Intro and Taxes Flashcards
What is the definition of FMV?
Not what they paid for it.
FMV = What would a willing buyer and a willing seller negotiate as a cash price if neither were under an obligation to buy or sell?
Many clients look to their last tax statement.
What generally makes up the client’s estate?
- Personal use assets
- Checking, savings, and investment accounts:
- Passive Investments
- Active businesses
- Retirement plans
- Life insurance plans
What taxes should you focus on?
US Federal Estate Tax
Income tax (401K specifically)
Generation Skipping transfer tax
NOT inheritance tax (not in TX and no federal)
Read Spendthrift trust statute:
(a) A settlor may provide in the terms of the trust that the interest of a beneficiary in the income or in the principal or in both may not be voluntarily or involuntarily transferred before payment or delivery of the interest to the beneficiary by the trustee.
(b) A declaration in a trust instrument that the interest of a beneficiary shall be held subject to a “spendthrift trust” is sufficient to restrain voluntary or involuntary alienation of the interest by a beneficiary to the maximum extent permitted by this subtitle.
(c) A trust containing terms authorized under Subsection (a) or (b) of this section may be referred to as a spendthrift trust.
(d) If the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of the settlor’s beneficial interest does not prevent the settlor’s creditors from satisfying claims from the settlor’s interest in the trust estate. A settlor is not considered a beneficiary of a trust solely because:
(1) a trustee who is not the settlor is authorized under the trust instrument to pay or reimburse the settlor for, or pay directly to the taxing authorities, any tax on trust income or principal that is payable by the settlor under the law imposing the tax; or
(2) the settlor’s interest in the trust was created by the exercise of a power of appointment by a third party.
What is a self-settled trust?
When a settlor wants to create a trust for the benefit of themselves. Risky because the settlor’s creditors can often attach.
Some states (Not TX) allow self-settled trusts.
Liability of property during marriage: what questions to ask?
Whose debt is it (the husband’s, the wife’s, or both?)
When was the debt incurred (before of during the marriage?)
What kind of debt is it (Tort of contract?)
Is it some kind of special debt: (Where one incurred but both are responsible)
Special debt 1: One spouse incurred, but acting as the agent of the other? (Vicarious liability, not created automatically by marriage, but can be jointly liable for a joint venture!)
Special Debt 2: Debt incurred was a debt for a necessity (food, clothing, shelter, medical, support of minor children) Both spouses are responsible for necessity debts.
What is the unified transfer tax formula? (i.e. before death gift tax, after death estate tax)
Gross estate
- Deductions
=Taxable Estate
+ Post-1976 taxable gifts
=Tentative Tax Base
What makes up the gross estate?
- Probate estate:
a. Real property
b. Stocks & bonds
c. Mortgages, notes, and cash
d. Misc. property. - Non-probate:
a. Insurance
b. JTWROS
c. Multiple party accounts
d. Annuities - General Powers of Appointment
- Special Lifetime transfers: Property that has already been given away but is included in the gross estate anyway.
a. 3 year rule
b. Retained life estate
c. Effective at death
d. revocable - QTIP Property: Qualified Terminable Interest Property = property in which the decedent had a life estate. Full value of the life estate is included in the estate!
Remember, if married only decedents 1/2 interest in community property is included in the gross estate!
What can be deducted from the gross estate in the transfer tax formula?
- Ordinary:
a. Funeral
b. Administrative expenses
c. Debts and mortgages - Special:
a. Marital Deduction
b. Charitable Deduction
Both are based on to whom the property passes, spouse or charity. Both are unlimited amounts! Dollar for dollar deductions (so if billionaire leaves everything to charity, $0 taxable estate!)
What are post 76 taxable gifts?
Inter vivos gifts in excess of the annual exclusion and which are not included in the gross estate as special lifetime transfers.
What is the tentative tax base?
The amount on which the tentative tax is computed; the net tax owing is the tentative tax reduced by certain credits (most notably the unified credit that translates into the applicable exclusion amount; other credits include the credit ofr tax on prior transfers.
Gift definition:
lifetime transfers for less than full and adequate consideration (donative intent is not required). If the transfer is for consideration, possible income tax consequences (part gift and part sale, if sold below FMV, part gift)
Value of a gift:
is generally the FMV of the gift at the time of the transfer, less any consideration received. Focus on FMV! Then ask whether it was sold below FMV and whether part was a gift.
Spousal splitting of gifts:
If spouses elect to “split” one spouse’s gift, they incur joint and several liability:
Out of fairness, couples in common law states can elect to split the gift on their return 50/50.
In community property states, already 50/50 if community property. If separate property, then they can agree to split!
A gift must be completed to be included. What does completed mean?
Revocable trusts are incomplete gifts. Rev trusts have no tax consequences. Settlor is taxed on all the income during his life because he still has constructive ownership, so revocable trusts are gift tax neutral.
But if your parent lends you cash and you don’t pay it back → that is a gift. Or if the loan without interest → income and gift consequences.
What are the nontaxable gifts?
Annual exclusion
Tuition and Medical Expenses
Marital Transfers
Charitable Transfers
Rules of Annual Exclusions as nontaxable gifts
Currently $17,000 per donor, per donee, per year.
No relationship between the donor and donee required. (could be total strangers but why would they be)
Gift of a present interest is usually required (this is why we use Crummey Trust)
Gifts in trust usually don’t qualify (but see Downstream planning later) (see Crummey Trust)
Spouses may be able to elect to “split” one spouse’s gift and transfer $34,000 per donee.
Rules of tuition and med expenses as nontaxable gifts
Unlimited exclusion
Must be paid directly to the provider (school/hospital) not the donee
No requirement of relationship between donor and donee.
Rules for marital transfers as non taxable gifts
Assume a valid marriage in this class.
Unlimited martial deduction (a billionaire could give a billion dollars to his spouse and would have no gift tax consequences)
Spouse must be qualified: the recipient spouse must be a US citizen.
The transfer must be in a proper form.
A transfer in trust generally doesn’t qualify BUT:
If the recipient spouse is not a US citizen, then you must use a QDOT (qualified domestic trust)
Other than a QDOT, generally a gift in trust will not qualify for the marital deduction (but more trusts later)
Rules for charitable transfers as nontaxable gifts
Unlimited charitable deduction.
The charity must be qualified: Different requirements than for income tax, but more charities that qualify for income tax qualify for gift tax exclusion.
The transfer must be in a proper form.
When there are split interset transfers (child given a life estate then to Baylor), only the charity’s interset is excluded.
Definition of a taxable gift:
“Taxable gift” is generally the net value of the gift less exclusions and deduction.
Very few gifts trigger taxes because of the 13 million exemption. Want to give away as much property without triggering the gift tax.
After the exemption is used, gift tax payable at a flat 40% rate (like estate tax)
In a community property state, what value is included in the gross estate?
Only the decedents ½ interest of community property is included in the gross estate!
Example: Husband makes a gift to kids of a prior marriage. Gave away all of blackacre. How much of a gift did he give for tax purposes? Wife owned a ½ interset, so only 50% of the value. Gift of 50% is included in the gross estate.
Estate tax –> gross estate –> probate estate –> rules for value of TIC
The value of the TIC included in the gross estate for estate tax purposes is the decedent’s undivided 1/x interest in that property.
Estate tax –> gross estate –> non-probate estate –> rules for value of JTROS
The value of the JTROS included in the gross estate for estate tax purposes depends on if the JTs are married.
If spouses: only 50% of the value is included in the gross estate.
If not spouses: rebuttable presumption that 100% is included. Can be rebutted based on how they acquired their interest.
Example: A&B JTROS and not married. A bought 100% of the land and then adds B with ROS. If B dies first, then there is a rebuttable presumption that 100% is included. But if A dies first, that presumption would stand.
Estate tax –> gross estate –> probate estate –> rules for value of life estates generally
Generally, the value of a life estate is not included in the gross estate because it automatically terminates on death. (BUT exception: QTIP life estates and retained life estates)
Estate tax –> gross estate –> probate estate –> rules for value of vested remainders
The value of a vested remainder is included in their gross estate because remainders are inheritable.
How do you value a remainder interest? actual value of the remainder interest so looking at the age of the life tenant. The government gives actuarial tables. The younger the life tenant, the less the value of the remainder is.
Estate tax –> gross estate –> probate estate –> rules for value of contingent remainders
The value of a contingent remainder: nothing is included in the gross estate because the condition was not met (survivorship)
