Final

Question 1

Gross Estate - Definition

Answer 1

The value of the gross estate of the decedent shall be determined by including, at the time of his death, all property, real or personal, tangible or intangible, wherever situated.

Question 2

Valuation - Generally

Answer 2

Estate value is comprised of all property at “moment of death;” this will be the “fair market value” (what a willing buyer would pay a willing seller with no reservations).

Question 3

Valuation - Stocks

Answer 3

Fair market value of stocks is calculated as the mean between the highest and lowest quoted selling prices on the date of death.

Question 4

Transfers

Answer 4

Includes property passing by intestacy and by operation of law:

1. Wills: included in the gross estate
2. Operation of Law: Includable in the gross estate to the extent of the ownership interest of the decedent.
3. Revocable Trusts: The value of all decedent’s property held in a revocable trust is includable in the gross estate.
4. Life Estates: Decedent’s interest is extinguished at death. If the life estate was created by someone other than the decedent, its value is not included in the gross estate.

Question 5

Simplified Estate Tax Formula

Answer 5

Gross Estate: FMV of decedent’s property

• Deductions (Expenses, debt, taxes, losses, charitable gifts, marital deduction)
• Unused exclusion amount (equal to the year of death exclusion amount minus accumulated taxable gifts

= Net taxable estate

Multiply the net taxable estate by 40%

= Net estate tax due

Question 6

Simplified Gift Tax Formula

Answer 6

Gifts subject to tax made during the calendar year at FMV

• Deductions (marital and charitable)
• Annual exclusion

= Taxable gifts for the year

• Unused exclusion amount (equal to the year of gift exclusion amount minus prior years’ accumulated taxable gifts.

= Net taxable gifts

Multiply the net taxable gifts by 40%

Question 7

Generation Skipping Tax - Generally

Answer 7

GST discourages generation skipping transfers by applying the highest applicable rate at the time of the transfer.

Gift tax will be imposed on the GST paid for inter-vivos transfers.

Question 8

Generation Skipping Tax - Exceptions

Answer 8

1. Skipped Generation: if donee’s parents are deceased, there is no GST because there is no person alive that is being skipped.
2. Life Tenant with General Power of Appointment: No GST because the property will be included in the life tenant’s gross estate anyway.
3. Other Relatives: Leaving property to a niece/nephew is not considered a “skip,” but leaving it to a grand niece/nephew is considered a “skip”.
4. Non-Relatives: If decedent leaves the estate to a non-spouse or non-relative who is more than 37.5 years younger, GST applies.

Question 9

Gross Estate - Alternative Valuation Date

Answer 9

The estate representative can select a date which is six months after the date of the decedent’s death to value the property in the gross estate if it results in a decrease of the gross estate and the estate tax liability.

Question 10

Co-ownership of Property: Tenancy in Common/Community Property

Answer 10

The amount included in the decedent’s estate is the percentage of ownership of the property which the decedent held.

Question 11

Co-ownership of Property: Joint Tenancy

Answer 11

When a joint tenant dies, the entire value of the property is generally included in the gross estate.

No valuation discounting is available for joint tenancy property.

Question 12

Co-ownership of Property: Joint Tenancy Exceptions

Answer 12

1. Contribution: If the executor can prove that the surviving joint tenant made a monetary contribution to the acquisition or improvement of the property, that proportionate share will be deducted from the gross estate.
2. Gift: If both of the joint tenancy interests were acquired by gift, the proportionate ownership interest is included in the gross estate.
3. Spouses: If spouses own property as joint tenants with right of survivorship, only one-half is includable in the gross estate of the first joint tenant to die. Contributions to the purchase and maintenance of the property are irrelevant for spouses.

Question 13

Income Tax Basis to Survivor: Tenants in Common

Answer 13

Surviving co-tenant gets a “step-up” in basis to its date of death value of only the interest acquired at death.

Question 14

Income Tax Basis to Survivor: Joint Tenant Spouses

Answer 14

Surviving co-tenant spouse gets a step up in basis on only one-half of property.

Question 15

Income Tax Basis to Survivor: Non-Spouse Joint Tenants

Answer 15

Surviving joint tenant who did not contribute to the consideration paid for acquisition or improvement of the property gets a full step up.

If the survivor furnished part of the consideration, only that proportionate share of the property contributed by the decedent joint tenant would be stepped up in value.

Question 16

Income Tax Basis to Survivor: Community Property

Answer 16

The basis to the surviving spouse is equal to the value of the entire property at the death of the first spouse. Holding record title as community property or executing a transmutation agreement will allow a double step up, thus saving income tax.

Question 17

Transfer with Retained Life Estate - Generally

Answer 17

If the life estate was held by the creator of the life estate, the property is included in full in the gross estate when they die.

Question 18

Transfer with Retained Life Estate - Retained Rights

Answer 18

If the creator of the power retains the right to the income from the property or the right to affect the enjoyment of the property, it will be included as if it were a retained life estate.

Question 19

Transfers Taking Effect at Death - Taker Survival

Answer 19

Requires inclusion in the estate of the creator of a gift if:

1. The instrument requires the taker to survive the creator of the power, and
2. The reversionary interest retained must be worth more than five percent in value at the time of the creator’s death.

E.g. If the possibility of getting the property back is greater than five percent (on a present value basis), then the full value of the property will be included in the creator’s estate.

Question 20

Revocable Transfers - Generally

Answer 20

If a person creates a trust in which they retain the power to revoke or amend, they are treated as an outright owner of the trust. The entire value of the trust must be included in the grantor’s gross estate.

Question 21

Powers of Appointment - Generally

Answer 21

A right given by a grantor to someone else to determine who will receive property.

Question 22

Powers of Appointment - General vs. Special Powers of Appointment

Answer 22

General: The open-ended ability to leave the property to whomever one wishes is tantamount to full ownership.

 •   The full value of the trust property must be included in the gross estate of the holder of the right. 

Special: A limited power. Limits the group of persons to whom the property can be left, e.g. children of holder of the power.

•   The trust property is not included in the estate of the holder of the right.

Question 23

Life Insurance - Generally

Answer 23

The proceeds of a life insurance policy are includable in the gross estate of the insured in any of the following three situations:

1. The proceeds are received by the estate of the insured.
2. The proceeds are received by another, such as a creditor, for the benefit of the insured.
3. The decedent held any incident of ownership with respect to the policy.

The owner of a life insurance policy is the person who holds the contractual rights under the policy.

In community property jurisdictions, a spouse’s life insurance is deemed to be owned 50% by each spouse in the absence of an agreement to the contrary.

Question 24

Life Insurance - Incidents of Ownership

Answer 24

Powers such as the right to change beneficiaries, borrow against a cash value policy, and similar contractual rights.

If the insured held any incident of ownership, the policy proceeds must be included in the insured’s gross estate.

If the insured did not hold any incidents of ownership, and the proceeds were payable to a named beneficiary, none of the proceeds are includable in the decedent’s gross estate.

Question 25

Life Insurance - Irrevocable Life Insurance Trust

Answer 25

An effective device to avoid inclusion in the insured’s gross estate. The insured nor his spouse should be the trustee.

Question 26

Three Year Rule - Generally

Answer 26

Regardless of when the property was transferred, it is not includable in the gross estate, unless one of four exceptions applies:

1. Termination of a retained life estate
2. Termination of a transfer taking effect at death
3. Termination of a revocable transfer
4. Transfer of ownership of life insurance policy

Question 27

Three Year Rule - Gift Tax

Answer 27

Gift tax attributable to any taxable gifts which was paid by the decedent within three years of death is includable in the gross estate.

Question 28

Gross Estate Deductions under §2053

Answer 28

Qualifying deductions under §2053 include:

1. Funeral expenses
2. Administration expenses
3. Claims against the estate

Question 29

Non-bona Fide Claim

Answer 29

Intended to prevent claims which are not supported by adequate and full consideration in money or money’s worth from being used to escape estate tax.

Question 30

Claims Against the Estate - Amount Considerations

Answer 30

Any disputed claim against the estate over $500,000 cannot be deducted until actually paid.

Disputed aggregate claims not over $500,000 may be deducted prior to actual payment.

Question 31

Charitable Bequests - Bequest of a Full Interest in Property

Answer 31

If decedent leaves all or some portion of their estate to charity with no private party also having an interest, the portion of the bequest to a qualifying charity would be fully deductible.

Question 32

Charitable Bequests - Qualifying Charity

Answer 32

Non-profit organizations operated exclusively for religious, charitable, scientific, literary, or educational purposes.

Question 33

Charitable Bequests - Split-Interest Gifts

Answer 33

No deduction of a remainder or similar partial interest is allowed unless the bequest qualifies as a charitable remainder annuity trust, unitrust, or pooled income fund.

Question 34

Charitable Remainder Annuity Trust (“CRAT”)

Answer 34

Trust which is required to pay between 5%-50% of the fair market value of the trust assets.

The value of the charitable remainder must be at least 10% of the trust’s initial value.

A CRAT must pay the stated percentage to the income beneficiary even if corpus has to be invaded.

Question 35

Charitable Remainder Unitrust (“CRUT”)

Answer 35

Same as a CRAT, except the stated percentage is based on the fluctuating value of the trust assets.

Unlike a CRAT, a CRUT pays the lesser of:
• The stated percentage of the trust assets, or
• The trust’s actual net income

No invasion of corpus is permitted.

Question 36

Marital Deduction - Generally

Answer 36

A spouse can leave his or her entire estate to the surviving spouse with no tax liability, because a husband and wife are treated as one for tax purposes.

The property interest can pass to the surviving spouse by will, intestacy, or by operation of law.

Question 37

Terminable Interest Rule - Generally

Answer 37

If the interest that the surviving spouse has is a terminable interest, the marital deduction generally will not apply.

Must be property that will be included in the surviving spouse’s gross estate.

If the deduction were allowed, the tax might be avoided at the deaths of both spouses, e.g. to wife for life, remainder to children.

Question 38

Terminable Interest Rule - Simultaneous Death Rule

Answer 38

Gives an estate planner the ability to allow a decedent to require that the surviving spouse must survive for six months (or less) after decedent’s death to be able to take the property bequest. If the period exceeds six months, the terminable interest rule applies.

Question 39

Terminable Interest Rule - Life Estate with General Power of Appointment

Answer 39

Surviving spouse is given a life estate of all the income with a general power of appointment.

Question 40

Terminable Interest Rule - Qualified Terminable Interest Property (QTIP)

Answer 40

Gives the estate planner the ability to satisfy the decedent’s desire to give the surviving spouse a right to all of the income from property for life with the remainder locked in to his children.

Applies to separate and decedent’s share of community property.

If the surviving spouse has a terminable interest and the remainder goes to someone else, the administrator can make a QTIP election to have the property qualify for the marital deduction. The surviving spouse’s estate must include that property in full in her estate.

Question 41

Terminable Interest Rule - QTIP Requirements

Answer 41

Income: The surviving spouse must be entitled to all of the income for his/her life from the property payable at least once annually.

Power of Appointment: No person can have a power to appoint the property to anyone other than the surviving spouse during his/her lifetime. The interest of the surviving spouse cannot be taken away by someone else, but the interest that would pass at the surviving spouse’s death can go to someone else. The surviving spouse can be given a special power of appointment over the remainder. if a general power of appointment over the remainder is given which satisfies §2056(b)(5), QTIP is inapplicable and the property qualifies for the marital deduction.

Question 42

Surviving Spouse Not a U.S. Citizen

Answer 42

The marital deduction generally shall not apply if the surviving spouse is not a U.S. citizen. Rational for the rule is that the non-citizen spouse might take the moveable assets out of the country and avoid U.S. estate tax at her death.

Question 43

Surviving Spouse Not a U.S. Citizen - Qualified Domestic Trust Exception

Answer 43

The marital deduction will apply to a non-citizen spouse if these three requirements are met:

1. One U.S. Trustee: The trust instrument requires that at least one trustee is a U.S. citizen (or domestic corporation)
2. Trustee Withholds: No distribution of principal of the trust can be made unless the U.S. citizen trustee is required to withhold U.S. estate tax and satisfy treasury regulations.
3. Trustee Election: The executor must agree to satisfy the above requirements.

Question 44

No or Low Interest Loans - Generally

Answer 44

Any loan made by a lender with no or a below market rate of interest may result in severe gift and income tax consequences under §7872.

Question 45

No or Low Interest Loans - Consequences

Answer 45

1. There is not a gift of the loan proceeds, provided the borrower is expected to pay back the loan principle.
2. There is an annual gift with resulting gift tax on the amount of foregone interest.
3. There is imputed interest income to the lender with resulting income tax due on the amount of foregone interest.

Question 46

No or Low Interest Loans - Exemptions

Answer 46

1. No gift tax or income tax to the lender, if the loan in the aggregate to any borrower is $10,000 or less.
2. No imputed interest income to the lender, if the net investment income of the borrower is $1,000 or less and the total loan is $100,000 or less.

Question 47

Gift Tax Annual Exclusion - Generally

Answer 47

$14,000 per donee per year.

Question 48

Gift Tax Annual Exclusion - Present Interest Requirement

Answer 48

The gift to the donee must be the gift of a present interest. If it is a gift of a future interest, the exclusion does not apply.

Question 49

Gift Tax Annual Exclusion - Minor’s Trust

Answer 49

A future interest held by a minor will qualify for the annual exclusion if these three requirements are met:

1. Spending allowed: the trust must provide that both the income and principal may be expended before age 21 for the benefit of the minor beneficiary.
2. Passes outright: When the minor reached age 21, the entire trust property must pass outright to the minor.
3. Power of appointment/payment to minor’s estate: One of the following must be provided:
   a. Appointment: the minor must be given the right under the trust to appoint the property to whomever the minor desires, or
   b. Payable to estate: trust assets payable to the minor’s estate if the minor dies.

Question 50

Gift Tax - Trustee Income Accumulation

Answer 50

If a trustee has the power to accumulate income, rather than pay it out in full to the current beneficiaries, it is a future interest.

Question 51

Gift Tax - “Crummy” Withdrawal Rights

Answer 51

A trust can be established under which income accumulates and still qualify for the annual exclusion if the beneficiary is given a withdrawal right.

Sufficient notice and reasonable time to exercise withdrawal power must be given to the holder of power.

Annual exclusion will be denied whenever there is a prearranged understanding that the power will not be exercised, or when the exercise of power would result in adverse consequences to the donee.

Question 52

Gift Splitting by a Married Couple

Answer 52

If there is community (or jointly held) property that is given to a donee, the gift will be split anyway, because it is deemed to be coming one half from each spouse.

If the property which is given to the donee is separate property, consenting spouses can treat the gift as if it were made one-half by each, even though one legally owned the entire interest.

Question 53

Educational and Medical Expenses

Answer 53

A donor may pay educational or medical expenses of the donee without having the gift deemed a taxable event.

The expenses must be paid directly to the educational/medical institution.

Question 54

Grantor Retained Annuity Trust and Grantor Retained Unitrust - Generally

Answer 54

Unless a grantor’s retained right to income qualifies as a GRAT or GRUT, the retained interest will have a gift tax value of zero.

If it does not qualify, the entire value of the property transferred will be subject to gift tax.

A qualified retained interest is an annuity which is payable at a fixed amount or fixed percentage of the property in trust.

Question 55

Estate Plan Benefits - Clients Who Won’t Exceed Exclusion Amount

Answer 55

1. Double step up via transmutation of all property into community property. Can use the portability election, plus the marital deduction/QTIP options.
2. Avoid Probate
3. Lock In Feature: The revocable living trust can ensure that the assets are going to go to the beneficiaries the client wants
4. Hold Back Feature: Keeps the property held back from the beneficiaries until they reach an age at which the beneficiaries can be fully trusted with having full control over the assets.
5. Avoid Change of Ownership: Prop. 13 allows for significant savings on property taxes as long as there is no change of ownership. The trust can provide that the deed goes directly to the children/beneficiaries.
6. Spendthrift Clause: While in a revocable living trust, the assets of the trust are not protected from creditors
   However, once the first spouse dies, the half that goes into an irrevocable trust would be protected from creditors.

Question 56

Basic Estate Plan for Married Couple

Answer 56

1. Transmutation of property into community property
2. Revocable Living Trust: Can contain language giving a trustee control in the even that one or both of the spouses become incapacitated.
3. Unused Exclusion Amount: The executor can make an estate tax return election to allow the surviving spouse to take into account the unused estate tax exclusion amount when the second spouse dies.

Question 57

Revocable Living Trust - Death of First Spouse

Answer 57

Trust will normally provide that a trust, Trust A, will come into existence, which will consist of the surviving spouse’s community property share. The surviving spouse has entire freedom and control over the Trust A assets.

Question 58

Revocable Living Trust - Trust A, Trust B, and Trust C

Answer 58

If the total community property estate exceeds the combined exemption amounts, Trust A will get one-half of the total estate, and Trust B will get up to the unused exemption amount. Any remainder would go into Trust C.

Trust A: Consists of the surviving spouse’s community share.

Trust B: This is the bypass trust which consists of an amount of property up to the current exemption amount, sufficient to cause there to be no federal estate tax at the death of the first spouse. It normally provides income for life to the wife with the remainder to the children. No QTIP election would be made, such that the corpus will be excluded from the survivor’s estate.

Trust C: The marital deduction trust, or QTIP Election Trust

Question 59

Gifts of Appreciating Property

Answer 59

1. Clients that are not going to exceed the lifetime exclusion amount: Should discourage gifts of appreciating property because the beneficiaries wouldn’t get the step up in basis at the time of death. Cash gifts are ok.
2. Clients that are going to exceed the lifetime exclusion amount: Gifts of appreciating property are ok because the appreciation amount is kept out of the estate, which saves 40% tax on the appreciated value. The beneficiaries won’t get a basis step up, but the tax savings may be a greater benefit.

Question 60

Estate Plan Benefits - Clients Who Will Exceed Exclusion Amount

Answer 60

1. All of the benefits for clients that aren’t going to exceed the allowance amount above apply to all clients, except for the tactics regarding discouraging gifts of appreciating property.
2. Discount on gifts given for minority stake in corporate entities. 40% discount is a fairly average rate. The discount is calculated by taking all relevant factors into account - the number of other owners, the percentage being transferred, the amount that the transferees might already own, the class of property being transferred, etc.
3. Buy life insurance and not be owner of the policy. Name child as the owner. ILIT (Irrevocable Life Insurance Trust)
4. Charitable donations
5. GST Bypass Trust: Establish a trust in a state that doesn’t have rules against perpetuities. This allows the money to avoid estate tax in future generations. No matter how much the property appreciates, the trust would never be subject to estate tax.

Question 61

Gift Giving with Valuation Discount

Answer 61

When an interest in an entity is gifted, the amount should be stated as a percentage interest in the entity, which as of the date gifted is equal to a gift with a FMV of $14,000.

If the interest conveyed is later determined to have a FMV that exceeds $14,000 for the year, the interest in the entity is to be adjusted so that the gift is limited to a value of $14,000.

Doti’s Steps:
1. Set up a limited liability company, and prepare an operating agreement for the LLC

2. Transfer legal title of the entity to the LLC
3. Assign a gift of a percentage membership interest for each child
4. Create a buy-sell agreement so that neither child can sell or transfer their interest without offering it to mom/dad first (a right of first refusal).

Question 62

Why Make an Inter-vivos Gift?

Answer 62

1. $14,000 tax free allowance: Per donor, per donee, per year
2. Appreciation is out of the estate
   • But, no basis step up
3. Discount for a gift of an interest in an entity
4. Reduce income taxes
   • Parents might enter a lower income tax bracket