Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Exam time > Estates > Flashcards

Estates Flashcards

1
Q

Gifting Strategies

A
  • Never gift property when the fair market value is less than the adjusted basis. Instead, sell the property and let the donor recognize a capital loss for income tax. The donor can then gift the cash proceeds to the donee who can then purchase the property with the proceeds.
  • Consider gifting property with the greatest appreciation potential to the youngest donee available who has the most time for the asset to appreciate.
  • When making gifts to charities, always gift appreciated property to avoid the capital gain taxes on the difference between the fair market value and the donor’s adjustable taxable basis. For such property, the donor may be able to deduct the fair market value as a charitable deduction, subject to the income tax limitations.
  • Gift income-producing property to the donee in the lowest marginal tax bracket so that the income is subject to the lowest possible income tax.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

How do you value financial securities for estate tax purposes?

A
  • The fair market value of a financial security is the average of the high and low trading price for the decedent’s date of death or the alternative valuation date.
  • If the valuation date is a weekend, the valuation of the financial security is the average of the applicable values for the trading day before and the trading day after.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Exceptions to the terminable interest rule

A
  1. A six-month survival contingency
  2. A terminable interest, either outright or in trust, over which the surviving spouse has a general power of appointment.
  3. A Qualified Terminable Interest Property (QTIP) Trust
  4. A Charitable Remainder Trust (CRT) where a spouse is the only noncharitable beneficiary.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Summary of the common objectives of life insurance

A
  1. Protect income stream for beneficiaries
  2. Source of funds for education
  3. Provide liquidity at death
  4. Source for retirement income
  5. Create or sustain family wealth
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Summary of the Installment Payment of Estate Tax (Section 6166)

A
  • 10 annual installments (if the estate meets eligibility requirements)
  • Up to $1,550,000 (2019)
  • First installment must be made within 5 years after the estate tax return is due
  • 2% interest on first $1,550,000 (2019) of a closely held business interest. Amounts greater than this are subject to an interest rate that is 45% of the usual underpayment rate. If the estate makes use of the lower interest rate, the interest is not deductible.
  • Eligibility where the closely held business is actively engaged in the trade or business:
    (a) Value of closely held business interest > 35% of the AGE. Must be a sole proprietorship or partnership in which the decedent owned 20% capital interest or voting share.
    (b) If more than one business, they can be aggregated to meet the 35% of AGE if the decedent owns 20% of the capital interest, or voting shares, in the closely held business.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Summary of Special Use Valuation (Section 2032A)

A

Reduce the fair market value of real property up to $1,140,000 (2019)

Eligibility:

  1. Business real property must be used in farm or business activity managed by the decedent or the decedent’s family for 5 out of the 8 years prior to the decedent’s death
  2. Value of business real and personal property must be >= 50% of the GE as adjusted
  3. Value of business real property must be >= 25% of the GE as adjusted
  4. Real property must pass to qualifying heirs
  5. Executor must file election with the estate tax return
  6. Heirs must use property in business for at least 10 years
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Summary of the GSTT: Key Points, Transfers Subject to GSTT, GSTT Rate

A
  • Designed to tax large transfers between skipped generations (i.e. grandparent to grandchild)
  • It is separate from and additional to the gift and estate tax systems.
  • Transfers Subject to GSTT: Direct skips, taxable terrminations, and taxable distributions
  • GSTT Rate: The GSTT rate is the highest marginal rate for the unified gift and estate tax rates (40% for 2019).
  • Any GSTT paid will be added to the fair market value of the gift to determine total taxable gifts for the federal gift tax.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Exceptions and Exclusions to GSTT

A
  • GSTT annual exclusion is $15,000 per donee per donor, gift splitting is available if both spouses elect
  • Indexed, but $15,000 for 2019

Exceptions:

  • The predeceased parent rule applies for direct skips to lineal descendants and collateral heirs if the decedent does not have any direct lineal descendants (children, grandchildren)
  • Lifetime exemption available during life or at death equal to the applicable estate tax equivalency of $11,400,000 for 2019

Exclusions:
* Qualified Payments or Qualified Transfers (Medical and Educational Payments): The direct payment of tuition to a qualified educational institution or the direct payment of qualified medical expenses to a medical care provider on behalf of a skip person is not subject to GSTT. The exclusion from GSTT also applies if the payments are made from a trust.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

CRATs: Income Tax Deduction, Income Recipient, and Income

A
  • Income Tax Deduction: Total value of property less present value of retained annuity payments
  • Income Recipient: Noncharitable beneficiary (usually donor)
  • Income: At least 5% and no more than 50% of initial fair market value of assets paid at least annually for life or term <= 20 years (similar to fixed annuity)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

CRUTs: Income Tax Deduction, Income Recipient, and Income

A
  • Income Tax Deduction: Total value of property less present value of retained unitrust payments
  • Income Recipient: Noncharitable beneficiary (usually donor)
  • Income: At least 5% and no more than 50% of current fair market value of assets (revalued annually) paid at least annually for life or term <= 20 years (similar to variable annuity)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

PIFs: Income Tax Deduction, Income Recipient, and Income

A
  • Income Tax Deduction: Total value of property less present value of retained income interest
  • Income Recipient: Noncharitable beneficiary (usually donor)
  • Income: Trust rate of return for year
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the six basic steps of the estate planning process?

A
  1. Establish the client/planner relationship.
  2. Gather client information, including the client’s current financial statements and establish the client’s transfer objectives, including family and charitable objectives.
  3. Determine the client’s financial status.
  4. Develop a comprehensive plan of transfers consistent with all information and objectives.
  5. Implement the estate plan.
  6. Review the estate plan periodically and update the plan when necessary (especially for changes in family situations).
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Intestate

A

to die without a valid will

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Characteristics of a Holographic Will

A
  • Handwritten (not typed) by the testator and includes the material provisions of a will
  • Must be dated and signed by the testator, but most states do not require a witness
  • Valid in most states
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Characteristics of a Noncupative Will

A
  • Oral, dying declarations made before a sufficient number of witnesses
  • In some states, noncupative wills may only be effective to pass personal property, not real property, and the dollar amount transferred via this method may be limited.
  • The use of noncupative wills is fairly restricted and is not valid in most states.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Characteristics of a Statutory Will

A
  • Drawn by an attorney and complies with the statutes of wills of the domiciliary state
  • Referred to as witnessed or attested wills
  • Must be typed or be in writing, be signed by the testator (generally in front of witnesses) and be signed by the witnesses
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

When is a will valid?

A
  • The will maker is the age of majority in their domiciliary state or is an emancipated minor.
  • The will maker has legal testamentary capacity, which means that they must understand the consequences of writing the will, including being able to: (1) recognize and recollect the property being disposed of by the will and (2) recognize the relationships of those friends and relatives who have any claim to the testator’s assets
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is the “per capita” method?

A

Sometimes called “by the head” allows the deceased person’s heirs to move into the generational slot of the deceased heir and inherit accordingly

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is the “per stirpes” method?

A

Sometimes called “by the roots” directs that the deceased person’s designated share flow to their heirs. Per stirpes is also referred to as taking by representation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Characteristics of a Power of Attorney

A
  • A standalone document that allows an agent to act for the principal and may include the power to appoint assets
  • Power to act
  • Ends at the death of the principal
  • May be general or limited
  • May be revoked at any time by the principal
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Characteristics of a Power of Appointment

A
  • A power, usually included in a trust or power of attorney, allowing the power holder to direct assets to another
  • Power to transfer assets
  • May survive the death of the grantor
  • May be general or limited
  • May be revoked by the principal during life or at death (via last will and testament)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Fee Simple

A
  • Full outright ownership by one person
  • Transfers via probate by will or intestacy law
  • The fair market value of property owned as fee simple is fully included in a decedent’s gross estate, but if the property is transferred to the surviving spouse, the fair market value of the property is eligible for the unlimited marital deduction
  • 100% included in owner’s gross and probate estates
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Tenancy in Common

A
  • Joint interest in property between two or more individuals
  • Owners can choose to partition their interests without the consent of the other owners
  • Each person holds an undivided, but not necessarily equal, interest in the whole property
  • The fair market value of a decedent’s ownership interest in tenancy in common property is included in their gross estate
  • If the property is transferred by probate to the decedent’s surviving spouse, the fair market value of the decedent’s interest in the property is eligible for the unlimited marital deduction
  • The decedent’s interest in tenancy in common property passes through probate.
  • Note that each tenant in common will generally have an interest proportional to their financial contribution. On occasion, however, a tenant in common’s share of ownership in the property will be of greater proportional share than their pro rata contribution. In such a case, a gift has been made from one party to another.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Joint Tenancy with Rights of Survivorship

A
  • Interest in property held by two or more related or unrelated parties
  • Each owns an undivided, equal interest in the whole
  • Each owner generally shares in income and expenses in proportion to their interest
  • At the death of one joint tenant, their interest automatically passes to the surviving property owners and therefore the property is not included in the decedent’s probate estate.
  • Individuals can choose to partition their interest without the consent of the other joint tenants even when the joint tenant is a spouse. After the property is partitioned, each owner owns their share as fee simple.
  • Property is included in the decedent’s gross estate to the extent of the decedent’s original contribution percentage (actual contribution rule). (Spouses named as joint tenants are deemed to have each contributed exactly 50% of the financial consideration to the property and the value of the property is eligible for the unlimited marital deduction.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Tenancy by the Entirety

A
  • Joint ownership of property only between spouses that cannot be partitioned without the consent of the other spouse.
  • At the death of the first spouse, the property automatically transfers to the surviving spouse, and therefore does not go through probate.
  • 50% of the fair market value of the property is included in the decedent’s gross estate.
  • Because the property automatically transfers to the surviving spouse, the value of the property is eligible for the unlimited marital deduction.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Community Property

A
  • Ownership form available only to spouses
  • Each spouse is deemed to have contributed, and to own, 50% of the property and the interest cannot be partitioned without the consent of the other party
  • Decedent’s interest is included in the probate estate and both halves of community property are stepped to fair market value even though the decedent only owned 50% of the property.
  • No automatic right of survivorship to the surviving spouse, but if the property is transferred to the surviving spouse by will or intestacy, the value of the property transferred to the spouse is eligible for the unlimited marital deduction.
  • Earnings during the marriage are community property. (Property acquired before the marriage and property acquired by gift or inheritance during the marriage is separate property.)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Community Property States

A
  • Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin
  • Alaska allows residents and nonresidents to enter into community property agreements permitting in state property to be treated as community property.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Rules Regarding Moving from Common Law to Community Property State

A
  • Property acquired before the move generally retains its separate property status, unless the couple agrees to treat the property as community property.
  • Property acquired subsequent to the couple’s move into the community property state is considered community property.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What are some examples of property that pass through probate?

A
  • Fee Simple
  • Tenancy in Common
  • 1/2 Community Property
  • Automobiles
  • Household Goods
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

What are some advantages of the probate process?

A
  • Implements disposition objectives of testator
  • Provides for an orderly administration of assets
  • Provides clean title to heirs or legatees
  • Increases the chance that parties of interest have notice of proceedings and, therefore, a right to be heard.
  • Protects creditors by insuring that the debts of the decedent are paid.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

What are some disadvantages of the probate process?

A
  1. Delays - can be complex and excruciatingly slow
  2. Costs - can result in substantial monetary costs
  3. Publicity - the process is open to public scrutiny
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

How much can individuals gift as a result of the annual exclusion?

A

Individuals may gift, transfer-tax free, up to $15,000 (2019) per donee per year. Any person may be a donee; one does not need to be a related party.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

What is the special annual exclusion for noncitizen spouses and citizen spouses?

A

Noncitizen: $155,000 for 2019
Citizen: unlimited

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

What is a Crumney provision?

A

A Crumney provision is the explicit right of a trust beneficiary to withdraw some, or all, of any contribution to a trust for a limited period of time, generally after 30 days, after the contribution. This power of withdrawal is essentially a general power of appointment or the ability of the power holder to appoint assets to themselves.

A Crumney provision (called a power to lapse) may limit the withdrawal right to an amount equal to the annual exclusion or less, thus, converting what might have been a gift of a future interest in the trust to a gift of a present interest, which will then qualify for the annual exclusion.

35
Q

What is the 5/5 Lapse Rule?

A
  • If a trust has more than one beneficiary, the 5/5 Lapse Rule must be applied to determine if the lapse causes a taxable gift from the beneficiary holding the Crumney power to the other beneficiaries of the trust. Such a taxable gift is a gift of a future interest and is not qualified for the annual exclusion.
  • Under the 5/5 Lapse Rule, a taxable gift is deemed to have been made when a power to withdraw an amount in excess of the greater of $5,000 or 5% of the trust assets has lapsed, or not been used by a beneficiary.
36
Q

Characteristics of transfers resulting in no gift tax

A
  • Gifts made to political organizations are exempt from gift tax. The term “political organization” means a party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function.
  • A qualified transfer is a payment made directly to a qualified educational institution or medical provider.
  • Payments of legal support obligations are exempt from the gift tax rules.
37
Q

Gifts to Minors (UGMA/UTMAs)

A
  • Gifts to minors, excepting small amounts, are usually made either in trust or through a custodian type account.
  • The Uniform Gifts to Minors Act (UGMA) provides that gifted property is transferred to a named custodian under the state UGMA. Permissible gifts include cash, securities, life insurance, and annuities. The custodian is permitted to spend money on behalf of the minor and serves without bond and normally without the need to account.
  • The Uniform Transfers to Minors Act (UTMA) was designed to replace UGMA. The UTMA expands the kind of property that can be transferred from the limited types under UGMA to any property interests. UGMAs and UTMAs are less expensive than establishing trusts and transfers to either are considered gifts of a present interest. The only caution is that UGMAs and UTMAs cannot be used to provide what would otherwise by legal support.
38
Q

Examples of Gifts Made within Three Years of Death that are Included in a Decedent’s Gross Estate (IRC Section 2035)

A
  1. Any gift tax paid on gifts made within three years of the decedent’s date of death
  2. The value of any property gifted within three years of the decedent’s date of death if they retained an interest
  3. The death proceeds of any life insurance policy insuring the decedent’s life that was gifted within three years of the decedent’s date of death
39
Q

Characteristics of the Alternate Valuation Date

A

To Qualify:

  1. The total value of the gross estate must depreciate after the date of death and
  2. The total estate tax must be less than the estate tax calculated using the date of death values

Valuation if properly elected: All assets valued at the AVD except:

  • Assets distributed or sold before 6 months which are valued at the date of distribution or sale
  • Wasting assets (annuitized annuities, patents, royalties, installment notes, lease income) must be valued at the date of death
  • Wasting assets will naturally decline over time and would cause a decrease in the estate not connected to a market value decrease
40
Q

What is deducted from the gross estate to determine the adjusted gross estate?

A
  1. Funeral expenses
  2. Last medical expenses
  3. Administrative expenses
  4. Debts of the decedent
  5. Losses during estate administration
  6. State Death Tax Deduction: A deduction for estate, inheritance, legacy, or succession taxes paid to any state or territory
41
Q

Characteristics of the failure-to-file penalty

A
  • 5% per month up to a maximum of 25%, reduced by the failure-to-pay penalty, up to 5 months
  • If determined to be fraudulent, the penalty is increased by 15% per month up to a maximum of 75%
42
Q

Characteristics of the failure-to-pay penalty

A

0.5% per month up to a maximum penalty of 25%

43
Q

Characteristics of the holding period of inherited property

A

The holding period of property acquired from a decedent is always deemed to be long-term (i.e. held for the required long-term holding period). This provision applies regardless of whether the property is disposed of at a gain or loss and regardless of decedent’s holding period

44
Q

Characteristics of a Self-Canceling Installment Note (SCIN): Term of Payment, Deductability of Interest, Buyer’s Adjusted Basis, Seller May Keep Collateral Interest

A
  • Term of Payment: Determined by Seller
  • Deductability of Interest: Depends on Property
  • Buyer’s Adjusted Basis: Purchase Price of Property
  • Seller May Keep Collateral Interest: Yes
45
Q

Characteristics of a Private Annuity: Term of Payment, Deductability of Interest, Buyer’s Adjusted Basis, Seller May Keep Collateral Interest

A
  • Term of Payment: Life of Annuitant
  • Deductability of Interest: None
  • Buyer’s Adjusted Basis: Sum of Annuity Payments Paid
  • Seller May Keep Collateral Interest: No
46
Q

Characteristics of a Grantor Retained Annuity Trust (GRAT)

A
  • A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust that pays a fixed annuity (income interest) 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.
  • The GRAT is funded by the grantor with a transfer of property. The annuity can be a stated dollar amount, fixed fraction, or a percent of the initial fair market value of the property transferred to the GRAT.
47
Q

Characteristics of a Qualified Personal Residence Trust (QPRT) including Gift and Estate Tax Consequences

A
  • A special form of a GRAT where the grantor contributes a personal residence to a trust and instead of receiving an annuity in dollars, they receive use of the personal residence as the annuity interest component.
  • At the end of the trust term, the residence passes to the remaindermen and if the grantor is still living, they may then lease at a fair market value rent, the property from the remaindermen and continue to use it as their personal residence.
  • If the grantor dies before the expiration of the trust term, the fair market value of the residence is included in the grantor’s gross estate.
  • A QPRT can only hold one residence, but an individual can have two QPRTs.
  • The original transfer of the residence is treated as a gift to the extent that the fair market value of the residence exceeds the present value of the grantor’s retained interest (the use).
48
Q

Characteristics of a Tangible Personal Property Trust (TPPT) including Gift and Estate Tax Consequences

A
  • Very similar to QPRTs except that these are funded with personal property, not real property. They usually transfer artwork, antiques, and other items of personal property that have potential to appreciate in value.
  • If the grantor dies before the expiration of the trust term, the fair market value of the trust property is included in the grantor’s gross estate.
  • The original transfer of the personal property is treated as a gift to the extent that the fair market value of the personal property exceeds the present value of the grantor’s retained interest (the use).
49
Q

Characteristics of a Family Limited Partnership (FLP) including Gift and Estate Tax Consequences

A
  • A family limited partnership (FLP) is a limited partnership created under state law with the primary purpose of transferring assets to younger generations using valuation discounts.
  • Usually, one or more family members transfer highly appreciating property to a limited partnership in return for both the 1% general and 99% limited partnership interests. In a limited partnership, the general partner has unlimited liability and the sole management rights of the partnership, while the limited partners are passive investors with limited liability and no management rights.
  • Upon creation of the partnership, there are neither income nor gift tax consequences because the entity created (the limited partnership and all of its interests, both general and limited) is owned by the same person(s) who owned it before the transfer.
  • Once the FLP is created, the owner of the general and limited partnership interests values the limited partnership interests. The grantor then begins an annual gifting program utilizing the discounts, the gift tax annual exclusion, and gift-splitting (where applicable) to transfer limited partnership interests to younger generation family members.
50
Q

What are Testamentary Trusts?

A
  • Trusts created after the death of the grantor
  • Two of the most common types: (1) credit shelter (bypass) trusts and (2) marital deduction trusts (QTIP Trusts, General Power of Appointment Trusts, or Estate Trusts)
51
Q

What is a Pourover Trust?

A

A trust that receives assets from another source, generally the grantor’s estate at their death. The trust is generally unfunded or minimally funded until the assets “pour” into the trust.

52
Q

Characteristics of Irrevocable Life Insurance Trusts (ILITs)

A
  • The purpose of an ILIT is to prevent an insured party from having incidents of ownership in the life insurance policy on their own life.
  • When an ILIT is created, the grantor often wants to qualify the gifts to the ILIT for the gift tax annual exclusion so that their applicable gift tax credit amount will be available for other planning either during lifetime or at death. Since an ILIT is irrevocable, transfers to the ILIT are usually made subject to a Crumney withdrawal right on behalf of the beneficiaries.
53
Q

Characteristics of a Testamentary Bypass (Credit Shelter Trust)

A
  • The bypass trust can be structured so that all of the income of the trust is payable to the surviving spouse. In addition, the trustee can be given the right to make discretionary distributions of principal for the surviving spouse’s health, education, maintenance, and support (an ascertainable standard). Furthermore, the surviving spouse can be given the right to demand, on an annual basis, the greater of $5,000 or 5% of the trust corpus.
  • Upon the surviving spouse’s death, the assets in the bypass trust usually pass to the children (or some other noncharitable beneficiary) and are not included in the surviving spouse’s gross estate for federal estate tax purposes.
54
Q

Characteristics of an Inter Vivos Bypass (Credit Shelter) Trust

A
  • Creating an inter vivos bypass trust can yield even bigger benefits than creating a bypass trust at death. When all property transfers occur at the death of an individual, everything is potentially included in the gross estate and subject to estate tax.
  • Instead of waiting until death to create the trust, an individual can transfer $11,400,000 (2019) in assets to an inter vivos bypass trust and shield the transfer with the applicable gift tax credit amount. Once this is accomplished, all future growth and appreciation in the property that is transferred to the bypass trust escapes federal estate taxation at the decedent’s death.
55
Q

Characteristics of Power of Appointment Trusts (A-Trusts)

A
  • Either inter vivos or testamentary irrevocable trusts
  • Can be a general or limited (special) power of appointment
  • The power must be general to qualify for the marital deduction
  • Power of appointment trusts are frequently used in planning to take advantage of the unlimited estate tax marital deduction
56
Q

Benefits of a Power of Appointment Trust for avoiding the Generation Skipping Transfer Tax

A

By granting a non-skip person a general power of appointment over a trust that will distribute assets to a skip person, it is possible to change the identity of the transferor for tax purposes.

Since the non-skip person will be required to include the value of the trust assets in their gross estate because of the general power of appointment, they will be considered the transferor for generation-skipping transfer tax purposes.

57
Q

Characteristics of Qualified Terminable Interest Property (QTIP) Trusts

A
  • typically created at the death of the first spouse
  • grants the surviving spouse a lifetime right to the income of the trust
  • transfers the remainder interest to individual(s) of the grantor’s choosing
  • qualifies for the unlimited marital deduction even though the spouse does not receive outright access to the assets
58
Q

Characteristics of Grantor Retained Income Trusts (GRITs)

A
  • created by a person who keeps an income interest in the trust
  • Grantor transfers property to the trust, retains some form of income interest for a period of time, and upon termination of the trust, transfers the remainder interest to a third party
  • Since the third party does not receive the immediate right to possess or enjoy the property, a discount on the value of the remainder interest is available due to the passage of time (temporal discount).
59
Q

Characteristics of a 2503(b) Trust

A
  • may hold property in trust for the lifetime of the beneficiary/ies
  • must make income distributions to the beneficiary/ies on an annual basis = at a minimum, the interest and dividends received by the trust must be distributed. (Once distributed, the income can be placed in a custodial account for the benefit of the child or may be used for the child’s benefit.)
  • Gifts made to a 2503(b) trust will partially qualify for the gift tax annual exclusion. The portion qualifying for the gift tax annual exclusion equals the present value of the income interest that the child will receive over the term of the trust.
60
Q

Characteristics of a 2503(c) Trust

A
  • allows income to accumulate in the trust
  • allows the grantor to qualify the entire gift to the trust up to the annual exclusion amount for the gift tax exclusion
  • can only have one beneficiary
  • trustee may, but is not required to, make principal and income distributions for the benefit of the child
  • trust must terminate when the child reaches age 21, or, at a minimum, the child must be given the right to receive the trust assets at age 21.
61
Q

Characteristics of Charitable Remainder Trusts

A

created when the grantor transfers assets to a trust, retains an annuity or unitrust interest for a period of time or for life and the remainder value passes to a qualified charity

62
Q

Characteristics of Charitable Lead Trusts

A
  • created when the grantor transfers assets to a trust, gives an income stream (must be an annuity or unitrust interest to qualify for the charitable deduction) to a charity for a fixed period of time followed by a transfer of the remainder interest in the trust to a third party or, possibly, back to the grantor.
  • If a third party is named as remainder beneficiary of the trust, use of a CLT can achieve significant wealth transfer goals
  • May be a CLAT or CLUT.
  • Irrevocable trust
  • If the grantor (donor) drafts the trust document to treat the trust as a grantor trust then the grantor will receive an income tax deduction at the inception of the trust
63
Q

Characteristics of Totten Trusts

A

not really trusts, but rather bank accounts that include payable on death beneficiary clauses (PODs). A bank account with a payable on death clause is transferred to the named beneficiary upon the death of the owner and escapes probate

64
Q

How do you choose between the CRAT and the CRUT?

A
  • If the client’s primary objective is to maximize the income payments to the noncharitable beneficiaries, a CRUT is the better choice, particularly if the trust assets are expected to appreciate. However, due to the guaranteed income payments from the CRAT, the noncharitable beneficiary would receive more from a CRAT than a CRUIT if the value of the trust assets decline.
  • The CRAT has a significant cost advantage over a CRUT holding the same property if the underlying trust assets are not readily marketable and require a qualified annual appraisal. This is because the CRAT only requires one valuation at the funding of the trust and a CRUT requires yearly valuations. Yearly appraisals for property that is not readily marketable can be very expensive.
65
Q

Qualifications for the Marital Deduction

A
  1. The property must be included in the decedent’s gross estate. (If property is not included in the decedent’s gross estate, they will not be able to deduct the value of that property from the gross estate as a marital deduction.)
  2. The property must be transferred to the surviving spouse.
  3. The interest must not be a terminable interest unless it meets one of the exceptions.
  4. If the surviving spouse is not a US citizen, additional requirements must be met in order to qualify for the unlimited marital deduction.
66
Q

What is a terminable interest?

A

A terminable interest is any interest in property passing from a decedent to his surviving spouse where the surviving spouse’s interest in that property will terminate at some point in the future.

67
Q

Under what conditions will the marital deduction NOT be available?

A
  1. A terminable interest is transferred to a surviving spouse and
  2. another interest in the same property passes from the decedent to someone other than the surviving spouse (a third party) for less than full and adequate consideration in money or money’s worth and
  3. the third party may possess or use any part of the property after the interest of the surviving spouse terminates
68
Q

Qualified Terminable Interest Property (QTIP) Trusts

A
  • Use of a QTIP Trust (a “C Trust”) allows a decedent to qualify a transfer for the marital deduction at their death yet still control the ultimate disposition of the property.
  • A QTIP Trust holds property for the benefit of a surviving spouse and makes income distributions to the surviving spouse at least annually.
  • At the surviving spouse’s death, the trust property will transfer to the beneficiary as determined by the grantor of the QTIP Trust, the first-to-die spouse.
69
Q

What are the requirements to qualify as a QTIP Trust?

A
  • The property transferred to the trust must qualify for the unlimited marital deduction. Consequently, it must be in the gross estate of the first-to-die spouse and must be transferred to the surviving spouse (in this case, in trust).
  • The surviving spouse is entitled to all of the trust income for their life and that income must be paid at least annually. If the trust earns income during the surviving spouse’s lifetime that is not distributed as of the date of the surviving spouse’s death, the trust must distribute this income to the surviving spouse’s estate.
  • During the surviving spouse’s lifetime, no one can have the right to appoint the property to anyone other than them.
70
Q

What requirements must be met in order to qualify the Qualified Domestic Trust (QDOT) for the unlimited marital deduction?

A
  1. At least one of the QDOT trustees must be a US citizen or a US domestic corporation
  2. The trust must prohibit a distribution of principal unless the US citizen trustee has the right to withhold estate tax on the distribution
  3. The trustee must keep a sufficient amount of the trust assets in the United States to ensure the payment of federal estate taxes or the trustee must have a minimum net worth sufficient to assure the payment of estate taxes upon the death of the noncitizen surviving spouse
  4. The executor of the citizen-spouse’s estate must elect to have the marital deduction apply to the trust
71
Q

Characteristics of the Stock Redemption Buy-Sell Agreement

A

The stock redemption buy-sell agreement is structured between the owners of a firm and the company or business entity itself.

  • Under such an agreement, the business entity purchases both life and disability insurance policies on the owners of the business.
  • The business is named as the beneficiary of the policy and receives any insurance proceeds upon the death or disability of one of the business owners.
  • The business then uses the policy proceeds to purchase the stock or partnership interest owned by the deceased or disabled owner.
  • If the owner in question retires rather than dying or becoming disabled, the business can use the accumulated cash value of the policy to redeem the owner’s interest or shares.
72
Q

What is a Cross-Purchase Buy-Sell Agreement?

A
  • This is a buy-sell strategy used for firms with few owners.
  • Each co-owner (shareholder or partner) holds a life insurance policy and/or a disability policy on their fellow co-owners.
  • As the number of co-owners increases arithmetically, the number of insurance policies required to cover all possible combinations of individuals increases geometrically.
73
Q

IRC Chapter 14

A
  • Under Chapter 14 of the IRC, the strength of using the buy-sell agreement to establish the purchase price of the business entity has been stripped away.
  • However, IRC Section 2703 provides a safe harbor if certain provisions and guidelines are met, including:
    (1) The agreement must be part of a bona fide business arrangement.
    (2) It cannot be a device designed to transfer the property to members of the decedent’s family for less than adequate consideration.
    (3) Terms of the agreement must be comparable to one that would be entered into by parties who would be involved in an arm’s-length transaction.
74
Q

IRC Section 303

A

States that the estate of a deceased shareholder may redeem enough shares to cover the death taxes (federal and state estate, inheritance, and generation-skipping transfer taxes), funeral expenses, and administrative expenses of the decedent, and the shares redeemed for this purpose will qualify for capital gains tax treatment.

75
Q

List some IRD assets

A
  • Qualified Plans
  • IRAs
  • US Savings Bonds
  • Installment Notes
  • Annuitized Annuities
  • Accrued Dividends
  • Accrued Wages
  • Net Unrealized Appreciation (NUA)
  • Patents/Copyrights
76
Q

Rules Regarding Alternate Valuation Date

A

If the executor or administrator elects to value the estate’s assets on the alternate valuation date, the fair market value of the assets six months after the decedent’s date of death is included in the gross estate.

77
Q

Definition and Requirements of Disclaimers

A

Definition: A disclaimer is an irrevocable and unqualified refusal to accept a gift or bequest.
Requirements:
(1) the disclaimer must be in writing
(2) the disclaimer must be made within nine months of the date on which the transfer creating the interest was made or the day on which the disclaiming party reaches the age of 21
(3) the disclaimant cannot specify the party to whom the property will be transferred as a result of the disclaimer
(4) the disclaimant cannot accept any interest or benefit in the property prior to disclaiming

78
Q

What is a “Skip Person”?

A

A skip person, or the person to whom a transfer may result in a generation-skipping transfer tax, is broadly defined as any lineal descendant of the transferor’s grandparent (or their spouse’s grandparent) who is two or more generations younger than the transferor and any person who is not a lineal descendant, is not the spouse of the transferor, and is two or more generations younger than the transferor based on age (37 1/2 years).

79
Q

What is a “Non-Skip Person”?

A
  • A non-skip person is any person or trust that is not a skip person. A transferor’s spouse or former spouse is always considered a non-skip person because they are considered to be in the same generation as the spouse.
  • A trust is a non-skip person if any non-skip person holds an interest in the trust. Also, if no person has an interest in the trust, but a distribution may be made to a non-skip person, the trust is a non-skip person.
80
Q

What are the three types of taxable transfers that GSTT applies to?

A
  1. A direct skip
  2. A taxable distribution
  3. A taxable termination
81
Q

Definition of a GSTT taxable termination

A

Any termination of a trust interest unless at the termination of the trust, the trust property transferred is subject to (1) federal estate or gift tax, (2) a non-skip person receives an interest in the property transferred out of the trust, or (3) the distribution from the trust will never be made to a skip person.

The taxable amount of a taxable termination equals the value of the trust property transferred less any expenses, indebtedness, and taxes attributable to the taxable termination. The trustee is liable for the GSTT on a taxable termination.

82
Q

Definition of a GSTT taxable distribution

A

Any distribution from a trust to a skip person that is not a taxable termination or a direct skip.

  • The 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.
  • Unlike direct skips and taxable terminations, the transferee is liable for the GSTT on a taxable distribution.
83
Q

Characteristics of a Buy-Sell Agreement

A
  • Provides a commitment for the surviving owners to buy the deceased’s interest, not just an option to buy.
  • It provides liquidity to the deceased’s estate for paying death taxes and other debts.
  • It provides for continuation of the business by the surviving owners.
  • It can establish the estate tax value of the business interest in the deceased’s estate.

Exam time (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions