Estate Planning: Advanced Estate Planning

Question 1

The Unlimited Marital Deduction:

Answer 1

-Advantages:

Defers estate taxes until death
may fund the applicable estate tax credit of the surviving spouse
ensures the surviving spouse has sufficient assets to support his lifestyle.

• to claim the marital deduction, the decedent must have been married as of the date of their death and the surviving spouse must receive property through the estate.
• marital deduction is limited too (1) property passing to the spouse must qualify for the marital deduction. (2) only the net value of qualifiying property that is left to a surviving spouse can be included as the martial deduction.

Question 2

Chart - ways to leave property and qualify for the marital deduction

Answer 2

Question 3

What are the requirements for a transfer to qualify for the marital deduction?

Answer 3

1. property must be included in the decedents gross estate.
2. property must be transferred to the surviving spouse
3. the interest must not be a terminable interest unless it meets on of the exceptions. Terminable interest property is property that will terminate at some point in the future.

Question 4

What are the exceptions to the terminable interest rule?

Answer 4

• six month survival contingency
• terminable interest, either outright or in trust, over which the surviving spouse has a general power of appointment.
• A qualified terminable interest property Trust (QTIP)
• A Charitable Remainder Trust (CRT) where a spouse is the only non charitable beneficiary.

Question 5

What are the two trust that can be used to transfer property to spouse and still qualify for the unlimited marital deduction?

Answer 5

1. General Power of Appointment Trust (GPOA)

2. Qualified Terminable Interest Property (QTIP)

Question 6

What is the General Power of appointment trust?

Answer 6

• Requires the unconsumed assets to be included in the surviving spouses gross estate and thus qualifies the transfer of the property for the unlimited marital deduction.
• To qualify for the marital deduction, the trust must grant the surviving spouse the power to appoint the property to himself, his estate, his creditors, or the creditors of his estate.

Question 7

What is a qualified Terminable Interest Property Trust? (QTIP)

Answer 7

• Allows a decedent to qualify a transfer for the marital deduction at his death yet still control the ultimate disposition of the property.
• QTIP Trust holds property for the benefit of a surviving spouse and makes the income distributions to the surviving spouse at least annually.
• At the death of the surviving spouse, the trust property will transfer to the remainder beneficiaries as determined by the grantor (first to die spouse)
• to qualify as a QTIP Trust:

All income must be distributed annually to the surviving spouse, any income not distributed must be distributed to their estate at death.

Spouse must have authority to instruct trustee to sell non-income producing investments and reinvest those proceeds in income producing investments.

during spouses lifetime no one can have the right to appoint the property to anyone other than the surviving spouse.

Transferor or his executer must file an election to treat the trust as a QTIP trust on the transferors gift tax return or the decedents federal estate tax return.

Question 8

What is the annual exclusion amount for non-us Citizens?

Answer 8

$164,000

Question 9

What is a QDOT?

Answer 9

• Qualified Domestic Trust
• allows for the marital deduction for assets passed from a US citizen to a NON-US Citizen
• Will allow the US government to subject remaining assets to estate taxation upon the death of the non-citizen surviving spouse
• To Qualify the following requirements must be met:

At least one of the QDOT trustee must be a US Citizen or a US Domestic Corporation

trust must prohibit a distribution of principal unless the US Citizen trustee has the right to withhold estate tax on the distribution

trustee must keep a sufficient amount of the trust assets in the united states to ensure the payment of federal estate taxes, or trustee must make the payment of estate taxes upon the death of the non-citizen surviving spouse

-executor of the citizen spouses estate must elect to have the marital deduction apply to the trust

Question 10

What is portability between spouses?

Answer 10

*see examples

exclusion amount is portable between spouses

if one spouse dies and leaves all of their assets to the other spouse, the surviving spouse is able to use an remaining exclusion not utilized by their last spouse to die.

only applicable if both spouses die after December 31,2010

if a spouse remarries, they no longer can use the exclusion carried over from the first spouse.

Question 11

What is an ABC arrangement and what are the benefits?

Answer 11

-ABC Arragnement = transfer of remaining estate tax exemption to a bypass trust, transfer of a certain amount to a general power of appointment trust, and the transfer of the remaining balance to a QTIP trust.

Objectives Accomplished:

1. decedent guarantees the full use of his applicable estate tax exemption with the transfer to the B trust.
2. GPOA trust allows the spouse to receive income distributions as well as appoint principal to herself. Other two trust allow income distributions to the surviving spouse as well as the ability for the surviving spouse to receive principal distributions from both trust for HEMS.
3. QTIP and GPOA trust qualify the transfers for the unlimited marital tax deduction. GPOA trust allows the surviving spouse can choose the ultimate beneficiary of the trust property. QTIP Trust the decedent (first to die spouse) can choose the remainder beneficiaries.

Question 12

Capitalized Income Approach for Life Insurance.

Answer 12

Life Insurance Needed = (Gross Income-Adjustments)/Riskless Rate adjusted for inflation.

Question 13

Common Objectives of Life Insurance

Answer 13

• protect income stream for beneficiaries
• source of funds for education
• provide liquidity at death
• source for retirement income
• create or sustain family wealth

Question 14

Exceptions to the Transfer for Value Rule for life insurance?

Answer 14

If any of the following individuals purchase the policy the transfer for value rules will not apply:

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 transferors basis in the contract.

Question 15

How is a gift of a life insurance policy treated?

Answer 15

• If ownership is formally transferred, the gift of the policy will be considered a present interest gift and will qualify for the gift tax annual exclusion.
• for gift tax purposes the value of the policy depends on wether the policy is still in premium-pay up status or is already paid up:

Policy in Pay Status - Value for gift tax purposes is the a number provided by the insurance company upon request.

Paid up Policy - replacement cost of the policy, which equals the present cost charged by the insurance company to issue a similar contract.

Question 16

How are Gifts of Life Insurance Policies to Charities Handled?

Answer 16

-income tax deduction for a gift of an existing life insurance policy is limited to:

Public Charity - 50% of Donors AGI
Private Charity - 30% of Donors AGI

-ownership of the policy must be transferred to the charity, if donor wishes to qualify for income tax charitable deduction.

Question 17

What happens when you pass away owning a life insurance policy on someone else’s life?

Answer 17

-value of the policy will be included in his gross estate.

Question 18

What happens when you pass away owning a life insurance policy on your own Life?

Answer 18

• The death benefit of the policy is included in your gross estate.
• if you gratuitisly transferred the policy transferred ownership of the policyh to someone else within three years of your death then it is included in your gross estate.

Question 19

What is a cross purchase agreement?

Answer 19

Each owner owns a life insurance policy in each of the other owners. The estate of each owner then commits to selling the ownership to the surviving owners, typically for a predetermined cost.

Advantages: agreement allows for step up in the remaining shareholders interest and the life insurance cannot be affected by creditors.

Disadvantages: each owner must own a policy in all of the other owners. This is inefficient when there are many owners involved.

Question 20

What is a Stock Redemption (entity Purchase) Plan?

Answer 20

-Business entity owning the life insurance policies on each owner.

The estate of each owner then commits to selling their ownership back to the company

Advantages: Requires that the company purchases a policy on each owner so significanty less policies.

Disadvantages: remaining owners do not get a step up in basis on their ownership interest, also policy isnt protected from creditors.

Question 21

What is a section 303 redemption?

Answer 21

estate of a deceased shareholder may redeem shares to cover death taxes (Federal and State estate, inheritance, Generation Skipping taxes), funeral expenses, and administrative expenses. the shares redeemed for this purpose will qualify for capital gains treatment.

-generally no gains triggered as a decedent generally receives a step up in basis after death.

to qualify:

more than 35% of the decedents adjusted gross estate must consist of closely held business interest.

Question 22

What is the form 1041 & rules?

Answer 22

Form 1041 = Estate Fiduciary Income tax return

• since not a natural person, it is not required to use a calendar year for tax purposes. executor can elect to have the estate tax year end on the last day of any month during the year.
• expenses of administering the decedents estate and any casualty losses suffered during estate administration may be deducted on either the fiduciary income tax return for the estate (form 1041, or the decedents estate tax return (form 706), can deduct a portion of either also.
• Executor fee’s are deductible on form 1041 and 760, and are taxable income to the executor.

Question 23

What assets are IRD assets?

Answer 23

• qualified plans
• IRAs
• US Savings Bonds
• installment notes
• annuitized annuities
• accrued dividends
• accrued wages

Question 24

What is Section 6166, installment payment of estate taxes?

Answer 24

• possible to extend the payment of estate taxes attributable to the closely held business interest over a 14-year period. The first four years of payments are interest only, followed by 10 payments that amortize the estate tax liability over the payment period.
• to qualify for section 6166 three requirements must be met:
  1. the value of the business interest must exceed 35% of the value of the decedents adjusted gross estate.
  2. the business interest must be a closely held business.
  3. the entity must have been actively engaged in the conduct of a trade or a business at the date of the decedents death.

Question 25

What is the special use valuation (section 2032A)?

Answer 25

• If special use valuation is elected, the value included in a decedents gross estate will be the current use value of the property, subject to a limitation hat the highest and best use value cannot be reduced by more than $1,230,000
• see chart for qualifications

Question 26

What is the special use valuation (section 2032A)?

Answer 26

-If special use valuation is elected, the value included in a decedents gross estate will be the current use value of the property, subject to a limitation hat the highest and best use value cannot be reduced by more than $1,230,000

Question 27

Installment payment and special use chart!!! Memorize!!!

Answer 27

Question 28

Gift tax vs estate tax vs GSTT chart

Answer 28

S

Question 29

Who is considered a skip person for GSTT Tax?

Answer 29

• any lineal descendant of the transferors grandparent or their spouses grandparent who is two or more generations younger than the transferor
• any person more than 37 1/12 years younger and not two or more generations younger.

Question 30

When is a trust considered a skip person?

Answer 30

1. if all interest in the trust are held by a skip person

2. if the trust distributions can only be made to skip persons

Question 31

What is the predeceased ancestor exception?

Answer 31

• if a child of the transferor is deceased at the time of a transfer, then that childs descendants are moved up one generation for GST purposes.
• Also applies to grandnieces and grandnephews.

Question 32

What are the three types of taxable transfers for GSTT?

Answer 32

1. Direct Skip - Direct skip is an outright transfer of property to a skip person that is subject to estate and gift tax.

GSTT on a direct skip is imposed ont he value received by the transferee.

If paid from a trust, the trust is liable for the GSTT.

2. Taxable Termination - Any termination of a trust interest unless at termination of the trust, the trust property also transfers property to a non-skip person.

Trustee is liable for any GSTT tax on a taxable termination.

3. Taxable Distribution - a taxable distribution is any distribution from a trust to a skip person.
   - amount received by the transferee in a taxable distribution, reduced by any expenses incurred by the transferee in connection with the GSTT, is the taxable amount of the distribution.

TRANSFEREE liable for GSTT on a taxable distribution.

Question 33

Special Exceptions to GSTT?

Answer 33

-Transfers between September 25, 1985 - October 23,1986 are not subject to GSTT if:

Transfer was to an irrevocable trust that was in existence on or before sep 25 1985, to the extent no new contributions were made after that date.

transfer was pursuant to certain wills and revocable trust executed before oct. 122 1986, and decedent died before Jan 1, 1987

Transfer was from one person who was under a mental disability to change the disposition of his property continuously from oct 22, 1986

Question 34

GSTT summary chart - NEED TO KNOW

Answer 34