Estate Planning Rules

Question 1

Can a CFP Certificant borrow or lend money to clients?

Answer 1

Yes, Rule 3.7 of the Code allows a CFP certificant to lend money to a client if the client is a member of the certificant’s immediate family, or if the certificant is an employee of an institution in the business of lending money and the money lent is that of the institution, not the certificant.

Question 2

Blockage discount?

Answer 2

Used for large block of publicly traded stock that can’t be marketed without adversely affecting the price.

Blockage = Publicly Traded Stock

Question 3

Lack of marketability valuation discount?

Answer 3

Restrictions on marketability and costs of taking public a closely held business

Marketability = Closely Held Business

Question 4

Minority Interest Discount

Answer 4

Inability of closely held business interest to control business decisions.

Minority = Closely Held Business

Question 5

Co-Ownership Fractional Interest discount

Answer 5

Real estate that has impaired marketability because estate cannot sell its partial interest or purchase co-owner’s partial interest.

Co-Ownership = Real Estate

Question 6

Key Person Discount

Answer 6

Loss of person who is vital to business operations

Key Person = Closely Held Business

Question 7

Life Insurance Valuation at death

Answer 7

life insurance owned by decedent on his/her own life = valued at death benefit

life insurance owned by decedent on the life of another = valued at replacement cost

• replacement cost for term policy = unused premium
• replacement cost for cash value = interpolated terminal reserve plus policy unused premium

Owner / Insured / Gross Estate

Decedent / Decedent / Death Benefit

Decedent / Someone else / Replacement Cost

Someone one else / Decedent Zero look for the

3 Year Rule

Question 8

The Three Year Reversionary Rule applies in only three situations in which property must be included in the gross estate of a decedent because of an action taken within three years of death:

Answer 8

(1) paid gift taxes out of pocket on gifts made within three years of death (the “gross up” rule)
(2) transferred incidents of ownership on a life insurance policy on his or her own life
(3) released a retained right mentioned in the transfer sections of the Code (§§2036–2038)

Question 9

Property gifted by decedent is included in the gross estate if the decedent retained rights with respect to the property, including:

Answer 9

(1) the right to use or receive income from the property (§2036)
(2) the right to designate the persons who shall possess or enjoy the property or the income therefrom (§2036)
(3) the right to vote stock in a controlled corporation (§2036)
(4) a right of reversion in the property (§2037)
(5) the right to alter, amend, terminate, or revoke disposition of the property (§2038)
(6) the right to affect the time or manner of enjoyment of the property or its income by others (§2038)

Question 10

A Trust - Marital Trust

Power of Appointment Trust

Answer 10

• Marital Deduction
• Avoids Probate
• Surviving spouse has a General Power of Appointment
• Assets are included in the surviving spouse’s gross estate
• Surviving spouse appoints the assets at the surviving spouse’s death not the decedent
• Surviving spouse can invade corpus for any reason due to the General Power of Appointment
• Qualifying Income Interest- QII must be present
• Lifetime, Annual, Mandatory, Exclusive - LAME

Question 11

B Trust – Not a Marital Trust

Family ByPass Trust

Answer 11

• No marital deduction
• Avoids probate
• Assets are included in the Decedent’s Estate
• Decedent appoints the assets at the surviving spouse’s death
• Income is paid out according to trust documents – QII not required
• Special Power of Appointment may be added to trust documents
• HEMS- Health, Education, Maintenance, Support
• Surviving spouse may invade corpus for HEMS

Question 12

C Trust (QTIP Trust) - Marital or Non-Marital Trust

Answer 12

• Avoids Probate
• QTIP election made by the executor- Marital deduction
• Partial QTIP election is allowed
• Surviving Spouse does NOT have a General Power of Appointment
• Surviving spouse does NOT appoint assets at the surviving spouse’s death
• The decedent appoints the assets at the second death
• Any assets for which a QTIP election is made are included in the surviving spouse’s gross estate
• Any assets for which a QTIP election is NOT made are not included in the Surviving spouse’s gross estate
• QII is required for all income
• Lifetime, Annual, Mandatory, Exclusive LAME

Question 13

Bypass Planning Strategies Chart

Answer 13

Assumption is H has $6.5MM and he dies and then W gets the following options….

Strategy #1: is all asset go into A Trust (Marital Trust)

Apply unlimited marital deduction at death of first H spouse (All assets go to wife in A Trust) => No estate tax due

When the W spouse dies, all assets to kids. Wife uses Lifetime credit amount and DSUE => No estate tax due and all $6.5MM passes to kids free of estate tax

Strategy #2: Bypass Trust Planning

B Trust is funded with lifetime excusion amount of $5,490,000, apply credit amount => No estate taxes due then….

A Trust is funded with remaining $1,010,000 and we apply the unlimited marital deduction => no estate taxes due

Spouse W dies and then apply lifetime credit amount to her $1,010,000 => no estate taxes due

Leaves full $6.5MM to children (H bypass Trust and W’s assets)

Strategy #3: Bypass Trust Planning (Estate Equalization)

H dies and transfers $3.25MM to W spouse so they both have $3.25MM

H leaves $3.25MM in Bypass Trust => apply lifetime credit => no estate tax

W keeps $3.25MM in her trust. W dies and applies lifetime credit = no estate taxes and $6.5MM transfers to kids tax free

Question 14

What are the requirements for the Marital Deduction?

Answer 14

1. Property must pass from the deceased spouse to the surviving spouse
2. Property must be included in the deceased spouses gross estate
3. Property must NOT be a terminable interest, unless it is a deductible terminable interest.

Ex: Deductible termininal interests:

1. Qualified Terminable Interest Property (QTIP)
2. Life Estate with a GPOA or QTIP election made
3. Outright bequest subject to survival not exceeding 6 months
4. Naming the surviving spouse as the sole income bene of a CRAT or CRUT

Question 15

What is a terminable interest in relation to the Marital Deduction?

Answer 15

1. The deceased spouse gave an interest in such property to somoene in addition to the surviving spouse, and..
2. Surviving sposue can NOT prevent that person from possessing or using the property after the surviving spouse’s interest ends.

Ex:

Question 16

What is a Deductible Terminable Interest in relation to the marital deduction?

Answer 16

Deductible termininal interests:

1. Qualified Terminable Interest Property (QTIP)
2. Life Estate with a GPOA or QTIP election made
3. Outright bequest subject to survival not exceeding 6 months
4. Naming the surviving spouse as the sole income bene of a CRAT or CRUT

Example: Grantor establishes and funds a CRAT or CRUT naming spouse as sole income beneficiary either for the spouse’s lifetime or for a term certain not exceeding 20 years, and a qualified charity as the remainder beneficiary. Grantor’s estate will receive a marital deduction for the spouse’s income interest, and a charitable deduction for the charity’s remainder interest. Remaining trust assets will pass to the charity at the end of the trust term; spouse’s estate includes no part of the trust in his or her gross estate.

Question 17

Does the terminable interest rule only apply to the marital deduction or does it apply to other situations?

Answer 17

? - thinking it is only marital deduction but need to reseach more.

Question 18

There are four exceptions to the terminal interest rule, which generally stipulates that the property interests in question will qualify for the marital deduction if certain requirements are met. The exceptions include:

Answer 18

1. Survivorship Condition – Under Section 2056(b)(3), a bequest to a spouse may be conditioned on their survival for a period up to six months after the death of the decedent.
2. General Power of Appointment – This is the right to determine the ultimate disposition of certain designated property, dictated by section 2056(b)(5) of the IRC code. The survivor must have a life interest that entitles them to all of the income and must have the power to appoint the property to self or estate.
3. An Interest Income – Under 2056(b)(7), the survivor must have an income interest in a charitable remainder unitrust or annuity trust where they are the only non-charitable beneficiary. These conditions apply automatically; however, the executor can elect for these provisions not to apply.
4. Qualified Terminable Interest Property (QTIP) – With a QTIP, under section 2056(b)(8) the estate owner can control the disposition of the remaining interest after the surviving spouse’s death. The remaining interest will, however, be included in the surviving spouse’s estate. The surviving spouse receives the income from the property for life, with the remaining interest passing to the children or other designated beneficiaries at death.

Question 19

What are the tax implications of Cross Purchase Buy-Sell Life Insurance Policy?

Answer 19

1. Life insurance proceeds are not included in estate unless they were transferred for value within 3 years or they deceased partner has an incidence of ownership in it, like a beneficiary.
2. Since there has been no transfer for value, the beneficiary will receive the proceeds free of income tax.
3. Premium payments are not tax deductible to any of the partners.

Question 20

Life Insurance Tax Implications

Answer 20

Question 21

Stock Redemption Agreements concerning Buy-Sell Life Insurance?

Answer 21

ER owns the policy, pays for the policy and is the benefeciary of the policy - no step up in basis for remaining stock holders like it would be in they owned individually in a cross-purchase plan.

Premiums are NOT deductible to the ER and are therefore Not taxable income to the shareholders.

Question 22

What happens to the Gross Estate when the Grantor of a Retained Interest dies during the term of the retained interest?

Answer 22

The grantor’s death during the term of any type of grantor retained interest trust (GRIT, GRAT, GRUT, or QPRT) will cause the date-of-death fair market value of trust assets to be included in his or her gross estate because of the retained interest

Question 23

QDOT vs. QDRO

Answer 23

A Qualified Domestic Trust (QDOT) is is established to ensure collection of the estate tax due on a bequest to a non-U.S. citizen spouse.

1. A QDOT must have at least one trustee who is a U.S. citizen or a U.S. corporation.
2. For a QDOT to accomplish its purpose, an election must be made.
3. In a QDOT, the spouse of the grantor must be the sole income beneficiary.
4. Trust must be either a power of appointment trust, QTIP trust, CRAT, or CRUT.

QDRO

A qualified domestic relation order (QDRO) is a court order in a domestic relations case that orders pension or retirement plan benefits to be used to provide alimony or child support, or to divide marital property in a divorce

1. For the benefit of former spouse, child, or other dependent of the plan participant
2. Established by court order to secure obligation to pay child support, alimony, or marital property rights.
3. Distributions are subject to income tax
4. Alternate payee’s interest may be
   
   1. Distributed directly to the alternate payee.
   2. Distributed to an IRA owned by the alternate payee.
   3. Segregated until plan participant reaches retirement age, then distributed in periodic payments to the alternate payee.

Question 24

What’s the difference between 6166, 303 and 2032(A) in Estate Planning?

Answer 24

6166 is a deferral of estate taxes

Extension of time to pay estate tax when decedent’s gross estate includes a closely held business interest

The value of the interest must exceed 35% of the decedent’s AGE

a. This requirement must be met both with and without including all gifts required to be included in the gross estate via the transfer section (2036-2038) or incidents of ownership in a life insurance policy on the decedent within three years of death

Taxes may be paid over a period of 14 years and 9 months, but interest will accrue

Section 303 permits corporate stock to be considered a capital transaction instead of ordinary income

Section 303 permits corporate stock from the estate of a deceased owner to be redeemed and considered a capital transaction rather than ordinary income when proceeds are used to pay estate taxes, state death taxes, and administrative expenses.

Decedent’s gross estate must include closely held stock

Value the stock must exceed 35% of decedent’s AGE after including all gifts within three years of death

Amount redeemed cannot exceed death taxes of estate, plus funeral and administrative expenses

Corporation must have the cash to redeem the stock shares

Special use valuation 2032(A) - Allows Real Estate to be valued at current use instead of FMV

1. real estate valued at current use for farm or closely held business value, rather than fair market value
   
   1. fair market value of real estate cannot be reduced by more than a base amount
2. applies only to a farm or other real estate used in a closely held business
3. must be elected by decedent’s PR
4. Conditions for election
   
   1. The decedent was a U.S. citizen or resident at death.
   2. The real property:
      
      1. is located in the United States.
      2. is passed to a qualified heir.
      3. was being used for a qualified use by the decedent or a family member at the time of death, and for a total of five of the eight years prior to death.
      4. was owned by the decedent or family members for a total of five of the eight years prior to death.
   3. There was material participation by the decedent or a family member in the operation of the farm or business for a total of five of the eight years prior to the decedent’s death.
   4. The 50% and 25% tests are met.
      
      1. At least 25% of the gross estate, as adjusted (GEA), must be attributable to the closely held real estate.
      2. At least 50% of his GEA must be attributable to qualified use closely held real estate and personal property.

Question 25

Qualified Terminable Interest Property (QTIP) Trust Basics

Answer 25

The Qualified Terminable Interest Property (QTIP) Trust was a creation of ERTA-1981 pursuant to IRC § 2056(b)(7) which qualifies for the marital deduction, even if the surviving spouse is not given a general power of appointment during life or at death. Under a QTIP Trust, the surviving spouse need only be given all the income for life, which makes it similar to the traditional general power of appointment trust. However, unlike the general power of appointment trust, the personal representative must irrevocably elect (on Schedule M of the IRS Form 706 federal estate tax return) to qualify the trust in order for it to qualify for the marital deduction. If the election is not made in a timely fashion by the personal representative, the QTIP option is lost.

Perhaps the primary reason for the popularity of the QTIP trust is that the first spouse to die directs the disposition of the remaining trust estate upon the death of the surviving spouse, an ability to reach beyond the grave which is lost with an outright disposition qualifying for the marital deduction or a portability election. For that reason, the QTIP trust is often used in situations where there are multiple marriages and families.

Why QTIP? The QTIP Marital Trust is an attempt to balance the interests of the surviving spouse with the decedent’s desires to provide for other beneficiaries. It allows the testator to take advantage of the marital deduction, but also gives the testator the power to determine who will receive the remainder at the surviving spouse’s death, usually testator’s children. Thus, the advantage of a QTIP Trust over a general power of appointment trust is that the testator can determine what happens to any principal remaining at the surviving spouse’s death. With a general power of appointment trust, it is always possible that the surviving spouse could use the principal of this trust to finance a business of a second spouse or give the principal during life or after death to the second spouse or the children of the second spouse. This can be prevented with a QTIP Trust. Moreover, the QTIP Trust can actually protect the surviving spouse from any pressure by a second spouse to divert those funds. A QTIP Trust also allows some post-mortem marital deduction planning because the personal representative can elect to have all, a part, or none of the QTIP Trust qualify for the marital deduction, and can consider events occurring until the election is made.