Estate Roadmaps Flashcards
Estate filing tax requirements
Form 706
GROSS ESTATE (probate and non probate assets) - less funeral and admin exp, debts, taxes and casualty losses
ADJUSTED GROSS ESTATE (AGE)
- less marital and charitable deduction
TAXABLE ESTATE
+ plus adj taxable gifts (exceeding annual exclusion)
TAX BASE
- less exemption amnt, excess times tax rate
TENTATIVE TAX
- less gift taxes paid
NET ESTATE TAX
Gross estate probate and non-probate assets
All probate assets
- single owned assets
- tenancy in common
- beneficiary is estate
- community property
Non-probate assets (not all are shown)
- JTWROS/Entirety
- life insurance
- general powers
- gift taxes paid - 3 yrs (no GST taxes paid)
Life insurance inclusion in the decedent’s estate
Decedents is the insured (you)
- You own the policy then die (included in estate)
- Your spouse is the owner. You gifted it within 3 yrs (included in estate) or forgot to change beneficiary from your estate (included in your probate estate)
- You sold the policy to someone else (not included in estate/no 3 year rule)
Someone else is insured (your spouse)
- You own a policy on your spouse and you die then the replacement cost is included in your probate estate (term - unused prem / WL - cash value and unearned prem) No 3 yr rule
- You gifted your spouse’s policy time your daughter (nothing in estate)
Federal gift taxation
Complete and incomplete gifts
Future / Present interest
Not a complete gift
Ex: revocable trusts, disclaimer, disclaimer trust
Completed gifts: transferor gives up complete dominion and control
- Gifts of future interest (no $15k exclusion, uses exemption)
Ex: 2503b trust, remainder interest, trust accumulating income for yrs
- Gifts of present interest (qualify for $15k exclusion and gift splitting)
Ex: 2503c trust, direct gift, Crummy trust, 529, UTMA/UGMA
Unfunded and funded ILIT
Unfunded
Premium is a yearly gift
Has Crummy powers
Life policy on grantor
Funded
Lump sum gift Investment in ILIT Income pays premium Income is taxable to grantor Life policy on grantor
Order of deaths
Trusts and trust provisions
Both spouse living
- revocable trust with A/B/C provisions
- Life insurance trust
First death
- assets pass by marital deduction (no tax) to Marital A trust; power of appointment; spousal trust
- assets pass by marital deduction (no tax) to QTIP Trust current interest (can have HEMS and 5 or 5)
- assets pass ($11,400,000) no tax to Nonmarital B trust/bypass tryst (can have HEMS and 5 or 5)
- death benefit passes tax free to life insurance trust (can have HEMS and 5 or 5)
Second death
- Marital A and QTIP are subject to estate tax
- Marital A passes to 2nd spouse’s beneficiary
- QTIP, Bypass and Life Insurance pass to trust beneficiary
Gifts to minors
Future and present interest
Gift of future interest
- 2503b: income distribution only; use up exemption to fund; income subject to kiddie tax
Note: no $15k gift exclusion
Gift of present interest
- UGMA: strict funding; distributed at age 18; can be included in custodian’s estate; subject to kiddie tax
- UTMA: more flexible investments/funding; distributed at 21; can be included in custodian’s estate; subject to kiddie tax
- 2503c: invests in anything; normally distributed at 21; costly to set up; subject to trust rates; can be included in grantor’s estate
- 529: flexible distributions; lump sum gift $75k/$15k; donor retains control; can be used for K-12 ($10k)
Charitable Transfers
Income to donor until donor’s death
- Income tax deduction based on PV of remainder
- Not subject to gift tax
- At donor’s death remainder goes to charity
Trusts:
- CRAT (5%)
- no additions; fixed payments; payable to any charity; 10% ending value - CRUT (5%)
- additions allowed; variable payments (revalued annually); payable to any charity; 10% ending value
No trust needed:
- Pooled income (no 5%)
- additions allowed; variable payments based on fund income; payable to specific charity; no munis - Charitable Gift Annuity (no 5%)
- no additions; fixed lifetime income; payable to specific charity; charitable deduction based on gift minus annuity
Charitable Transfers
Income to charity
CLAT/CLUT (no 5%)
- income or estate tax deduction
- after period to time goes to non charitable beneficiary
Private Foundation (5%)
- 30% income deduction’- payable to charity or an individual
- can continue for an indefinite period (assumed to be non-operating)
Intrafamily transfers
Property owner needs income
PIGS need income
- Installment sale (easiest)
Sale at FMV in exchange for payments
- PV of remaining payments is included in owner’s estate
- Property is secured
- Gain is capital gain
- Do not use property that is subject to recapture (1245 property) - Self-canceling installment note (SCIN)
- No value included in estate
- Gain is capital gain
- Assets can be depreciated
- Interest can be deducted
- Higher payout than installment
(use if have estate or depreciation issues) - Private Annuity
Sale of property in exchange for periodic payments
- No value included in estate
- Property is transferred for promise to pay
- Taxation is recognized in the year that the annuity is established - GRAT/GRUT
Irrev trust allows grantor to gift property while retaining income interest
- At the end of the term corpus distributed to remainder person
- The value of the gift is discounted due to retained interest
- If owner does not outlive term it is brought back into their estate (string)
- Best for assets that are expected to appreciate - GRIT
For non-family members
Intrafamily transfers
Property owner wants to gift assets/income to family members
Trying to lower the size of the estate
- Partnership / S Corp
Gifting shares
- Family member receives conduit income (ineffective is child s under 24 - kiddie tax)
- Business entity must be capital sensitive. Not available if business is service related - Family limited partnership (FLP)
Gift interest to limited partners to reduce estate
- Qualifies for various valuation discounts allowing lower gift tax
- General partner retains control - Gift leaseback
Gift fully depreciated property
- Lease payments are a business deduction
- Do not use if child is under 24 - QPRT
Irrev transfer of personal residence
- At end of term residence is eliminated from grantors estate
- Value of the gift is discounted
- Owner must outlive term or it comes back into the estate
(similar to GRAT/GRUT)
Post Mortem Planning
Estate liquidity
Closely held stock
- Section 303 stock redemption
- business is a corporation
- value of stock must exceed 35% of AGE
- Amount of stock redeemed cannot exceed the sum of estate taxes plus admin costs
(If question says “corporation” then this is a viable option)
- Installment payment of estate taxes 6166
- paid over time to avoid fire sale (14 yrs)
- property must be in a sole prop, partnership or corp (Aggregation allowed of more than 20% ownership in a business)
- business must be active as of day of death
- value of business must exceed 35% of AGE
- during first 4 years can pay interest only on taxes
- low int rate on first $1MM (indexed to $1,550,000 in 2019)
- low int is not deductible
(this is a safe answer)
Post mortem planning
Estate tax reduction
Think “Family Farm”, it may be real estate
Special use valuation 2032A
- must meet 2 rules to qualify
1. 50% of gross estate must consist of real and personal property used in the business
2. 25% of the gross estate must consist of real property used in the business - $1,160,000 reduction in gross estate
- must have been in use 5 out of 8 rule before death and 10 years after death
(note: usually if qualifies for 2032A will qualify for 6166)
