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CFP - AB > Estates Planning > Flashcards

Estates Planning Flashcards

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1
Q

Interstate succession

A

When decedent died with no will

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2
Q

Ancillary probate

A

Separate probate procedure

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3
Q

Elective share

A

A surviving spouse who has not inherited a certain minimum amount provided by state law has a right to take a share of the deceased spouse’s estate

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4
Q

Uniform Simultaneous Death Act (USDA)

A

Any persons who die within 120 hours of each other deemed to predecease each other

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5
Q

Totten trust

A

Revocable trust in a bank account which depositor named as trustee for another’s benefit

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6
Q

Community property interest

A
  • Income earned during marriage
  • Appreciation in solely owned property that is attributable to the contributions of the nonowner spouse
  • Separate assets that have been commingled
  • Full 100% step up in basis on entire property if half is included in deceased spouse’s gross estate
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7
Q

Sole ownership

A
  • Subject to probate and can be disclaimed
  • Also referred to as outright ownership or fee simple
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8
Q

JTWROS and estate tax

A

full value included in gross estate of first to die unless survivor can establish ownership of some portion

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9
Q

Wills

A
  • Disposes of an individual’s property when she/he dies
  • Must conform to specific legal requirements of the state in which it is created, must be in writing and must be witnessed
  • To revoke, new will must state intended to revoke prior will
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10
Q

Testamentary trust

A
  • Created by will
  • Designates a person to serve as trustee, name beneficiaries of the trust & gives instructions on how trust assets are to be administered
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11
Q

Gross Estate

A

All probate assets COM-E-S-TIC
- COMmunity property
- Estate as beneficiary
- Singly owned (fee simple)
- Tenancy In Common

All non probate assets
- JTWROS & tenancy by entirety
- Life insurance (DB or cash value)
- General POA
- Gift taxes paid within 3yrs of death*

GSTT paid within 3yrs are *NOT added back

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12
Q

Adjusted Gross Estate (AGE)

A

Gross estate less:
- Funeral expenses
- Administrative expenses
- Debts
- Taxes
- Casualty losses

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13
Q

Taxable Estate

A

Adjusted gross estate less:
- Marital & charitable deductions

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14
Q

Tax Base

A

Taxable estate plus:
- Adjusted taxable gifts amounts exceeding annual gift tax exclusion

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15
Q

Tentative Tax

A

Tax base less:
- Estate tax deduction ($12,920,000)
- 40% tax rate

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16
Q

Net Estate Tax

A

Tentative tax less:
- Gift taxes paid

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17
Q

Prior transfer credit

A

Can’t pay estate taxes twice on same asset within 10 years

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18
Q

Inter-vivos gifting

A

Made while the transferor is alive

Requirements for a valid gift
1. Capable of transferring property
2. Capable of reverting
3. Must be delivery and acceptance
4. Donative intent

To be subject to taxation
1. Donative intent is not required
2. Complete gift

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19
Q

Appropriate gift property

A

Highly appreciated
- Charity or lower tax bracket

Likely
- Remove from estate

Income producing
- ONLY if lower tax bracket

Loss
- Sell then gift

Subject to depreciation
- Keep until fully depreciated

Out of state
- Gift to avoid ancillary probate

Life Insurance
- Excellent to gift

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20
Q

Gifts to non citizen spouses

A

$175,000

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21
Q

Increasing basis on appreciated gifts

A
  1. Appreciated property AND
  2. Gift tax paid by donor
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22
Q

Gift subject to indebtedness

A

Net value of the gift is subject to gift tax
If indebtedness is greater than cost then donor will realize a taxable gain

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23
Q

Gift tax filing

A

Form 709
- More than $17,000 to any non spouse donee
- Future interest of any amount
- Spouses elect gift splitting

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24
Q

Gift Splitting

A
  • Individually owned assets require consent to use the other spouses gift exclusion
  • Gift from community property/JTWROS assumes gift made one half by each spouse
  • Two gift tax returns must be filed by each spouse if exceed annual exclusion
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25
Q

Deductible gifts (exempt gifts)

A

Fully deductible. Taxable gift of zero

  • Directly to education institution
  • Directly to provider of medical care
  • Spouse
  • Qualified charity
  • Political organization
  • President of US
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26
Q

Incompetent

A
  • Not legally qualified
  • Lacking qualities needed for effective action
  • Unable to function properly
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27
Q

Durable power of attorney for health (DPOAHC)

A
  • Medical decisions only
  • Spinning power
  • Drafted separately from the DPOA
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28
Q

Advance medical directives

A

Directs clients physician to discontinue life sustaining procedures if the client is in terminal condition or permanently unconscious

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29
Q

Guardianship

A

Guardian of person: makes residential, health care and other personal decisions

Guardian of property: makes financial decisions

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30
Q

Omnibus Budget Reconciliation Act of 1993 (OBRA)

A

Allows disabled individual under 65 to remain on Medicaid by transferring assets to an irrevocable OBRA payback trust

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31
Q

Per capita vs Per stripes

A

Per capita: Equal shares to EVERYONE (kids, grands, great, etc)
“Per capita to my descendants who survive me”

Per stripes: Equal shares to select group
“Per stripes to my descendants who survive me”

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32
Q

Simple vs Complexed

A

Simple
- Income is distributed
- Income taxed to the beneficiary
- Normally, NO distribution of corpus
- NO charitable gifts

**Complex **
- Income must or may be accumulated
- Accumulation taxed to trust Distributions taxed to beneficiary
- Corpus CAN be distributed
- MAY make charitable gifts

33
Q

Bypass Trust
B Trust
Non marital trust

A

Gives the decedent postmortem control over transferred property

Not included in surviving spouse’s estate if no more than 5 or 5 provision or HEMS rights

Pass using federal estate tax exemption

34
Q

Marital trust
A trust

A
  • Second spouse to die controls property
  • Funded with property transferred to the surviving spouse at the descendant’s death.
  • Subject to surviving spouse estate tax
  • Pass by martial deduction
35
Q

Qualified Terminal Interest Property (QTIP)
C trust

A
  • Pass by martial deduction
  • Can have HEMS or 5 or 5 provisions
  • Subject to surviving spouse estate tax
  • Executor can make an election on decedent tax return for property to be treated as QTIP property
36
Q

Gift to minors of a future interest

A

2503(b) trust (bad boy)

  • Interest deductions only
  • Must use applicable credit to fund
  • Income payout may be subject to kiddie tax
  • Income considered gift of present interest
  • Principal is not required to be distributed. However, income distributions are mandatory
37
Q

Gifts to minors of a present interest

A

UGMA: subject to kiddie tax
- Must be funded with cash type assets
- Normally distributed at 18
- Can be included in custodian’s estate
- Cannot be testamentary

UTMA: subject to kiddie tax
- Can be funded with any type of asset including real estate
- Normally distributed at 21
- Can be included in custodian’s estate
- Can be testamentary

2503(c) trust (children): subject to tax rates
- Funded with any asset
- Normally distributed at 21
- Costs to set up & maintain
- Can be included in grantor/trustee’s estate

Section 529
Invested in specific funds
Flexible distribution
Lump sum gift $85,000
Donor can retain control
$10k per year towards K-12/student loans

38
Q

Sprinkling or spray provision

A

Power to direct income at the discretion of the trustee for the benefit of the beneficiary

39
Q

Discretionary provision

A

Provides beneficiary with only as much trust income or principal as trustee sees fit to distribute

40
Q

Support trust

A

Distributes only amount of income and principal the trustee deems necessary for the support or education of the beneficiary

41
Q

Income to *donor until donor’s death

A
  • Income tax deduction for present value
  • No gift tax
  • At donor death paid to charity

Trusts
- CRAT
- CRUT

No trust needed
- Pooled income
- Charitable gift annuity

42
Q

Income to charity

A
  • CLAT
  • CLUT
43
Q

Charitable Remainder Annuity Trust CRAT

A

Lifetime OR max 20 years
No additions
Fixed amount (at least 5%)
Must have 10% ending value
Remainder interest to one or more charities

44
Q

Charitable Unitrusts (CRUTS) as

A

Max 20 year term
Multiple additions
Fixed percentage (at least 5%)
Inflation protection
Must have 10% ending value
Remainder interest to one or more charities

45
Q

Net income with make up unitrust (NIMCRUT)

A

Non charitable beneficiary will receive the lesser percentage of the trust’s value or the net income earned by the trust during the year

46
Q

Charitable lead trust

A
  • Upfront income tax deduction
  • Highly appreciating assets expect to grow
  • Works best for wealthier, federal estate tax avoiding clients
47
Q

Charitable gift annuity

A
  • No additions
  • Fixed lifetime income NOT term certain
  • Specific charity
  • Deduction based on gift less annuity
48
Q

Pooled income fund

A
  • Additions allowed
  • Variable payments based on fund income no 5% rule
  • Specific public charity
  • NO term certain other than life of beneficiary
  • Cannot be invested in tax exempt securities (munis)
49
Q

Irrevocable life insurance trust (ILIT)

A

Face amount of the policy can be less than or equal to the value of the property that is transferred

  • Created to own and be beneficiary of policy on trust maker’s wife
50
Q

Private/Family Foundations

A

Created and controlled by a wealthy individual for family charitable purposes

Must hold, invest and give away 5% minimum annually to support charitable activities and other organizations

Grants for:
- School, travel or similar
- Scholarship, fellowship, prize or award
- Improve or enhance capacity, skill or talent of grantee

51
Q

Incidents of ownership

A

Right to assign, terminate, borrow against cash reserves, name or change beneficiaries

52
Q

Life insurance estate inclusion (you’re insured)

A

You own the policy & die
- Death benefit is included

Spouse owns your policy
- You gift and die within 3 years
- You gifted and never changed beneficiary from your estate

You sold your policy
- Nothing is included

53
Q

Life insurance estate inclusion (someone else insured)

A

You own policy
- Replacement cost is included (term: unused premium/whole: cash value + unearned premium)

You gifted
- Nothing, no 3 year rule

54
Q

Recapitalization (2701)

A

Reduce value of business interest in their estate through stock recapitalization or by hiring closely held stock

55
Q

Minority discount

A

Inability of a small shareholder to influence corporate policy makes the shares worth less

56
Q

Marketability discount

A

Due to lack of an established market, closely held business interests are more difficult to sell.

Range from 15% to 50%

57
Q

Blockages discount

A

Hold large block of publicly traded stock, selling it all at once could depress the market price

58
Q

Qualified Domestic Trust (QDOT)

A

No unlimited marital deduction
Estate tax exemption still remains
Jointly held property between spouses is not considered one half owned
Tax free gift of $175,000/annually

59
Q

Net gift technique

A

Gift made on condition donee pays the gift tax
- Donor’s $12,920,000 exclusion must first be exhausted
- Gross estate includes amount of gift tax paid by donees on net gifts made by decedent within three years of death

60
Q

Reverse gift

A

Wealthier spouse makes a gift of low basis assets to the dying spouse

Common law hack

61
Q

Private Annuity

A

Sale is property in exchange for periodic payments

  1. No value included in estate
  2. Property is transferred for a promise
  3. All gains would’ve been recognized over life of annuity will be taxed up front phantom income
62
Q

Installment Sale

A

Sale of property at FMV in exchange for payments

  1. PV of remaining payments included in estate
  2. Property is secured
  3. Gain is capital gain (Do not use if property is subject to 1245 depreciation)
63
Q

Grantor Retained Annuity Trust (GRAT/GRUT)

A

Irrevocable trust that allows grantor to make gifts of appreciating or income producing property while retaining an income interest

  1. Corpus is distributed to a remainder person
  2. Value of gift is discounted (due to retained interest)
  3. Owner must outlive term or brought back into estate
  4. Remainder transferred tax free to beneficiary
64
Q

Self Canceling Installment Note (SCIN)

A
  1. No value included in estate
  2. Gain is capital gain
  3. Assets can be depreciated
  4. Interest can be deductible
  5. Higher payout than installment

Appropriate when seller wants a payment stream that will die with them AND may end at an earlier date

65
Q

Partnership/S Corporation
(Intrafamily Transfers)

A
  1. Conduit income
  2. Business entity must be capital sensitive. Not available if service related business
66
Q

Family Limited Partnership (FLP)

A

Gift interests to limited partners to reduce the estate

  1. Qualifies for various variation discounts allowing for a lower gift tax
  2. General partner maintains control
67
Q

Gift leaseback

A

Parent wishes to establish gifting program but lack of money or assets. Gift fully depreciated property then leases the asset back

  1. Payments are business deduction, income to family member.
    - Must have legitimate business purpose for asset, reasonable lease payment and written/enforceable lease
68
Q

Qualified Personal Residence Trust (QPRT)

A

Irrevocable transfer of a personal residence
1. Eliminated from estate at end of term
2. Value of gift discounted
3. Must outlive term or brought back into estate

Makes sense:
- Large residence $1M+ in value
- Reasonable life expectancy
- Continues to live in home
- Large estate $12,920M+

69
Q

Skip Person

A

Related person who is at least two generations younger

Unrelated person who is more than 37.5 years younger

Succeeding generations move up one generation

70
Q

Types of GSTT gifts

A

Direct Skip: Danko Says Don’t
- Donor (transferor) pays GSTT

Taxable Terminations: Talk Tennis with Thomas
- Termination of a “non skip” person’s interest in income or principal with the result the skip person is the only remaining trust beneficiaries
- Trust pays GSTT

Taxable Distributions: Thomas Doesn’t Relent
- Trust has beneficiaries in two or more generations and the trustee makes a distribution to a skip person
- Recipient pays GSTT

71
Q

Income in respect of a decedent (IRD)

A

Income (including cap gains) which a decedent has a right to receive but wasn’t received

Must be included in gross income but deduction for estate and GST taxes paid on income

72
Q

Alternative valuation date

A

Assets valued at alternative date, 6 months after death.

  • Must reduce total value of gross estate
  • Federal tax liability must be reduced
  • Must be applied to ALL properties included in gross estate
  • Cannot be elected for assets that decrease in value with mere passing of time
73
Q

Distributed Net Income (DNI)

A

Limits the amount trust beneficiaries must report as gross income

Purpose:
1. Provide trust with a deduction for the amount distributed
2. Limit the portion of the destruction that is taxable to beneficiaries
3. Ensure no double taxation of trust income. Trust gets deduction, beneficiaries pays tax

74
Q

Noncommunity property interests

A

ONLY long term capital gain property

75
Q

Tenancy by the entirety

A
  • NOT subject to probate
  • CANNOT be disclaimed
  • Not protected from claims of both spouse’s joint creditors
76
Q

Dynasty Trust

A
  • B trust that benefits multiple future generations.
  • Operates under the conduit principle by paying income for several generations
  • Future interest since income vs corpus is paid out
77
Q

Special power of appointment

A

Exercisable only under certain specific conditions or limited period of time

No gift or estate tax

78
Q

Special Use Valuation (2032A)

A

Real estate used for farming or a closely held business
50% of gross estate must consist of real AND personal property
25% of gross estate must consist of real property
$1,310,000 reduction in decedent’s gross estate
Qualified use: 5 out of 8 years before death/10 years after

CFP - AB (6 decks)

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