Estate Planning _ Advanced Estate Planning Flashcards
Exceptions to the Unlimited Marital Deduction Terminal Interest Rule
- A 6-month survival contingency
- A terminable interest, either outright or in trust, over which the surviving spouse has a general power of appointment.
- A QTIP Trust
- A CRT where a spouse is the only non-charitable beneficiary
Qualified Domestic Trust (QDOT)
trust for a non-citizen spouse to collect deceased spouse’s assets and allows the US gov’t to subject the remaining assets to estate taxation upon the death of the non-citizen surviving spouse
Qualifications:
- at least one of the QDOT trustees must be a US citizen or a US domestic corporation
- the trust must prohibit a distribution of principal unless the US citizen trustee has the right to withhold estate tax on the distribution
- the trustee must keep a sufficient amount of the trust assets in the US to ensure the payment of federal estate taxes, or the trustee must have a minimum net worth sufficient to assure the payment of estate taxes upon non-citizen surviving spouse’s death
- the executor of the citizen-spouse’s estate must elect to have the marital deduction apply to the trust
What is an OVERQUALIFIED unlimited marital deduction?
When TOO MANY ASSETS PASS TO A SURVIVING SPOUSE RESULTING IN AN INCREASE IN OVERALL ESTATE TAXES WHEN THE SURVIVING SPOUSE DIES
What is an UNDERQUALIFIED unlimited marital deduction?
TOO MUCH OF THE DECEDENT’S PROPERTY WAS SUBJECT TO ESTATE TAX AT THE DEATH OF THE FIRST SPOUSE DUE TO A FAILURE TO MAKE ADEQUATE USE OF THE UNLIMITED MARITAL DEDUCTION
ABC Trust Arrangement
The different trusts used together in a marital situation to fully use available unlimited marital deductions.
A-Trust = General Power of Appointment Trust (qualifies transfers for the unlimited marital deduction)
- allows surviving spouse to receive trust income distributions and appointment principal to themselves
- surviving spouse chooses the ultimate beneficiary
B-Trust = Bypass Trust (transfer assets up to the applicable estate tax exemption)
- allows for HEMS use for surviving spouse
C-Trust = QTIP Trust (qualifies transfers for the unlimited marital deduction)
Life insurance transfer-for-value rule does not apply to these individuals
the insured
a partner of the insured
a partnership in which the insured is a partner
a corporation in which the insured is a shareholder or officer
a transferee who takes the transferor’s basis in the contract
Life insurance gift tax value – policy in premium-pay status vs. already paid up
Life Insurance Gift Tax Treatment
In Premium-Pay Status = SUM OF TERMINAL RESERVE + UNEARNED PREMIUM (valued at the date of the gift)
Already Paid Up = REPLACEMENT COST = PRESENT COST TO ISSUE SIMILAR CONTRACT
Cross-purchase buy-sell agreement
Each shareholder owns a policy on all of the other owners = N X (N-1)
Premiums are NONDEDUCTIBLE
Insurance cannot be attached by the company’s creditors
Remaining stockholder’s purchase deceased owner’s interest
Tax-free death benefit to the remaining owners
Step-up in basis of remaining owner’s interest
Allow for altering of ownership ratios
Stock Redemption or Entity purchase agreement
Company owns a policy on each owner
Premiums are NONDEDUCTIBLE
Life insurance can be attached by the company’s creditors
Company purchases deceased owner’s interest
Tax-free death benefit to the company
NO step-up in basis of remaining owner’s interest
Does not allow for an altering of ownership ratios
IRC Section 303 for Corporate Redemption from Closely Held Business
Allows estate of a deceased shareholder (closely held and family C-Corps) to redeem enough shares to cover estate taxes, administration and final expenses and qualify for capital gains treatment
shares get step-up to FMV
cash from corporation is a tax-free exchange allowing company to reduce its earnings and profits benefiting surviving shareholders
Qualification
- More than 35% of decedent’s adjusted gross estate must consist of closely held business interest
- multiple businesses can be aggregated provided decedent owned at least 20% of each company’s outstanding stock
Decedent Tax Return Filings – Which return forms are used for unpaid medical expenses, casualty losses, and executor fees?
Income in Respect of Decedent (IRD) Assets
Qualified Plans
IRAs
US Savings Bonds
Installment Notes
Annuitized Annuities
Accrued Dividends
Accrued Wages
How does the gift-splitting election work for married taxpayers?
treats a gift of separate property as being made 50% from each spouse
each spouse utilizes their annual exclusion for the gift
election is made on each spouse’s annual gift tax return
requires each spouse to sign the other’s gift tax return
applies to all gifts made by either spouse during the year
Alternate Valuation Date
executor or administrator elects to value assets using FMV six months after the decedents date of death to be included in gross estate
total value of gross estate must depreciate after date of death
AND
total estate tax must be less than estate tax using date of death values
all assets valued at the alternate valuation date
EXCEPT:
- assets distributed before 6 months
- wasting assets (annuitized annuities, patents, royalties, installment notes, lease income); they decline in value over time based on their asset type
Installment Payments of Estate Tax (Section 6166)
used for closely held business estate taxes if and when no liquidity and business cannot be sold in time or not prudent for the family
possible to extend payment over a 14-year period
FIRST FOUR YEARS = INTEREST ONLY PAYMENTS
10 YEARS = AMORTIZE ESTATE TAX LIABILITY (CAN PAY SOONER)
Qualification Requirements:
1. value of business interest must exceed 35% of decedent’s gross estate
- must be closely held business (sole prop; partnership if at least 20% of total capital interest included in gross estate; partnership w/ 45 or fewer partners; a corporation w/ 45 or few shareholders
- entity must have been actively engaged in conduct of trade or business at decedent’s date of death
Closely Held Business Special Elections
