from GE
- exercise the power prior to death
• exercising a GPA the holder makes an adjusted taxable gift to recipient
What’s the current gift value for gift tax purposes of a GRAT/GRUT?
The FMV of assets transferred to the trust - PV of retained income interest
GRATs - when is a gift created? Ann exclusion eligible? Who pays the tax? How is treated re:Gross estate?
- a taxable gift occurs when a GRAT is created
- the annual exclusion is NOT available (future interest gift)
- the grantor pays tax on any interest/dividends
- grantor must survive the trust term to exclude property from their estate
How would a business qualify for S. 303 closely held stock redemption treatment?
1 - business is a corporation
2 - value of stock must be at least 35% of the AGE
What is the gift made when establishing a GRAT?
The PV of the remainder interest when the trust is created is a taxable gift
- annual exclusion not allowed
Section 2032A special use valuation; what is it, how do you qualify for treatment, how does it factor into a decedents estate planning, and what are the requirements to maintain it?
S. 2032A is a way for a decedent owning a closely held business/farm to have a reduced gross estate valuation for said business
Valuation made on current use rather than highest and best to a max reduction of $1,190,000
Qualifications
- value of REAL AND PERSONAL PROP must be at least 50% of AGE
- value of REAL PROP ONLY must be at least 25% of AGE
- must pass to qualified heirs who were material participants in the business (5 out of prior 8 years)
- must elect treatment on F 706
- recapture of estate tax if disposed to non family member or property discontinues qualified use within 10y after decedents death
- except if beneficiary dies or F/B goes bankrupt
S. 303 stock redemption - what is it, how do you qualify for it, what effect does it have on estate planning?
S. 303 is for when a decedent shareholder of closely held CORPORATION redeems their stock in a tax efficient way
The transaction will considered a disposition of an asset & qualify for capital gain treatment
- as opposed to receipt of dividend (ord income)
Requirements
- stock must be INCLUDED in decedents estate
- value of stock must be > 35% of AGE
- redemption eligible for cap gain treatment cannot exceed (Fed/State death taxes + funeral expenses + administrative expenses)
How do you qualify for S. 6166 deferral of estate tax?
You must have owned a farm/closet held business at death, and the VALUE OF THE F/B is > 35% of AGE
Closely held biz can be either a
- partnership
- proprietorship
- corporation
If qualified-> executor can defer pmt of ET for 5y and then pay in 10 annual installments
- interest is paid during deferral period
What is a charitable gift annuity?
An irrevocable transfer of assets to a charity, in exchange for an annuity paid by the charity
Donor receives an income tax charitable deduction based on difference between PV of donated property and PV of annuity payments received
What is a PIF
An irrevocable transfer of assets to a charity in exchange for an income stream from the charity’s commingled asset management
- charity must have remainder interest as well
- payment is determined by earnings of trust annually
The PIF is created & maintained by the charity
- must be a public charity
- PIF cannot invest in tax free municipal bonds
Grantor retains an income interest for 1 or more beneficiaries for life
How do you determine the amount of a taxable gift for lapses of powers of appointment?
- determine if withdrawal right exceeds the 5/5 power
— 5/5 -> w/d the greater of $5,000 or 5% of the trust assets - divide the lapsed amount from the # of beneficiaries and subtract the difference between THAT number from the greater of 5/5 power
— that amount is the taxable gift made to the other beneficiaries
Ex) $140,000 trust w/ provision to w/d the greater of 25% or $15,000 for 2 bennys who let it lapse
- 5/5 benchmark; $7k (5%) > $5k
- lapsed amount = $30k (25% of $140k)
- 30/2 = 15-7 = $8k taxable gift from one Benny to the other
What’s a QDOT
A qualified domestic order trust
- qualified for unltd martial deduction for non citizen spouses
- pays spouse an income interest at least annually
- at least one trustee must be a US corporation or citizen
- executor may elect this on F. 706
• decedent does NOT have to do this prior to death
Can trusts create a charitable deduction during life and at death?
Yes, CRAT/CRUT/PIF’s all provide a CD during life (when funded) and for the decedents estate at death
— charitable ET deduction from AGE
What happens when you list a charity as a beneficiary to an IRA and the owner dies?
The estate receives an offsetting charitable tax deduction
What does DNI exclude?
Items relating to corpus (capital gains)
