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
Special Use Valuation (Section 2032A)
FMV (highest and best use of value) of property must be included in gross estate
value of land in current use does not matter
value included in gross estate will be the current use value of the property subject to a limitation that the highest and best use value cannot be reduced by more than $1,310,000 (2023)
Qualification Requirements:
1. decedent US resident at time of death
- property must be used in farming operation or trade/business that was actively managed by decedent or decedent’s family for 5 of 8 years immediately preceding decedent’s death
- value of real and personal property used in a qualifying manner must >= 50% of decedent’s gross estate
- value of real property used in a qualifying manner >= 25% of value of gross estate
- qualifying property must be located in US and must pass to qualifying heirs who must actively participate in the farming activity or business
- executor must file the election with the estate tax return complete with a recapture agreement
** heirs must use property in its qualified use for at least 10 years following decedent’s death
Closely Held Business Special Elections
Disclaimer Requirements
disclaimer is an irrevocable and unqualified refusal to accept a gift or bequest
Requirements
1. must be in writing
2. must be made within 9 months of the date on which the transfer creating the interest was made or the day the disclaiming party reaches age 21
3. disclaimant cannot specify the party to whom the property will be transferred as a result of the disclaimer
4. disclaimant cannot accept any interest or benefit in the property prior to disclaiming
** Surviving Spouse may disclaim and still receive benefits, all such property qualifies for the unlimited marital deduction
Post-mortem elections made by the Executor
QTIP Election
QDOT Election
GSTT Elections
GSTT Transferee
Categorized into two groups
- Non-skip person
- Skip persons
- Any lineal descendant of the transferor’s grandparent (or transferor’s spouse’s grandparent) who is 2+ generations younger than then transferor
- Any person who is not a lineal descendant, is not the spouse of the transferor, and is 2+ generations younger than the transferor based on age (37.5 years)
- Trust if (1) all trust interests held by skip persons, or (2) trust distributions can only be made to skip persons
** Generation = 25 years
- Individual’s generation includes all individuals 12.5 years older and younger than him
** Any spouse or former spouse of a transferor and all charitable organizations are always considered to be in the same generation as the transferor
** Adopted relatives considered the same as blood relatives
GSTT applies to three types of transfers
direct skip = outright gift to a grandchild or trust that is a skip person, transferor liable for GSTT unless made from a trust (trustee)
taxable termination = any termination of a trust interest unless at the termination of the trust, the trust property is subject to (1) federal estate or gift tax, (2) a non-skip person receives an interest, (3) the distribution will never be made to a skip person
taxable distribution = any distribution from a trust to a skip person that is not a direct skip or a taxable termination
What are GSTT EXCLUSIONS?
exclusion available for qualified transfers and annual exclusion of $17,000
transfers to a trust deemed a skip person are only considered nontaxable gifts for GSTT purposes if transfer <= annual exclusion and if:
- beneficiaries are given Crummey power over the contribution to the trust
- the trust assets can only be distributed for the benefit of the beneficiary during the beneficiary’s lifetime
- if the trust does not terminate before the beneficiary’s death, the assets must be included in the beneficiary’s gross estate
What are GSTT EXEMPTIONS?
Every individual is allowed a GST exemption = applicable estate tax exemption = $12,920,000 (2023), applies to gifts made during both life and death
