Post-Mortem Planning (Estate Tax & Income Tax Elections)

Question 1

What is the “applicable exclusion amount”?

Answer 1

The decedent’s basic exclusion plus his/her DSUE (deceased spouse unused exclusion).

Question 2

If gifting during lifetime, after a deceased spouse, what exclusion is used first?

Answer 2

DSUE

Question 3

May a non-resident, non-US citizen’s DSUE be ported to surviving spouse?

Answer 3

No

Question 4

What are the requirements for a QTIP Election?

Answer 4

1. The property must pass from the decedent
2. The surviving spouse must have a qualifying income interest for life
3. An irrevocable QTIP election must be made.

Question 5

What is the DSUE?

Answer 5

deceased spousal unused exclusion amount

Question 6

Who files the 706 and (thereby elects portability)?

Answer 6

The Executor

Question 7

What is the “basic exclusion amount”?

Answer 7

Equal to the federal gift or federal estate exemption in the year of the transfer.

Question 8

What are the rules on filing the 706 to obtain DSUE?

Answer 8

The regulations make it clear that the last return
filed by the due date, including extensions, controls for obtaining DSUE.

Before the due date, the executor can supersede the election made on a prior return. After the due date, the portability election or nonelection, is irrevocable.

Question 9

If no FET is due, how long can wait to file 706, with proper filed extension?

Answer 9

If the value of the gross estate and the amount of adjusted taxable gifts of the first to die is less than the amount required to file an estate tax return under §6018(a), then an extension to file for portability of up to TWO (2) years after the death of the surviving spouse is permitted

Question 10

What details need to be included in a 706 for marital deduction property?

Answer 10

For assets that qualify for a marital or charitable deduction, the return does not have to report the values of such assets, but only the description, ownership and/or beneficiary of the property together with the information to establish the right to the deduction.

Question 11

If a person has multiple deceased spouses, which DSUE applies?

Answer 11

DSUE of the last deceased spouse. Note that spouse HAS to die to have DSUE. Getting remarried does NOT void prior deceased spouse DSUE.

Question 12

What is the Alternate Valuation Election?

Answer 12

2031 says DOD values should be used for FET

However, can elect 2032, alternate valuation election, valuing six after DOD, except if sold, exchanged, or distributed prior to the 6 months, can use those values.

IF elect Alternate Valuation it applies to ALL assets.

1. It’s ONLY allowed if the aggerate estate will be LESS than DOD value; AND
2. Tax will be less. Thus, this election may not be made
   if zero tax was due based upon date of death values.

Question 13

What is the Special Use Valuation?

Answer 13

2032(A)
Value an estate’s real property based on the use of that property rather than its “highest and best use”

Eg. Farming property rather than turning into commercial property.

Question 14

For 2032(A) Special Use Valuation, what is “qualified real property”?

Answer 14

Property may be qualified real property if the following three requirements are met:
- it is located in the United States;
- it “was acquired from or passed from the decedent to a qualified heir of the decedent;” and
[Aquiring by spousal election or a will contest may not qualify]
- it was being used for a qualified use, on the date of the decedent’s death, by the decedent, surviving spouse, lineal descendent of decedent or rented to a family member.

Question 15

What is “qualified use” for 2032(A) Special Use Valuation?

Answer 15

Real property is utilized for a “qualified use” if it is used either as a farm for farming purposes or in a trade or business other than farming.

Question 16

Who is a “qualified heir” for 2032(A) Special Use Valuation?

Answer 16

A person is a “qualified heir” if he or she is a member of the decedent’s family and that person acquired or received property from the decedent.

A person is a “family member” of another individual if he or she is that individual’s ancestor or spouse, lineal descendant, spouse’s lineal descendant, parent’s lineal descendant, or the spouse of any of those lineal descendants.

If a qualified heir transfers the acquired property to a member of his or her own family, then that family member becomes a qualified heir.

Question 17

What type of asset can be used for a 2032(A) Special Use Valuation?

Answer 17

Real estate only

Question 18

What are the time requirements for qualified use both before and after death for 2032(A) Special Use Valuation?

Answer 18

The same qualified use named in the election must be maintained by a qualified heir or a member of his or her family by the decedent, spouse or qualified heir at least 5 out of 8 years BEFORE the death AND maintaining for 10 years after the decedent’s death (or at least until that heir’s death), otherwise additional tax will be imposed.

Question 19

Even if property meets the three (3) requirements above for 2032(A) Special Use Valuation, the real property is only “qualified real property” if it meets what following four (4) additional requirements?

Answer 19

• First, the real property to which the election is to apply must be designated in the agreement that is filed with the estate tax return

-Second, at least 50% of the adjusted value of the gross estate must consist of the adjusted value of any real property AND personal property that was both being used for a qualified use on the decedent’s date of death and was acquired from or passed from the decedent to a qualified heir. In regard to the gross estate, adjusted value means the gross estate’s value (prior to special use valuation) reduced by
amounts allowable as a deduction under Code Section 2053(a)(4) (i.e., unpaid mortgages and debts). In regard to real property, adjusted value means the property’s value (prior to special use valuation) reduced by amounts allowable as a deduction under Code Section 2053(a)(4) as to that property

-Third, at least 25% of the adjusted value of the gross estate must consist of the adjusted value of the real property which both (1) was acquired from or passed
from the decedent to a qualified heir, and (2) meets the fourth requirement;

• Fourth, during the eight years prior to the date of the decedent’s death there must have been periods aggregating at least FIVE years in which

(A) the real property was owned by the decedent, members of his or her family, or a qualified closely
held business, and was used for a qualified use by the decedent or a member of his
or her family, and

(B) “there was material participation by the decedent or a member of the decedent’s family in the operation of the farm or other business

Question 20

What is the standard for material participation?

Answer 20

Must be the person “at risk.”

The decedent or family member may achieve material participation through direct involvement or indirect involvement in the operation of the farm. If the participant works and is actually employed for 35 or more hours per week, or a lesser number of hours on a seasonal basis so long as all necessary functions are performed, then the material participation requirement is met through direct involvement.

Question 21

To get 2032(A) Special Use Valuation, what type of farm renting will work for material participation?

Answer 21

Sharecropping with third party - where the family/owners are at risk - YES

Cash renting to a qualified heir works too.

Cash rent to third party does not work.

Question 22

What is the maximum aggregate decrease in value based on the special use in 2021?

Answer 22

The maximum aggregate decrease in value based on the special use of all real property included in the election, as compared to the fair market value of that property is $1.19 Million in 2021

Question 23

How is special use exclusion partially or totally lost?

Answer 23

The special use exclusion is partially or totally lost if;
(1) within 10 years after the owner’s death, and before the qualified heir’s death, the heir disposes of any interest in the real estate (other than to the heir’s family member), or

(2) within any eight year period over the 10 years after the owner’s death, and before the qualified heir’s death, the heir ceases the qualified use for periods
totaling more than three years

Question 24

What is the QTIP?

Answer 24

Qualified Terminable Interest Property (QTIP”)

It is a special exception which allows “qualifying terminable interest property” to qualify for the marital
deduction even though the decedent is able to direct the ultimate disposition of the QTIP property
upon the surviving spouse’s death

Spouse has to get income for life - that’s it.

Question 25

In contrast to the QTIP, what are techniques that give the spouse MORE but keep the trust interest out of spouse’s estate?

Answer 25

HEMS
5x5 power
Special/limited power of appointment (not a general power of appt)

Question 26

What is the income requirement for a QTIP?

Answer 26

The surviving spouse possesses a “qualifying income interest for life” if the surviving spouse is entitled to ALL of the income from the property or has an interest for life in the property, and no person has a power to appoint any part of the property to any person other than the surviving spouse

Question 27

What is a Reverse QTIP Election?

Answer 27

Code Section 2652(a)(3) provides for an exception to the general rule and allows the personal representative of a decedent transferring property to a QTIP trust for the benefit of his or her spouse to make an election known as a “reverse QTIP election” to treat the property as if the QTIP election had not been made solely for purposes of the GST tax.

The result of this election is to treat the first decedent creating the QTIP trust as the “transferor” for purposes of the GST tax. One potential benefit of the reverse QTIP election is that the GST exemption of the first
decedent spouse will not be wasted.

If this election is NOT made, then when the surviving spouse/beneficiary of a QTIP trust passes away, the value of any property remaining in the trust is subject to the federal estate tax in that surviving spouse’s estate.

Question 28

Does DSUE apply to GST?

Answer 28

No

Question 29

What is a qualified disclaimer?

Answer 29

• it is in a writing signed by the disclaimant (or his or her legal representative);
• it is received by the transferor, the holder of legal title to the property, or the possessor of the property not later than the date which is nine (9) months after
  the later of
  (i) the date on which the transfer creating the interest in such person is made, or
  (ii) the date of which such person attains age twenty-one (21);
• such person has not accepted the interest or any of its benefits; and
• as a result of such refusal, the interest passes without
  any direction on the part of the person making the disclaimer and passes either to
  (i) the spouse of the decedent, or
  (ii) a person other than the disclaimant.

Question 30

What is the 6161 extension of time to pay FET?

Answer 30

Reasonable Cause
You will be paying interest, but no penalty.
Not exceed 12 months .

Such reasonable cause is due to such things as:

1. Liquid assets are not readily available for such assets as annuities, copyrights, royalties, contingent fees or accounts receivables.
2. Substantial assets require litigation to collect.
3. Most assets are illiquid and the executor has made a reasonable effort to convert them.

Question 31

What is the 6151 extension of time to pay FET?

Answer 31

Undue Hardship
Longer than 12 months but no more than 10 years.

“undue hardship” means more than an inconvenience to the estate. The extension to pay is needed to prevent the family from having to go out of business or
to allow time to allow a reasonable sale price rather than at a sacrifice price or in a depressed
market.

Question 32

What is the 6166 extension of time to pay FET?

Answer 32

Only applies to Closely Held Busineses (Doesn’t apply to the other assets reportable to FET)
Up to 15 years.

To take advantage of this tax deferral, the decedent must:

(1) have been a citizen or resident of the United States,
(2) properly make the election,
(3) own an interest in a closely held business included in his or her gross estate, and
(4) own an interest in that business with a value that exceeds 35% of the value of the decedent’s adjusted gross estate.

If meeting all four (4) requirements, the estate can also obtain up to a five (5) year deferral of the initial annual installment via the selection of a payment start date. Also gets special interest rate of at 2%.

Question 33

What is a closely held business for purposes of 6166?

Answer 33

A business may be considered closely held if it is:
(i) a sole proprietorship,
(ii) a partnership having 45 or fewer partners, or a partnership in which the decedent had 20% or more
of the partnership’s capital interest included in his or her gross estate, or
(iii) a corporation having 45 or fewer shareholders, or a corporation in which the decedent had 20% or more of the value of the corporation’s voting stock included in his or her gross estate.

Question 34

What is an Election By Qualifying Revocable Trusts to Treat Trust Income as Part of Estate?

Answer 34

645 Election

“Qualified revocable trusts” may elect to be treated as a part of the decedent’s estate (and not as a separate trust) for all taxable years of the estate ending after the date of the decedent’s death and before the “applicable date”

Benefit is that you get to file the trust return on a fiscal year rather than calendar year, which can buy time with things like an S Corp.

Question 35

What are Distributions In Redemption of Stock To Pay Death Taxes?

Answer 35

The result of Code Section 303’s application is that the redemption is taxed at capital gains rates and not at ordinary income tax rates.

Question 36

What six special types of trusts that can be ‘S’

Corporation shareholders.

Answer 36

There are six special types of trusts that can be ‘S’
Corporation shareholders. The six trusts are as follows: (1) a trust that is wholly owned by ONE United
States citizen or resident;
(2) a trust described in (1) that existed immediately before the death of the owner and “which continues in existence after such death, but only for the 2-year period beginning” on the owner’s death;
(3) a pour-over trust that received stock from the will, but only for the same two year period as previously described;
(4) “a trust created primarily to exercise the voting power of stock transferred to it”
(5) “an electing small business trust” or
(6) a qualified subchapter ‘S’ trust (“QSST”).

Usually use a QSST or ESBT

Question 37

How do you get a Qualified Subchapter ‘S’ Trust?

Answer 37

– There can be only one individual who is the current income beneficiary for each share of stock (i.e., all income is distributed currently), and he or she must be a United States citizen or resident.

— Also, the terms of the trust must require that:
(A) During the life of the current income beneficiary, there will be only one income beneficiary of the trust; (B) Any corpus distributed during the life of the current income beneficiary may be distributed only to that
income beneficiary;
(C) The current income beneficiary’s income interest
in the trust will terminate on the earlier of that income beneficiary’s death or the termination of the trust; and (D) Upon termination of the trust during the life of the current income beneficiary, the trust will distribute all of its assets to that income beneficiary.

– An election must be made

Question 38

What is the 65-day election for fiduciary income tax returns?

Answer 38

This election is a fiduciary income tax election under which the personal representative or trustee may elect to have any distribution (paid or credited), from the estate or trust, made within the first 65 days after the close of a taxable year treated as if they were paid on the last day of, and thus within, the prior taxable year for all purposes.