Estate Planning - Transfer Outright & In Trust Flashcards
What happens when you sell an asset to someone for price less than FMV?
Seller is deemed to have made a gift to the buyer equal to the difference between the fair market value of the property and the actual sales price.
What are private annuities?
- transaction between two (usually related parties)
- seller sells an asset to a buyer in exchange for an unsecured promise from the buyer to make fixed payments to the annuitant for the remainder of the annuitants life.
- promise must be unsecured, seller bears risk that buyer will NOT make payments.
- requires payments to be made over the lifetime of the seller/annuitant, which may fall short of or exceed the life expectancy found in the IRS mortality tables. (example: Annuity payments may be calculated for 16 years, but the payments must continue if the seller lives for 21 years)
- Benefits to the seller: Defers recognition of capital gain over lifetime, receives a constant income stream, removes asset transferred and appreciation from gross estate.
- annuity not included in gross estate of the seller/annuitant at death.
- from annuitants perspective, each private annuity payment is split into three components; interest, capital gain, and income tax free return of capital.
- Buyers adjusted basis in the property exchanged for the private annuity, is equal to the total of all annuity payments actually paid. If seller dies shortly after the transfer buyer will have low basis/high gain.
What is a Self Canceling Installment note (SCIN)?
- a sale for the full fair market value of the property transferred over defined by the seller.
- if seller dies before all of the installment payments have been made, the note is canceled and the buyer has no further obligation to pay.
- buyer pays a premium to seller to compensate for risk that they might die before all payments are made.
- Buyer can deduct interest paid. and their tax basis is the full amount paid for the note.
- seller receives the installment payments in three components: interest income, capital gain, and adjusted basis, also receives SCIN premium as either additional interest income or capital gain.
Self canceling notes vs private annuities
What is a grantor retained annuity trust?
- irrevocable trust, pays a fixed annuity (interest income) to the grantor for a defined term and pays the remainder interest of the trust to a noncharitable beneficiary at the end of the GRAT Term.
- present value of the expected future remainder interest, is a gift of a future interest subject to gift tax.
- term of annuity is defined by the grantor, longer the term = higher present value of annuity payments and lower value of remainder interest for gift tax purposes.
- if grantor dies during the annuity term, value of property within the GRAT is included in his estate.
- RISK is the grantors failure to survive the GRAT term, causing the fair market value of the property to the GRAT to be included in the grantors gross estate.
- no income tax consequences on the initial transfer to the GRAT, because grantor still owns the assets, however trust payments made annually are included in the grantors income.
What is a GRUT?
- Grantor Retained Unitrust
- same as a GRAT but instead of paying a fixed annuity, a GRUT pays a fixed percentage of the trust assets each year as revalued on an annual basis.
What is a QPRT?
- Special form of GRAT, grantor contributes a personal residence to a trust and receives use of the personal residence as the annuity interest component.
- at end of term, residence passes to the remaindermen,.
- if grantor dies before expiration of the trust, the FMV of the residence is included in their gross estate.
- QPRT can hold one residence, each person can have two.
- The original transfer of the residence is treated as a gift to the extent the FMV of the residence exceeds the present value of the grantors retained interest.
What is a FLP?
- Family Limited Partnership, with purpose of transferring assets to younger generations at a discount.
- usually one or more family members transfer highly appreciating property to a limited partnership in return for both the one percent general and the 99 percent limited partnership interest.
- general partner has unlimited liability and the sole management rights of the partnership, limited partners are passive investors with limited liability and no management rights.
- upon creation of the partnership, no income nor gift tax consequences.
- grantor then begins an annual gifting program utilizing discounts, the gift tax exclusion, and gift splitting to transfer limited partnership interest to younger generation family members.
- used to protect family assets & one major advantage is the FLP member maintains control of the assets.
- FLP should have its own checking accounts, tax ID, payroll, and should not allow members to withdraw funds at will, nor shoud the FLP pay for personal expenses of its owners.
What is medicaid?
- Medicaid is a health insurance program sponsored by federal government but administered by the individual states. Medicaid is primarily intended to benefit certain low-income individuals and families.
- will pay for long term care in a nursing home for persons who meet the qualifications.
- Medicaid has strict income and asset level requirements to qualify.
- due to this some people give away assets in an attempt to qualify for medicaid. The federal government has adopted a penalty test that imposes a period of ineligibility upon anyone who gives away their assets in order to qualify for the income or resource requirements of medicaid.
- The state can look back 60 months and look at those who transferred assets for less than FMV. If an individual has transferred assets for less than Fair Market Value, the state must withhold payment for nursing facility care.
Summary of transfers during life
What are testamentary trust vs. Standby trust?
Testamentary trust = trust created by a will
Standby Trust = created but not funded prior to the grantors death, waiting for assets to be transferred to them pursuant to the terms of the grantors will (standby trusts)
What are testamentary trust vs. Standby trust?
Testamentary trust = trust created by a will
Standby Trust = created but not funded prior to the grantors death, waiting for assets to be transferred to them pursuant to the terms of the grantors will (standby trusts)
Basic structure of a trust
Trustee
- must at all times act in the best interest of trust beneficiaries, the trustee is considered a fiduciary.
- Prudent man rule - trustee, as a fiduciary, must act in the same manner a prudent person would act if the prudent person was acting for his own benefit after considering all of the facts and circumstances surrounding the decision.
What are the reasons to use a trust?
- Management: Can be used to provide professional management of assets for individuals who are not suited by training or experience to manage assets for themselves.
- Creditor protection: Assets placed in a trust with the correct spendthrift provision , creditors of the beneficiary will not be able to access the funds in the trust to satisfy outstanding creditor claims.
- Avoid probate: Probate is an expensive process, you can use a trust to avoid the probate. A revocable trust can be used to avoid probate, it is important to note that revocable trust only avoid probate they do not avoid estate taxes.
- Minimize taxes: Trust can generate tax savings by transferring future appreciation to the grantors heir, minimization of the transfer taxes on subsequent generations, and the reduction in the size of the grantors estate.
Revocable vs irrevocable trust for taxes
Tax effects of various trust?
Tax effects of various trust?
What is a Bypass (Credit Shelter Trust)?
-Can either be Intervivos (during Lifetime) or Testamentary (at death)
Testamentary:
creates the trust at the individuals death.
used when couples have assets over $12,060,000 and less than $24,120,000 in joint assets can avoid federal estate taxation by transferring $12,060,000 in property to a bypass trust at the death of the first spouse. the decedents applicable estate tax credit will offset any estate tax.
Structured so that income of the trust is payable to the surviving spouse, in addition, the trustee can be given the right to make discretionary distributions for the spouses ascertainable standard (HEMS)
upon surviving spouses death, the assets in the bypass trust pass to the children or non charitable beneficiary , and are NOT included in the surviving spouses gross estate
Intervivos:
Individual can transfer $12,060,000 in assets to an intervivos bypass trust and shield the transfer with the applicable gift tax credit amount of $4,769,800.
all future growth and appreciation in the property that is transferred to the bypass trust escapes federal estate taxation at the decedents death.
GRAT examples
Charitable deduction chart
- Any Charitable contributions not used can be carried forward for 5 years.
- Maximum deduction taken for all charitable contributions in the year cannot exceed 50% of AGI.
Bargain sale to charity example
CRAT,CRUT, pooled income fund chart
