Section 8: Estate and Wealth Transfer Flashcards
Qualifying strategies to gift to minors using annual exclusion
529 plan
2503(B)
2503(C) -age 21
UGMA & UTMA to age 26
What is a future interest?
Donee must wait to use the gift- “remainder interest”
Income can be accumulated for later distribution
non-income producing property work well here
Sprinkle or spray provision
What are the best type of property to keep? (not gift)
-Appreciated property that will be sold after death
-property that would result in a loss if sold- sell property and claim loss
-Depreciating income property
Best types of property to gift
Property appreciating w/ L-T appreciation value
Property w/ low gift tax value and potentially high estate tax value
Income producing property when moved to lower bracket
Appreciated property that will be sold if donee is in low tax bracket
GST Tax Annual Exclusion
Direct present interest only gifts for up to annual exclusion amount
Transfer to trust with one skip person
e.g. no multiple skip person trusts or sprinkle or spray provisions
What is a qualified disclaimer?
Satisfied statutory code in the internal revenue code
Refusal to accept assets- disclaimed property transfers to another recipient or trust
Must be made in writing w/ in 9 months- can’t accept any interest in the disclaimed property- can be at death or intervivos
When could the marital deduction not be available?
Spouse gets limited POA over property or spouse receives (TIP) terminal interest property
QTIP trust is an exception
Revocable Trust Vs Irrevocable considering estate inclusion
Revocable- always included
Irrevocable- no included unless ability is retained to distribute income or principle, accumulate trust income, change genes, use trust assets to discharge legal obligations
What is the 5 & 5 power?
Bene can w/d with out any approval $5,000 or 5% of corpus each year
Fail safe if trustee is not generous
If not exercised in that year the 5% or $5k is part of your gross estate
What is the AVD?
Alternate Valuation Date
6 months after debt- regarding taxable estate only- elected by the estate
e.g. 2022 good year to use since market went down
What are the power of attorney options?
Non-durable- ceases at principal’s incapacity
Durable POA- agent can act before and after incapacitation
Springing durable POA- an agent can act only when incompetency is declared- often requires to doctors to attest
What is a cohabitation agreement?
When marriage is not an option, it provides a similar function to a prenuptial agreement
Addresses:
treatment of income, property brought to relationship and debts, how different debts should be handled during the relationship, how expenses are shared, property division if relationship ends, arbitration agreement
What is a marital share or “A trust”?
Trust is established for spouse, takes advantage of the unlimited marital deduction, included in gross estate of surviving spouse at death
What is a credit shelter trust or “B trust”?
Trust is established for a spouse
Designed to preserve and maximize gift tax exemption- when spouse dies it passes directly to the surviving spouse exempt from gift and estate taxes, when surviving spouse dies, trust not included in their estate
What is a Grantor Retained Income Trust?
This was a popular strategy pre-1990
Now typically used for R/E and artwork
bene can be non-family- use for period of years then transfer- gift gets discounted for future value- no annual exclusion since it is a future interest gift, all growth passes tax free between initial funding and end of term
What are some community property estate related considerations?
1/2 of all CP assets included in spouses gross estate
Marital deduction available to offset the decedents estate tax if property bequeathed to surviving spouse
Entire value of property gets stepped up basis - this is different then Non-community property states where they get 1/2 step up in basis
What are the “powers of appointment” types?
General Powers, special or limited powers, 5-5 powers (often used in crummy trusts)
Who has legal ownership of assets in a trust?
Trustee
Even when not the beneficiary- rationale is the fiduciary duty
Trustee is most accurate although grantors and settlors can be the trustee
Which trust could be used as an estate freezing strategy?
Grantor Retained Annuity Trust- GRAT
Optimal for transferring assets with high potential for appreciation and when interest rates are low
What are the advantages of a revocable living trusts?
-reduces cost and time delays by avoiding probate
-maintains confidentiality by avoiding public filing
-provides for management of grantors assets upon disablity
What is a QPRT?
qualified personal residence trust
Transfer a tax payers home out of an estate- retains right to live in it rent free for a period of time and pay normal expenses, then rents from the trust, freezes the valuation- rent free period reduces valuation, grantor pays rent- remainderman pay the income taxes
What are the grantor retained trust options?
GRAT- grantor retained annuity trust
GRIT- grantor retained income trust
GRUT- grantor retained unitrust (least common and least efficient in reducing estate)
*if grantor fails to outlive the terms of the trust it is pulled back into the estate
What is a skip person?
Two or more generations below- can be a skip person trust- can also be imposed via disclaimer
What is the Predeceased parent rule?
If parents pre-decease then all lineal decendents move up one generation for GST purposes
How are unrelated persons handled as it relates to GST tax transfer purposes?
Unrelated person within 12.5 years of age are considered the same generation, the succeeding generations go in 25 year increments
What is the annual exclusion for a non-US spouse?
2018- $152k
Better option is gift annually as opposed to QDOT- best option is to become a US citizen to get full unlimited marital deduction
What is a QDOT?
qualified domestic trust
Used if surviving spouse is not a US citizen
Meets requirements for estate tax marital deduction for transfers made to the trust
QDOT requirements: trustee must be US citizen or bank or trust w/ US presence, non-US citizen must get all income for life, trustee has right to with-hold all taxes related to income and estate, executor must elect QTIPq
What are the Terminable Interest Property exceptions?
-spouse must live 6 months
-life insurance proceeds or annuity payments to surviving spouse w/ general POA over payments
-testamentary charitable remainder trust that pays surviving spouse income for life
Does the general power of appointment qualify for the marital deduction?
Yes- since it allows for unrestricted access to the property including creditors
What is required to satisfy the QTIP election?
-Property passes directly to the spouse
-Receives qualified income interest for life
-decedents executor makes irrevocable election on estate tax return
-Qualified income: spouse must be entitled to all income, distributed at least annually (no accumulation), spouse is only bene, remaining property will be included in spouses gross estate
What is an intentionally defective grantor trust?
If you own assets expected to appreciate significantly e.g. new biz venture or property down in value- this amplifies potential to pass growth in a tax efficient manner
Fund w/ approx 10% of value of the trust, take back an interest bearing note
What is a SLAT?
Spousal lifetime access trust- dynasty type trust
Should be funded with separate property (not community property)
Can be designed as a SLAT with dynasty features so spouse has access while accomplishing GST objectives- Delaware has favorable laws for this
What are the incidents of ownership?
Right to…
change or name beneficiary, cash value, receive dividends, borrow or make w/d, pledge as collateral, right to dispose any of these
If any of these rights are retained, can pull D/B back into gross estate
What is the three year rule regarding life insurance?
If owner transfers policy to a new owner and insured dies within three years the d/b must be included in the insured’s gross estate- does not apply if owner is not the insured
Code section 2035
Life Insurance valuation by type of policy
- Single premium: value of new issue charge for a comparable policy
- Whole life: interpolated terminal reserve plus any unearned premiums if surrender value is greater- use that number
- Term- unused premium
- New policy bought for another person- value is gross premium paid by the owner
What is a trust protector?
not a required third party but sometimes used, aka special trustee or trust advisor- named to provide greater flexibility for carrying out trust provisions in the future- can adapt trust based on circumstances changing- can terminate trust, reduce or accelerate distributions to bene, name additional beneficiary, change trust based on tax law changes, etc
What is the contribution rule regarding estate tax?
Entire FMV of property will be included in first decedents estate unless proved surviving owner contributed to purchase of asset, only applies to non-spouses, amount included in estate is determined by proportional contribution- surviving owner receives step up on basis on decedent’s share
What should be considered if converting property from being owned individually to JTWROS?
-all income is deemed equal- if otherwise split unequal gift is considered made, annual exclusion applies
-in converted, purchaser has made taxable gift minus annual exclusion
-if original owner continues to pay all expenses, that is deemed a gift
Family Limited Partnership considerations
- can achieve approx. 40% estate valuation discount
-if not needed i.e. estate is bellow the estate tax exclusion, it can cause a STEP DOWN in basis
-Can be cumbersome for tax purposes- not really necessary if estate is below $15m
How are income taxes handled on an inhereted IRA if the decedent’s estate paid taxes?
e.g. estate was valued higher then the estate tax credit
any estate taxes paid at death can be deductible and attributable 1st to inherited IRA- applicable to taxable estates only
What is a section 2701 preferred stock recapitalization?
Estate freezing technique
Owner recapitalizes business- goal is to transfer portion of business to children- creates voting preferred and common stock
Common shares can be gifted to children- preferred shares pay qualified dividends- gift reduced by annual exclusion- recapitalizing freezes value on par for preferred shares
What is the NIIT threshold?
net investment income tax
single - $200k
Joint- $250k
When gifting/planning consider impact of NIIT on both donee and bene
What is a simple trust?
A conduit that passes all income to beneficiary
Seperate tax entity that does not pay taxes
$300 personal exemption
What is a complex trust?
Separate tax entity that pays taxes on retained income
$100 personal exemption
Deductions allowed on distributions
How are irrevocable trusts taxed?
Progressive/compressed tax brackets
Trusts are aggregated so multiple trusts will not save taxes
grantor trusts are taxed back to grantor- trust itself is not a taxable entity- (grantor trust rules)
IRC671-677
Three qualified options to gift assets to minors?
2503(b) trust- can be used for multiple genes, hold any property, income and corpus can be split between genes, A/E for present interest gifts- requires income distributions
2503(c) trust- only for one bene, does not distribute income annually but requires distribution at age 21, an apply A/E under certain circumstances
UGMA/UTMA- alternate to above, used to simplify (UTMA can hold any property, best for s-corp no double taxation)
What are the kiddie tax rules?
$1,050 standard deduction
Income 1,050-$2,100 taxed at child’s rate
Above taxed at trust or estate rates
Applied to under 18, 19-23 if earn less then 1/2 income and full time student
What are the grantor trust rules?
Trust is a grantor trust when grantor or spouse:
1. retains 5% reversionary interest
2. Controls beneficial enjoyment
3. Retains power to dispose at less FMV
4. Borrows without adequate interest or security
5. Retains certain admin powers
6. Can revoke trust
7. Can receive distributions
8. Can receive income to pay for life insurance
What is the estate tax return form?
IRS Form 1041
Deductions can be taken on 1041 or form 706
529 contributions
Annual exclusion applies
Can front load up to 5 years worth of contributions- can also gift split doubling with spouse
What is a net gift?
The donee agrees to pay the tax- this should be in writing
Formula: Donors tentative tax/ (1+donors gift tax rate)
What does it mean when we say gift tax is “tax exclusive”?
if the donor fails to pay tax and it can’t be collected then the donee is liable- any gift taxes paid within 3 years are in luda legal in decedent’s estate “gross up rules”
What are the 5 steps in determining the amount of a taxable gift?
- Is it a gift? e.g. not gifts- revocable trust, irrevocable w/ rights to change, political parties, qualified disclaimer, loans w/ proper interest, child support, etc
- Can this be split?
- Can annual exclusion be taken?
- Can marital deduction be taken?
- Can charitable deduction be taken?
What are exempt gifts?
Statutory exempt: direct payment of tuition to educational institution and payment made directly to hospital on behalf of another
What are examples of indirect gifts?
-transfer to irrevocable trust
- payment of someone else’s expenses
-forgiveness of debt
-below market interest loan
-assignment of benefits of insurance
What is a reverse gift?
Gift to an ill person w/ intention of receiving the property back
donee must live for one year if spouses
What is a bargain sale?
part sale part gift
e.g. sale to charity
What is the taxation on the disposition of property below the donor’s basis of gifted property?
- Donee sells property for less then FMV on date of gift- donee’s basis is the FMV on date of transfer (holding period starts over)
- Subsequently sells at price greater then when received but lower then donor’s basis- no gain or loss
- Sells at a price higher then donor’s basis- assumes the basis and holding period of donor
What is the holding period of inherited property?
Always considered L-T cap gain regardless of actual holding time
When is a gift complete?
1.Totten trust
2. Joint account
3. forgiveness of note
4. split interest gift
totten trust and jt account: only when donee takes a w/d otherwise no gift is made
Forgiveness of note: when donor makes the note canceled
split interest: @ time donor transfers property to trust or changes deed
What is “gift causa morris”?
deathbed gift- gift is not complete until death occurs
What are the non-tax benefits of gifting?
vicariously enjoyment, provide support/HEMS, see how well donee can manage assets/business, maintain privacy that you cant through testamentary gift, reduce probate/admin costs, protect donor from creditor claims
What are special or limited powers of appointment?
typically don’t allow the holder to appoint themself, their estate, or creditors
can appoint specific class of beneficiaries- e.g. children, charity, or anyone other then himself
Could appoint self if restricting Authority e.g. donor consents, bene consent, HEMS (ascertainable standard)
What is an ascertainable standard?
Gives holder right to invade corpus for very specific purposes- most common is HEMS
e.g. not ascertainable standard: “welfare, comfort, wellbeing”
What are the possible actions of a general power of appointment?
can exercize power to demand money withdrawal right , demand right, or power to invade
Can release powers which is a gift to remainderman
Can decide to let powers lapse
What is an ancillary probate?
separate probate located outside of decedent’s state of domicile, used for R/E primarily- solution hold property jointly or in trust to avoid 2nd probate- also tax issues can arise when multiple states want to tax
What are the ademption statutes?
asset bequeathed but nolonger in existence due to be sold and purchased something esle- asset can be traced and given in lieu
What are “letters of administration or letters testamentary”
letters are proof the court has recognized the PR/executor administrator giving them authority to collect and deal w/ assets of decedent estate- appointment must be approved by court- if no one is named called “administrator of estate”
What is a totten trust?
Not a trust at all, simply a bank account whereby the acct holder holds the account for benefit of another- term is misleading
What is an elective share?
surviving spouse can elect up to 1/2 share of assets - the amount prescribed by law, spouse can give up rights prescribed by law only in Non-community property states
What are the three ways property transfers at death?
By will or intestecy
By operation of law
By contract
What is Dower & Courtesy?
rights a surviving spouse has to protect against being disinherited or creditors exhausting assets- state provides 1/2 assets instead of dower and courtesy some states enacted homestead- some also allow for family allowance
What issues can arise with life insurance in a community property state?
gift tax problems- in CP state assets used to buy/pay premiums- with a non-spouse bene- spouse is considered making a gift when d/b pays e.g. child
What is quasi community property?
Property acquired in a common law state brought into a quasi state would become CP- this is unlike a pure CP state- only exemption is if it wouldn’t originally been CP in quasi state
Quasi states: CA, ID, AZ, WA, WI
What are the considerations when moving from a community property state to a non-CP state?
spouses may choose to divide but should consider tax consequences, assets acquired in state will remain CP even if new common law state- even when sold and new assets are repurchased- it is advisable not to mix CP assets w/ non
What does community property function similarly to in a common law state?
Tenants in common
What is the RUFADAA?
revised uniform digital fiduciary access to digital assets
recognizes digital property- similar to rights of real property and tangible personal assets
Adele established an irrevocable trust and funded it with $1.5 million in securities. Her three married children are the beneficiaries of the trust, and each child can withdraw $50,000 of the trust corpus each year. Her daughter Liz did not withdraw money from the trust this year. Did Liz make a taxable gift to her brother and sister who are the other beneficiaries of the trust?
No, because the amount of the power that lapsed was less than 5% of the trust corpus.
Martin recently inherited property from his father. Martin and his wife Regina jointly made cash gifts of $200,000 to their son this year. This is the first taxable gift they have ever made.
Taxable gift $ amount?
How are gift tax returns filed?
What is their remaining unified credit?
How much would be added to adjusted gross estate?
Martin and Regina each made taxable gifts of $85,000 this year.
Martin, the donor spouse, will file a gift tax return, and Regina will indicate her consent to gift split on his IRS Form 709.
Martin and Regina each has $4,332,800 of their unified credit remaining.
When Martin and Regina die, $85,000 will be added into their estate tax return as an adjusted taxable gift.
John Alexander has established a trust for his wife in his will. This trust is designed to preserve or maximize the gift tax exemption. When John dies, the trust will pass to his wife exempt from gift and estate taxes. When John’s wife, Emma, dies though, the remainder of this trust will not be included in her estate and will pass to the beneficiaries of the trust once again, free from gift and estate tax. What is this trust called?
B trust or Credit Shelter Trust
Which trust will pass to spouse by taking advantage of the unlimited marital deduction with no gift or estate taxes? Upon death of surviving spouse it WILL be included in the gross estate.
A Trust or Marital Trust
Which trust once established (husband) allows spouse (wife) to withdraw funds during her lifetime?
It’s funded by a portion of the gift tax exemption. He continues to pay taxes on income and capital gains from the trust so that appreciation on this trust passes to his children, the beneficiaries tax-free. What is this trust called?
A SLAT
Overview of IDGT
An IDGT allows the grantor to access the assets in the trust by substituting assets of equal value. The value of the assets is determined when the trust is funded and the grantor pays tax on the income and capital gains of the trust. Assets pass to the beneficiaries tax-free.
A qualified annuity interest in a grantor retained annuity trust (GRAT) may be based on a fixed dollar amount or percentage of the value of the trust, and cannot vary except to the extent the amount or percentage in any year does not exceed ___% of the prior year’s payment:
120%
True or False
State death tax payments are deductible on the decedent’s federal estate tax return.
True
What type of asset and interest rate environment would present the best oppourtunity to utilize a GRAT for transferring wealth to heirs?
GRATs are optimal for transferring assets with a high potential for appreciation and when interest rates are low. This is an estate freezing strategy.
