Estate Planning Flashcards2
Estate Planning
The process of accumulation, management, conservation, and transfer of wealth considering legal, tax and personal objectives.
Effective Transfer
Occurs when a person’s assets are transferred to the personal institution intended by that person.
Efficient Transfer
Occurs when transfer costs are minimized consistent with the greatest assurance of effectiveness.
Probate Process
The legal process of changing title to the decedent’s assets from the decedent to the heirs and legatees.
Estate Planning Goals
1.) Fulfill the client’s property transfer wishes; 2.) Minimize transfer taxes; 3.) Minimize transfer costs; 4.) Maximize net assets to heirs; 5.) Provide needed liquidity at death; and 6.) Fulfill the client’s healthcare decisions.
Heirs
Those who inherit property under state law.
Legatees
Those who inherit property through a will.
Risks in Failing to Plan an Estate
1.) The client’s property transfer wishes go unfulfilled; 2.) Transfer taxes are excessive; 3.) Transfer costs are excessive; 4.) The client’s family may not be provided for financially; and 5.) Insufficient liquidity to cover client’s debts, taxes and co
The six basic steps of the estate planning process
1.) Establish the client/planner relationship; 2.) Gather client information and establish client’s transfer goals; 3.) Determine client’s financial status; 4.) Develop a comprehensive plan to transfer property consistent with information and goals; 5.) I
Unauthorized Practice of Law
The proffering of legal advice or services by one who is not a licensed attorney.
The Basic Documents of an Estate Plan
Wills; Side Letters of Instruction; Power of attorney; Durable power of attorney for health care; Living wills or advance medical directions; and do not resuscitate orders.
Will
A legal document hat give an individual the opportunity to control the distribution of property at death and avoid state intestacy laws.
Testator
Will-maker.
Testate
A status where the deceased passed away with a will.
Intestate
A status where the deceased passed away without a will.
Domicile
The state where a person lived at the time of death.
Situs
The state where (real) property is actually located.
Ancillary Probate
A probate process in a state other than the state of domicile.
Uniform Probate Code
A model set of rules that serves as a guideline for many states’ probate laws.
Administrator
An estate representative appointed by the probate court.
Executor
An estate representative appointed by the decedent through the will.
Requirements to execute a valid will
The will must be in writing and it must be signed at its logical end by the testator.
Statutory Will
A will drawn up by an attorney that complies with state statutes for wills and witness requirements.
Holographic Will
A will handwritten by the testator that includes the material provisions of a will. Must be signed and dated by the testator.
Nucupative Will
An oral will, spoken before death to a sufficient number of witnesses.
Mutual/ Reciprocal Will
A will written to benefit another individual who has an identical will written to benefit the other person.
Joint Will
A will in which two or more individuals will execute one will that transfers their common interest in property to one individual.
Legal Capacity to Execute a Will (“Sound Mind”)
A requirement for validation of a will in which the testator has the mental capacity to understand the consequences of writing the will; Understand the nature and extent of the property being disposed of in the will; and Recognizes the natural objects if
Introductory Clause
Statement in a will identifying the testator of the will.
Declaration Clause
Statement in a will that this is the last will and testament of the testator.
Bequest Clause
Area of a will that directs the distribution of specific property.
Residuary Clause
Area of a will that transfers property not previously distributed through the bequest clause(s).
Appointment of Executor Clause
Statement in a will that identifies the executor and any successor executor, including an explanation of the powers granted the executor.
Guardianship Clause
Statement in a will that identifies an individual to raise minor children or legal dependents of the testator.
Tax-Appointment Clause
Statement in a will directing which assets will bear the payment of any debts and estate taxes.
Attestation/Witness Clause
A provision at the end of a will that is signed by at least two qualified witnesses who certify the document is the testator’s will bearing the testator’s signature and meets the requirements for a valid will.
Self-Proving Clause
Area in a will where a notary declares that he witnessed the testator and witnesses signing the will.
Simultaneous Death Clause
Statement in a will that establishes a presumption regarding which individual died first in the event that both individuals died in the same event when it is impossible to determine which individual died first.
Survivorship Clause
Statement in a will requiring that a beneficiary/heir must actually survive the decedent for a specified period of time to receive the identified inheritance or bequest.
Disclaimer Clause
Statement in a will that reminds heirs that they can disclaim bequests while still allowing the testator to direct the distribution of disclaimed property.
Contingent Legatee Clause
Statement in a will that allows the testator to determine in advance how their property should be distributed in the event the original legatee is no longer able to inherit the will because of death or disclaimer.
Per Capita Distribution Method
Allows the deceased person’s heirs to move into the generational slot of a deceased heir and inherit accordingly. Slip “by the head.”
Per Stirpes Distribution Method
Allows designated property of a deceased heir to flow to his/her heirs by representation.
No-Contest/ in terrorem Clause
Statement in a will that substantially decreases or eliminates a bequest to an heir if they file a formal, legal contest to the will.
Revocation of a Will
A testator can revoke a will by shredding or burning it, or by creating a will that specifically revokes the previous will.
Codicil
An amendment or supplement to a will.
Side (or Personal) Instruction Letter
A document detailing the testator’s wishes regarding the disposition of specific tangible assets as well as funeral and burial wishes, eth location of important documents, etc.
Forced Heirship
Statutes of state law that require a certain portion of an estate to be transferred to the decedent’s children.
Marital Share
Statutes of state law that require the decedent to provide for his surviving spouse under certain circumstances.
Felonious Homicide Statutes
State law that prevents legatees who have been convicted of intentionally killing the decedent from inheriting the decedent’s will or through the intestate process.
Divorce Statutes
State law that invalidates any provision in a will that leave assets to a former spouse.
Anti-Lapse Statutes
State law that presumes that if a close relative is not alive when the testator dies the testator would have wanted bequests to those individuals to pass directly to their heirs.
Power of Attorney
Legal document that authorizes a trusted person to act on one’s behalf.
Principal
The grantor of a power of attorney.
Attorney-in-Fact/ Power Holder/ Agent
The person given trust of a Principal’s property.
Power of Appointment
A power given to another that enables them to appoint assets in a general or limited way.
Durable Feature
The agent of a power of attorney/appointment does not expire upon the principal’s incapacity or disability but rather expires only at the principal’s death.
Springing Power
The agent of a power of attorney/appointment received this role only upon some defined event or determination.
Power of Attorney for Property
Provides an agent with the power to manage a principal’s property and finances only.
Durable Power of Attorney for Health Care/ Medical Power of Attorney/ Health Care Proxy
A legal document that appoints an agent to make health care decisions on behalf of a principal who is unable to make those decisions for him/herself.
Living Will/ Advanced Medical Directive
A legal document expressing an individual’s last wishes regarding sustainment of life under specific circumstances.
Do Not Resuscitate Order (DNR)
Document declaring the principal’s wish to avoid having cardiopulmonary resuscitation (CPR) performed in the event their heart stops beating.
The Three Categories of Property
Real Property; Tangible Personal Property; and Intangible Personal Property
Real Property (Realty)
Property that includes land and anything permanently attached to the land.
Tangible Personal Property
All property that is not realty property and that has physical substance.
Intangible Personal Property
Property that is not real property and is without physical substance.
(Sole) Fee Simple Ownership
The complete ownership of property by one individual who possesses all ownership rights associated with the property.
Fee Simple Absolute
The ability to use; consume; or dispose of one’s property. 100% included in gross and probate estates.
Tenancy in Common (TIC)
Interest in property held by two or more related or unrelated persons with each co-owner having an interest in the entire property proportionate to their financial contribution.
Joint Tenancy with Right of Survivorship (JTWROS)
Interest in property held by two or more related or unrelated persons with a right of survivorship.
Actual Contribution Rule (regarding JTWROS)
The rules that requires the inclusion of a decedent’s original contribution percentage of JTWROS property in the decedent’s gross estate.
Tenancy in the Entirety (TE)
Interest in property similar to joint tenancy between a husband and wife.
The Four Key Components of Tenancy in the Entirety
1.) Applies to joint ownership only between married couples; 2.) Neither tenant is able to sever their interest without the consent of the other tenant; 3.) Property ownership interest is automatically transferred to the other tenant upon death; and 4.) I
Community Property
Civil law originating statutory regime under which married individuals own an equal undivided interest in all property accumulated during their marriage.
The Three Most common Types of Property Titling
1.) Life Estate; 2.) Usufruct; and 3.) Term Interest
Life Estate
An interest in property that ceases upon the death of the owner of the interest and provides the owner of such interest with a right to the income and/or use or property during life.
Usufruct
A civil law concept (only available in Louisiana) similar to a life estate under common law rules.
Term Interest
An interest in property that grants the holder the right to use the property for a definite term.
Legal Ownership
Ownership type that implies that a party has title to the property and possesses all rights, duties and responsibilities associated with the property.
Equitable Ownership
The economic right to enjoy the benefits of property without possessing legal ownership of the property.
The Probate Process
The legal process through which the decedent’s assets that are not automatically transferred to their heirs by contract or law are retitled in the name of the heirs.
Devisee
A person who inherits real property under a will.
The Five Primary Advantages of Probate
1.) Implements disposition objectives of testator; 2.) Provides for an orderly administration of assets; 3.) Provides clean title to heirs or legatees; 4.) Increases the chance that parties of interest have notice of proceedings and a right to be heard; a
The Three Primary Disadvantages of Probate
1.) Can be complex and excruciatingly slow (delays); 2.) Can result in substantial monetary costs (costs); and 3.) The process is open to public scrutiny (publicity).
Estate Administration or Succession
The passing of passing property at death to surviving heirs/legatees.
Abatement
The reduction in assets transferring to a legatee because the estate has insufficient assets to satisfy all legatees.
Ademption
Extinction of a legacy because an asset - specifically bequeathed to a legatee - has been disposed of prior to death.
Administrator
A person appointed by the probate court to oversee the probate process when an executor has not been named.
Ancillary Probate
Concurrent second probate process conducted in a non-domiciliary state in which the decedent owns property; which often requires the services of an attorney from that state; and separate court fess.
Domicile
Where a person lives - the location of their home.
Executor
Estate representative designated in the will of a decedent. The executor may serve without bond if the bond is waived by the decedent.
Heir
One who inherits under state law.
Legatee
One who inherits under the will.
Letters of Administration
A legal document that affirms the power of the administrator to act as the agent of the probate court.
Letters of Testamentary
A legal document that affirms the power of the executor to act as the agent of the probate court.
Pay-on-Death Account (POD)
A bank account utilizing a beneficiary designation.
Situs
The place state where property is located.
Surety Bond
A bond posted by the administrator or executor of the estate to protect creditors; heirs; and legatees from losses created by the administrator or executor.
Totten Trust
Not a trust but rather a bank account with a beneficiary clause.
Transfer-on-Death Account (TOD)
An investment account utilizing a beneficiary designation.
“Marshalling the Assets”
A phrase referring to the process of an administrator or executor identifying and taking control of a decedent’s assets.
Examples of Nonprobate Property
Life Insurance; Annuities; IRAs/SEPs/SIMPLEs/Qualified Retirement Plans; and Totten Trusts/Pay-on-Death accounts/Transfer-on-Death Accounts.
The four important questions to ask about transfers
1.) Is the transfer a taxable gift?; 2.) Do any exceptions; exclusions; or exemptions apply to avoid tax liability?; 3.) What is the tax due and how is it reports?; and 4.) Is the gift appropriate in light of the goals and objects of the donor and the don
Donor
The person who gives the gift.
Donee
The person who receives the gift.
Gift
A voluntary transfer – for less than full consideration – of property from one person to another person or entity.
The Elements of a Gift
1.) The donor must have the intent to make a voluntary transfer; 2.) The donor must be competent to make the gift; 3.) The donee must be capable of receiving the gift; 4.) The donee must take delivery; and 5.) The donor must actually part with dominion an
Donative Intent
The conscious desire to make a gift to the donee.
The Elements of a Donor’s Competence Make a Gift
Has attained the legal age of majority; 2.) Has the mental capacity to make the gift; and 3.) Owens – or possesses a general or limited power of appointment over – the property that is the subject of the gift.
Consideration
The value of property transferred in return for other property.
Direct Gift
A direct payment of cash or transfer of property to a donee.
Indirect Gift
A payment – or transfer – to a third party on behalf of a donor for the benefit of the donee.
Incomplete Gift
Any transfer that includes a revocable beneficiary designation or a transfer to a revocable trust. Incomplete transfers are not considered gifts for gift tax purposes.
Reversionary Interests
Interest in property that have been transferred away and subsequently revert back to the grantor.
Net Gift
A gift made on the condition that the donee pay gift tax due.
The Gift Tax Annual Exclusion
The de minimis rule set by Congress to help reduce the reporting requirements for small gifts. That is the amount up to which individuals can gift property gift tax free. $13,000 in 2012 & $14,000 in 2013.
Split Gift Election
An election available to a donor of separate property which allows him to utilize his spouse’s annual exclusions and transfer up to two times the annual gift tax exclusion per year per donee.
The Gift Tax Applicable Credit
A gift tax credit that shelters up to the specified limit of cumulative lifetime taxable transfers greater than the annual exclusion amount from transfer taxes.
Applicable Credit Equivalency Amount
The fair market value of taxable property that can transfer without creating a gift tax greater than the applicable credit against transfer taxes.
Present Interest
An unrestricted right to the immediate use of property. A present interest gift qualifies for the annual exclusion.
Future Interest
An interest which is limited in some way by a future date or time. A gift of a future interest does not qualify for the annual exclusion.
Crummey Provision
The explicit right of a trust beneficiary to withdraw some – or all – of any contribution to a trust for a limited period of time after the contribution.
The Two Primary Benefits of a Crummey Provision
1.) It qualifies the transfer as a present interest gift; and 2.) It creates a general power of appointment for estate tax purposes.
5/5 Lapse Rule
Guideline used to determine if a lapse in the Crumney provision by one trust beneficiary results in a taxable gift to other beneficiaries. A taxable gift is deemed to have been made when a power to withdraw an amount in excess of the great of $5,000 or 5 percent of the trust assets has lapsed or not been used by a beneficiary.
Transfers Exempt from Gift Tax
1.) Transfers to Political Organizations; 2.) Qualified Transfers (direct payment for tuition or direct payment of medical expenses); 3.) Payments for Support; 4.) Payments between Divorcing Spouses; 5.) Transfers within a Business Setting 6.) Gifts to sp
Form 709
The gift tax return form required to be filed by individuals unless all gifts are less than or equal to the annual exclusion or are exempt from gift tax.
Calculating Gift Tax
1.) Sum the total gifts for the calendar year; 2.) Subtract the total exclusions and deductions; 3.) Add the donor’s taxable gifts for the calendar year to the donor’s previous taxable gifts for all prior calendar years; 4.) Calculate the gift tax from t
Donee’s Adjusted Basis in Gifted Property
The donee’s adjusted basis for most gift property received equals the adjusted basis of the donor.
Double-Basis (or Bifurcated Basis) Rule
Occurs when the FMV of property at the date of a gifting is less than the donor’s adjusted basis. The donee will have one basis for gains (the donor’s adjusted basis) and one basis for losses (the FMV as of the date of the gift). Subsequent sale of the pr
Gross Estate
The FMV of all interested owned by the decedent at the time of death plus the FMV of certain property interest the decedent transferred during his life that he retains some rights; powers; or possession.
Gross-Up Rule
The requirement to include any gift tax paid on gifts made within three years of a decedent’s date of death in the gross estate.
Retention Interest Provisions of the IRC
Require the inclusion of the value of property gifted by the decedent within threeyears of death in the gross estate.
Straight Life Annuity
An annuity paid to the annuitant until death.
Survivorship Annuity
Provides payments to one person and then provides payments to a second person upon the death of the first.
Incident of Ownership
The right of the insured – or his estate – to enjoy any of the economic benefits of the policy.
Minority Discount
The reduction in value of an asset caused by the transfer of a minority interest in a business. (15-50%)
Lack of Marketability Discount
The reduction in the value caused by the transfer of an asset that has an inherent lack of marketability. (15-50%)
Blockage Discount
Reduction in value due to the sale of large blocks of corporate stock that are listed on a public exchange.
Key Person Discount
Reduction in value due to the death or disability of a key person.
Alternative Valuation Date
The option to select a date other than the date of death for valuation of the estate due to a high estate valuation due to perceived temporary market conditions.
Adjusted Gross Estate
Equal to the gross estate less any deductions for funeral expenses; last medical expenses; administrative expenses; debts; and losses during the administration of the estate.
Unlimited Charitable Deduction
The allowance for deduction of the value of assets included in the decedent’s gross estate which are transferred to a charitable organization at the decedent’s date of death.
Taxable Estate
The adjusted gross estate less the unlimited chartable and marital deductions.
Tentative Tax Base
The taxable estate plus all post-1976 taxable gifts.
Tentative Tax
The total transfer taxes (estate and gift) on all property transferred during his life and at his death determined by applying the tax rate from the unified tax rate schedule to the tentative tax base.
Estate Tax Liability
The tentative tax less any applicable credits available to the decedent. This tax must be paid by the executor or administrator of the estate.
Form 709
The federal estate tax return that must be filed if a decedent’s gross estate plus adjusted taxable gifts is greater than the applicable estate tax credit equivalency for the year of death. The return and payment of the taxes are due 9 months after the de
The Adjusted Basis for Heirs/Legatees
The basis of an inherited item usually equals the FMV of the property on the date of death or alternative valuation date.
Income in Respect of a Decedent (IRD) Assets
Property that’s value resulted in-part from income-tax deferral planning and which do not have a step-up basis adjustment for heirs/legatees. Property includes IRAs; 401(k); 403(b); qualified retirement plans; etc.
Heir Donor
An individual who received property from a decedent that was gifted to the decedent by the heir within one year. This property does not have a step up basis.
Advantages of Transferring Assets during Life vs. at Death
1.) When sold appreciation of the assets after the sale are removed from the transferor’s gross estate; 2.) Future income from the asset after the sale will be excluded from the transferor’s gross estate; 3.) The sale of property leads to capital gains ta
Arm’s Length Transaction
A transfer between unrelated parties in the form of a sale; installment sale; or exchange.
Sale
The direct transfer of property in exchange for money or property of equal FMV.
Installment Sale
A sale of property in which the buyer makes a series of installment payments to the seller. If the seller dies before the last installment is paid; then the outstanding balance of the sale and any accrued interest are included in the gross estate of the s
Exchange
A mutual transfer of assets with equal FMVs between individuals.
Partial Sale-Gift Transactions (Bargain Sales)
When an individual sells an asset for an amount less than the asset’s FMV and essentially makes a gift to the buyer equal to the difference between the FMV and the actual purchase price.
Private Annuity
A transaction between two (usually related) private parties where the seller/annuitant sells an asset to the buyer in exchange for an unsecured promise from the buyer to make fixed payments to the annuitant for life.
Self-Cancelling Installment Note (SCIN)
A secured transaction involving the sale of property for full FMV over a term defined by the seller. If the seller dies before the Installments are fulfilled then the note is cancelled and the buyer owns the property outright.
SCIN Premium
The premium paid on a Self-Cancelling Installment Note that is higher than a straight installment sale to compensate the seller for the risk taken that he/she will die before the completion of the sale.
Grantor Retained Annuity Trust (GRAT)
An irrevocable trust that pays a fixed annuity to the grantor for a defined term and pays the remainder interest of the trust to a non-charitable beneficiary at the end of the GRAT term.
Grantor Retained Unitrust (GRUT)
An irrevocable trust that pays a fixed percentage of the trust’s assets each year to the grantor for a defined term and pays the remainder interest of the trust to a non-charitable beneficiary at the end of the GRUT term.
Qualified Personal Residence Trust (QPRT)
A GRAT where the grantor contributes a personal residence to the trust and instead of receiving an annuity receives the use of the personal residence for specified term. If the grantor dies before the QPRT expires then the FMV of the residence is include
Tangible Personal Property Trust (TPPT)
A GRAT where the grantor contributes personal property such as artwork and antiques to the trust and instead of receiving an annuity receives the right to use the property until the TPPT expires.
Family Limited Partnership (FLP)
A limited partnership created under state law where one or more family members transfers highly appreciated property to a limited partnership in return for both the one percent general and 99 percent limited partnership interests. The limited interests th
The Three Means of Transferring Property at Death
1.) By a will; 2.) By Contract (beneficiary designation); and 3.) By Operation of Law (Titling of property/Use of trusts/Intestacy).
Universal Legacy
Circumstance when the testator gives to one or several person his entire estate.
Residual Legatee
An individual or individuals who receive the balance of the estate after all specific bequests are satisfied.
The Most Common Intestate Prioritization
1.)Surviving Spouse; 2.) Descendants; 3.) Parents/Siblings/Descendants of Siblings; 4.) More Remote Ascendants (Grandparents/Aunts/ Uncles); 5.) More Remote Collaterals (Cousins/Nieces/Nephews); and 6.) Decedent’s Domiciliary State.
Trust
A structure that vests legal title to assets in one party (the trustee) who manages those assets for the benefit of others (the beneficiaries) of the trust.
Trust Principal/Corpus Res/Fund
Money or property transferred to a trust.
Grantor
The person who creates and initially funds a trust.
Trustee
The individual or entity responsible for managing the trust assets and carrying out the directions of the grantor as expressed in the trust instrument.
Fiduciary
A person who has legal duty to act in the best interest of another as a result of holding a position of trust and confidence.
The primary duties of a fiduciary
1.) The duty to be loyal to the beneficiaries of the trust and to make decisions in their best interest; and 2.) The duty to care for the beneficiaries and to make decisions only after engaging in diligent investigation and after thoughtful consideration
Prudent Man Rule
The idea that the trustee – as a fiduciary – must act in the same manner that a prudent person would act if he/she was acting for his own benefit after considering all the facts and circumstances surrounding a decision.
Beneficiary
The person or persons who holds the beneficial title to the trust assets.
Income Beneficiary
The person or entity who has the right to current income or distributions from the trust or the current right to use the trust assets.
Remainder beneficiary
The person or entity who is entitle to receive the assets that remain in the trust on the date of its termination.
Income (with regards to trusts)
Includes dividends and interest earned on trust investments.
Principal (with regards to trusts)
Includes the original trust principal plus all capital gains.
Spendthrift Clause
A trust stipulation that states that the beneficiary may not anticipate distributions from the trust; and may not assign/pledge distributions from the trust to anyone.
Self-Settled Trust
When the grantor of the trust is also the beneficiary of the trust.
Revocable Living Trust
A revocable trust that s managed by the grantor and is for the benefit of the grantor during his lifetime. The property transferred to the trust avoids the individual’s probate estate but is included in the gross estate.
Trust tax savings result from . . .
1.)The transfer future appreciation to grant’s heirs; 2.) The minimization of transfer taxes on subsequent generations; 3.) The reduction in the size of the grantor’s gross estate; and 4.) The reduction of income taxes for the donor of income produce on t
Rules against Perpetuities (RAP)
Common law that states all interest in trust must vest within lives in being plus 21 years.
The Uniform Statutory Rule against Perpetuities
Guideline accepted by many states that sets the perpetuities period at 90 years and creates a presumption that all interests that vest within that 90 year period are valid interests.
Anti-Alienation Statues
Rules that prevent grantors of trusts from prohibiting trustees from selling trust property in states that have abolished Rules against Perpetuities.
Simple Trusts
Trusts that mandate the annual distribution of all trust income.
Complex Trust
A trust that is permitted to accumulate income; benefit a charity; or distribute principal.
Distributable Net Income (DNI)
The concept used by the Code to prevent double taxation for income earned by a trust.
Revocable Trust
A trust that allows the grantor to retain the right to revoke the trust any time prior to incapacity or death.
Irrevocable Trust
A trust that does not give the grantor the right to take back the property that was transferred to the trust.
Inter Vivos Trust
Any trust that is created during the lifetime of the grantor.
Testamentary Trust
Any trust created after the death of the grantor.
Standby (Contingent) Trust
A trust created during the grant’s lifetime that is either funded or minimally funded and waits for a triggering event to activate it.
Pourover Trust
A trust that receives assets from another source: Generally the grantor’s estate at the grantor’s death.
Grantor Trust
An inter vivos trust established by the grantor and who is responsible for paying the income tax attributable to the trust’s income.
Funded Trust
A rust that has received a transfer of property from the grantor.
Unfunded Trust
A trust that has been drafted but not funded.
Irrevocable Life Insurance Trusts (ILIT) or Wealth Replacement Trust (WRT)
An irrevocable trust that owns and holds life insurance on its grantor’s life and removes the insured’s incident of ownership.
Bypass/”B”/Credit Shelter Trust
A trust created to ensure that an individual makes use of his applicable estate tax credit.
Power of Appointment Trust
A trust that grants a beneficiary a (general or limited) power of appointment over the trust.
Estate Trust
A trust which grants the surviving spouse a testamentary general power of appointment over the trust assets. Because of the spouse’s general power of appointment over the trust the FMV of the trust will be eligible to the unlimited marital deduction at the death of the first-to-die spouse.
Qualified Terminable Interest Property (QTIP) Trust
A trust that grants the surviving spouse a lifetime right to the income of the trust while transferring the remainder interest to individual(s) of the grantor’s choosing. These trusts do qualify for the marital deduction.
Grantor Retained Income Trust (GRIT)
A trust created by a person who keeps an income interest in the trust or a right to use trust assets. At termination the remaining assets in the trust pass to the remainder beneficiary. There are four types of GRITs: GRATs; GRUTS; QPRTs; and TPPTs.
Grantor Retained Annuity Trust (GRAT)
A type of GRIT where the grantor funds a trust and retains a right to receive a fixed percentage of the initial contribution to the trust on an annual basis for a specific term.
Grantor Retained Unitrust (GRUT)
A type of GRIT where the grantor funds a trust and retains a right to receive a fixed percentage of the annual value of trust assets on an annual basis for a specific term.
Qualified Personal Residence Trust (QPRT)
A type of GRIT where the grantor contributes a personal residents to a trust and retains a right to use the residence for a specified period.
Tangible Personal Property Trust (TPPT)
A type of GRIT where the grantor contributes personal property that has the potential to appreciate in value to the trust and retains a right to use the property for a specified period.
Dynasty Trust
A trust arrangement designed to last for very long periods of time to avoid transfer taxation at the death of each generation of the family.
Grantor Trusts
A trust that’s income taxes are paid by be paid by the grantor of the trust. Goes by names such as Intentionally Defective Grantor Trust (IDGT); Defective Trust; and Intentionally Defect for Income Tax Only Trust (IDIOT).
Beneficiary Defective Trust
A trust where the beneficiary becomes liability for payment of income tax on trust income.
2503(b) Trust
A trust for the benefit of a minor designated to qualify the present value of the income interest of the trust for the annual exclusion. A 2503(b) trust must pay its income annually to the minor; but it may hold the trust property for the minor’s lifetime
2503(c) Trust
A trust for the benefit of a minor designed to qualify the contribution to the trust for the annual exclusion. A 2503(c) trust must give the minor the right to receive trust assets when he reaches age 21; but not required to pay the income to the minor at
Crummey Trusts
A trust that allows the beneficiary to withdraw the contribution made by the grantor to the trust.
Charitable Remainder Trust (CRT)
A trust in which a non-charitable beneficiary receives the income interest and a charitable organization receives the remainder interest.
Charitable Lead Trusts (CLT)
A trust in which a charitable organization receives the income interest and a non-charitable beneficiary receives the remainder interest.
Blind Trust
A revocable trust whereby an individual transfers property to the trust for management purposes when self-management of the assets might be deemed to be a conflict of interest.
Public Charities
Charitable organizations that receive broad support from the general public.
Private Foundations
A charitable organization that receives it support from a single individual or family. It can be either a private operating foundation or a private non-operating foundation.
Private Operating Foundations
A private foundation that spends at least 85% of its adjusted net income (or minimum investment return - if less) on activities engaged in for the active conduct of the exempt purpose.
Private Non-operating Foundation
A private foundation that does not meet the standards of a private operating foundation.
Ordinary Income Property
Property that when sold results in recognition of ordinary income.
Capital Gain Property
Property that when sold results in either capital gain or Section 1231 gain.
Tangible Property
Property that is not realty and may be touched.
Charitable Gift Annuity
Involves the inter vivos transfer of property to a charity in exchange for the charity’s promise to pay an annuity either to the donor; the donor and his spouse; or to another person for life.
Pooled Income Fund
Donor contributions are pooled in a trust created and maintained by the charity. Each donor receives an allocable share of the income from the trust for his life.
Sprinkling Provision
The trustee of an estate’s right to make distributions to the trust beneficiaries at his discretion.
Unlimited Marital Deduction
Because a married couple is viewed as one single economic unit for estate and gift tax purposes an individual receives a deduction from his gross gifts or from his adjusted gross estate for the transfers to a spouse. That is: Transfers to a spouse are not
Benefits of the Unlimited Marital Deduction
1.) Defers estate taxes until the death of the surviving spouse; 2.) May fund the applicable estate tax credit of the surviving spouse; and 3.) Ensures the surviving spouse has sufficient assets to support his/her lifestyle.
Limitations of the Unlimited Marital Deduction
1.)The property passing to the spouse must qualify for the marital deduction; and 2.) Only the net value of qualifying property that is left to the surviving spouse can be included as the marital deduction.
The three primary ways to leave property to a spouse and qualify for the marital deduction
1.) Outright transfers to spouse; 2.) General Power of Appointment (GPOA) Trusts; and 3.) Qualifies Terminal Interest Property (QTIP) Trusts.
Three Property Interest requirements for the Marital Deduction
1.) The property must be included in the decedent’s gross estat3; 2.) The property must be transferred to the surviving spouse; and 3.) The interest must not be a terminable interest unless it meets one of the exceptions to the terminable interest rule.
Terminable Interest
An interest in property that terminates at some point.
Terminable Interest Rule
The rule that makes the marital deduction unavailable in situations where the property transferred will not be included in the second-to-die spouse’s gross estate due to terminal interest.
Three criteria that make a marital deduction not available
1.) A terminable interest is transferred to the surviving spouse; and 2.) Another interest in the same property passes from the decedent to someone other than the surviving spouse for less than full consideration; and 3.) The third party may possess or us
The four exceptions to the terminable interest rule
1.) A survival contingency of no more than six months is present; 2.) A terminable interest – either outright or in trust – over which the surviving spouse has a general power or appointment; 3.) A Qualified Terminable Interest Property (QTIP) Trust; and
Survivorship Clause
A clause included in a will requiring that the legatee survive for a specific period in order to inherit under the will. The bequest will qualify for the marital deduction if the property transfers to the surviving spouse and the time period of the surviv
Privity
The prohibition of a surviving spouse transferring his or her inherited or donated unused exemption amount to his or her next spouse at the surviving spouse’s death. The privity requirement prohibits the accumulation of exemptions through remarriage.
Qualified Domestic Trust (QDOT)
A trust created for the benefit of a noncitizen spouse which has enough stipulation to allow the U.S. government to subject assets remaining at the death of the noncitizen surviving spouse to estate taxation. Assets transferred to a QDOT qualify for the u
Overqualification
A situation where the decedent’s taxable base is less than the applicable estate tax credit equivalency because too many assets have passed to a surviving spouse.
Underqualification
A situation where 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.
Ascertainable Standard
An objective standard for allowing distributions defined in the IRC as distributions for health; education; maintenance or support (HEMS).
ABC Trust Arrangement
A common trust arrangement that utilizes a bypass trust (“B” Trust); a GPOA Trust (“A” Trust); and a QTIP Trust (“C” Trust) to provide the necessary support to a surviving spouse while maximizing the use of the decedent’s applicable estate tax credit and
Objectives of Life Insurance
Protect income stream for beneficiaries; Source of funding for education; Provide liquidity at death; Source for retirement income; and Create or sustain family wealth.
Term Life Insurance
A life insurance contract that states if the insured dies within the term of the contract the insurance company will pay the stated death benefit the beneficiary.
Universal Life Insurance
A term insurance policy with a cash accumulation account attached to it which grows tax-deferred depending on investment returns.
Variable Universal Life Insurance
Universal life insurance policies that allows the insured to choose how to invest the cash in the cash accumulation account.
Whole Life Insurance
A life insurance policy that remains in effect as long as the owner pays the premium. Part of each premium paid is allocated to a cash savings account.
Second-to-Die Policy
A life insurance policy that insures the lives of two individuals and the death benefit is paid after the death of the second-to-die insured.
Owner
The person who has title to the life insurance contract.
Insured
The person whose life is covered by the life insurance contract.
Beneficiary
The person or entity entitled to receive the death benefit once the insured dies.
Settlement Options
The beneficiary’s available options when receiving the death benefit - usually lump sum or annuity.
Lump Sum Death Benefit
A single payment of a life insurance death benefit to a beneficiary.
Surrender Value
The cash value of the life insurance policy less a surrender charge which is governed by the policy or state law.
Policy Dividends
Refunds of overcharged premiums to life insurance policy owners. The payments are treated as a return of the policy owner’s adjusted basis.
Lapses
When a power or right ends because of time or circumstance.
Modified Endowment Contract (MEC)
A life insurance policy that appears to function life an investment contract because the policy is paid up in just a few payments. MECs function life other life insurance policies except for the tax treatment of loans from the policy.
Section 1035 Exchange
A tax-free exchange of a life insurance contract for another life insurance contract , modified endowment contract or an annuity contract on the same insured.
Accelerated Death Benefit
A reduced payment of the death benefit of a life insurance policy paid to the insured during the insured’s lifetime in return for a surrender of the life insurance contract.
Chronically Ill Individual
A person who is certified by a licensed health care provider as being unable to perform without assistance at least two activities of daily living for at least 90 days.
Activities of Daily Living
1.) Easting; 2.) Toileting; 3.) Transferring; 4.) Bathing; 5.) Dressing; and 6.) Continence.
Terminally Ill Individual
A person who is certified by a licensed health care provider as having a condition or illness that can reasonably be expected to result in death within 24 months.
Qualified Viatical Settlement Provider
Companies that purchase life insurance policies form terminally or chronically ill individuals.
Premium Pay Status
A life insurance policy that the premiums are currently being paid on the policy.
Paid-Up Policy Status
A life insurance policy where the premiums are no longer necessary to keep the policy in force or a policy that cannot accept additional premiums without causing the policy to become a modified endowment policy.
Incident of Ownership in a Life Insurance Policy
The ability to exercise any economic right in a life insurance policy.
Three-Year Rule
Stipulation that state if an individual gratuitously transfers ownership of a life insurance policy on his life within three years of death the death benefit of the policy is included in his gross estate.
Transfer for Value
A transfer of an asset by means of a sale exchange or any transfer which includes valuable consideration. If a life insurance policy is transferred for value then the death benefit in excess of the transferor’s adjusted basis will be subject to income tax unless the transfer meets certain except
Expenses after the death of a decedent for which there are liquidity needs
Last Medical Costs; Funeral Costs; Transition or Adjustment Period Costs; Administrative Costs; and Income/Estate/Generation-Skipping Transfer Taxes.
Sources of Liquidity after Death
Sale of assets; Life insurance; Tax-Advantaged Accounts; Corporate Redemption from Closely Held Businesses; Distribution of Assets; and Loans for Payment of Taxes and Other Costs.
Split-Dollar Life Insurance
A form of life insurance ownership in which two parties have ownership interest in one life insurance policy. One party typically owns the death benefit and the other owns the cash value.
Examples of Income in Respect of a Decedent (IRD) Assets
Qualified Plans; IRAs; U.S. Savings Bonds; Installment Notes; Annuitized Annuities; Accrued Dividends; and Accrued Wages.
Disclaimer
An heir or legatee’s refusal to accept a gift or bequest. The disclaimer allows asset to pass to other heirs or legatees without additional transfer tax.
Generation-Skipping Transfer Tax
An excise tax imposed in addition to any gift or estate tax on the transfer of property to a donee other than a spouse who is two or more generations younger than the donor.
Broad Definition of a Skip Person
A transferee who is two or more generations younger than the transferor.
IRC Definition of a Skip Person
1.) Any lineal descendent of the transferor’s grandparent who is two or more generations younger than the transferor; or 2.) Any person who is not a lineal descendent; not a spouse of the transferor; and is more than 37 ½ years younger than the transferor
Non-Skip Person
An individual whom a transfer would not result in a GSTT.
Unrelated individuals
Those individuals who are not related to the transferor.
Non-Lineal Descendents
Relative who are more distant than the lineal descendants of the transferor’s grandparents.
The Three Types of Taxable Transfers to which GSTT Applies
1.) Direct Skips; 2.) Taxable Distributions; and 3.) Taxable Terminations.
Direct Skip
An outright transfer of property to a skip person that is subject to estate or gift tax.
Taxable Distribution
Any distribution from a trust to a skip person that is not a taxable termination or a direct skip.
Taxable Termination
Any termination of a trust interest unless at the termination of the trust the trust property transferred is subject to federal estate to gift tax; a non-skip person receives an interest in the property transferred; or the distribution will never be made
Estate Tax Inclusion Period (ETIP)
The period during which the FMV of the transferred property would be included in the gross estate of the transferor or the transferor’s spouse if he/she dies before their interest in the property terminates. The GST exemption cannot be applied during this
Applicable Fraction
Divide the applicable GST exemption allocated to the transfer by the value of the transfer reduced by any federal estate tax or state death tax incurred; the amount of any charitable deduction; and the value of the transfer that is a nontaxable gift.
Applicable Rate
The maximum estate tax rate in effect at the date of the GST multiplied by the “inclusion ratio.”
Inclusion Ration
Ratio determined by subtracting the applicable fraction from one.
Form 709
Form used to report gift and general-skipping transfers in life.
Schedule R or R-1 of Form 706
Form used to report direct skip transfers at death.
Form 706-GS(D) or (D-1)
Form used to report taxable distributions for GSTT.
Form 706-GS(T)
Form used to report taxable terminations for GSTT.
Types of Dynasty Trusts
Pot Trusts and Sub-Trusts;.
Pot Trust
A trust created as a single trust and remains a single trust during the period of administration. The trustee has the flexibility to treat all beneficiaries equally instead of basing beneficial interest the trust on the degree of relationship to the grant
Generational Sub-Trust
A trust within a larger family trust created at the birth of the first member in a generation or at the death of the surviving member of a generation for the benefit of that branch of the family.
