Estate Planning _ Transfer Outright and In Trust Flashcards
Arm’s Length Transaction
transfer between unrelated parties via sale, installment sale or exchange
valuable consideration based on FMV
does not attempt to reduce transferor’s gross estate or economically benefit the transferee
buyer and seller enter transaction without passing property to buyer at a reduced cost
Bargain Sale
individual sells asset for less than FMV, seller deemed to have made gift to the buyer
gift amount = FMV - sales price
Sales (Gift) and Leaseback
a company owning fully depreciated property sells the property to a buyer (usually a family member in a low income bracket)
new owner becomes the lessor and leases asset back to the former owner who becomes the lessee
lessee receives cash from sale of asset and makes periodic deductible lease payments and retains use of asset
useful to business in need of investment or operating capital
works well w/ high income tax bracket clients seeking to divert highly taxed income to family members in a lower income tax bracket
Full Consideration Transfers / Sales
structured as a sale of property intended to benefit transferee loved ones that a transferor would not typically consider with an arm’s length transaction
Types of transactions
- Private Annuities
- Self-Cancelling Installment Notes (SCIN)
- Grantor Retained Unitrust (GRUT)
- Qualified Personal Residence Trust (QPRT)
- Tangible Personal Property Trust (TPPT)
- Family Limited Partnership (FLP)
Private Annuities
between two (usually related) private parties
seller/annuitant sells and asset to buyer in exchange for an UNSECURED PROMISE FROM THE BUYER TO MAKE FIXED PAYMENTS TO THE ANNUITANT FOR THE REMAINDER OF THE ANNUITANT’S LIFE
ANNUITY TERM = LIFE EXPECTANCY OF SELLER/ANNUITANT BASED ON THE ANNUITANT’S AGE AT THE DATE OF SALE
Section 7520 rate is used to determine the interest portion of each payment and the PV of the private annuity
ANNUITANT DEFERS RECOGNITION OF ANY CAPITAL GAIN OVER HIS REMAINING LIFE EXPECTANCY, receives a constant stream of income for the remainder of his life, and REMOVES THE ASSET TRANSFERRED AND ANY OF ITS SUBSEQUENT APPRECIATION FROM HIS GROSS ESTATE
Annuity Payment components:
1. Interest
2. Capital Gain
3. Adjusted Basis (Income-Tax-Free Return of Capital)
Buyer’s interest payments are nondeductible for income tax purposes and adjusted basis is sum of all payments made
Self-Cancelling Installment Notes (SCIN)
sale for FMV over a term defined by the seller
if seller dies before all installment payments made the note is cancelled and buyer has no further obligation to pay
buyer pays a premium called SCIN premium to compensate seller for risk of dying before all payments are made
GENERALLY USED WHEN TRANSFEROR IN POOR HEALTH & EXPECTS TO DIE BEFORE END OF SCIN TERM
classified as an installment sale w/ buyer making payments of interest and principal
interest paid by the buyer is deductible if permitted by the IRC
BUYER’S ADJUSTED BASIS IS ALWAYS THE PURCHASE PRICE WHICH INCLUDES THE FULL FACE VALUE OF THE REMAINING NOTE PAYMENTS
Seller Receipt Components:
1. Interest
2. Capital Gain
3. Return of Adjusted Basis
4. SCIN Premium (either additional interest income or capital gain depending upon how SCIN was calculated)
Risk
- Buyer: transferor outlives the SCIN term and business risk
- Seller: default, interest rate, purchasing power, reinvestment
Grantor Retained Annuity Trust (GRAT)
PV of expected future remainder interest is a gift of future interest subject to gift tax
the longer the term the higher the PV of the annuity payments and the lower the remainder interest for gift tax purposes
if grantor dies during annuity term, the FMV as of grantor’s date of death is included in grantor’s gross estate and does not save any transfer tax
Grantor Retained Unitrust (GRUT)
Similar to GRAT paying a fixed percentage of the trust’s assets each year
Requires annual valuation
Less suitable for hard to value assets (e.g. real estate, businesses)
Qualified Personal Residence Trust (QPRT)
special form of GRAT, grantor contributes personal residence to trust where grantor receives use of personal residence as the annuity interest component
residence passes to remaindermen at end of the trust term
- if grantor still living, he may lease (at FMV rent) the property from the remaindermen and continue to use as his personal residence
if grantor dies before end of trust term, the FMV of residence is included in grantor’s gross estate
can only hold ONE RESIDENCE
INDIVIDUALS CAN HAVE UP TO TWO QPRTs
Medicaid qualification requirements and asset exlcusions
Requirements:
- US citizen or resident alien permanently residing in the US
- Age 65, disabled, or blind
- ACA authorized expansion to those under age 65 who meet income limits (not all states have adopted)
- Children’s Health Insurance program (CHIP) for children under age 19 for families that don’t qualify for Medicaid
- Income limit = $2,000 for individual and $3,000 for married couple when both get care
Asset Exclusions:
- Primary residence ($525K up to $750K) w/ some exception if applicant may return home or if used by dependents
- Car and personal property
- Term life insurance, whole life w/ little to no cash value, retirement accounts
- Real or personal property used in business or for production of income
Income Standard = 133% of federal poverty level ($19,720 per year for a family in 2023)
Transfers at Death
Transfers by Will
- legatees
- devisees
- heirs
Property Transferred at Death by Contract
- life insurance, annuities, qualified plans, IRAs, TODs, Totten Trusts, PODs (named beneficiary)
Transfers at Death by Operation of Law
- Titling
- With survivorship = JWROS & Tenancy By the Entirety
Trusts
- Testamentary = created by will
- Standby = created (but not funded) prior to the grantor’s death waiting for assets to be transferred to them pursuant to terms of the grantor’s will
Charitable Transfers at Death
Self-settled trust
when grantor is the beneficiary
spendthrift protection generally does not apply
Simple vs. Complex Trusts
Simple Trust – mandates the distribution of all income from trust
Complex Trust – trust is permitted to accumulate income, benefit a charity, or distribute principal
** taxed at trust income tax rates
Revocable vs. Irrevocable Trust Taxation
Public Charity vs. Private Foundation (Operating or Non-operating)
Public Charity - receives > 1/3 organization’s support from gifts, grants, contributions, membership fees, and related business activity sales
** less than 1/3 support can come from gross investment income plus unrelated business taxable income
Private Foundations
- Operating: spend at least 85% of adjusted net income (or minimum investment return, if less) on exempt purpose activities
- Non-operating
Charitable Giving Limits (AGI Ceilings)
50% ORGANIZATIONS
- public charities
- private operating foundations
- private non-operating foundations
- private non-operating foundations that distribute contributions to either public charities or private operating foundations within 2.5 months of their tax year end (pass-through private foundation)
30% ORGANIZATIONS
- contributions to private non-operating foundations that do not qualify for 50% orgs
- contributions of cash and ordinary income property (30% AGI limit)
- contributions of LTCG property (20% AGI limit)
If taxpayer donates to both 30% and 50% orgs during a year, the 50% donations are considered first.
5-year carryover on FIFO basis of any disallowed donation
Charitable Giving Valuation, Recordkeeping, and Reporting
