Sources for Estate Liquidity Flashcards
1
Q
What are the major causes of liquidity for estate planning purposes?
A
- Administrative expenses
- Estate, gift, income, and GST taxes
- Debt
- Medical expenses
- Financial needs during transition period
- Funeral expenses
2
Q
When are estate taxes due?
A
Within 9 months after death
3
Q
How can life insurance be useful for estate purposes and what is a good planning strategy for life insurance?
A
- When liquid asset such as bank accounts and/or investments are nonexistent or low:
- It could be beneficial to have life insurance
- To make sure proceeds are NOT included in the decendent’s gross estate:
- Useful to put it in a Irevocable Life insurance trust
4
Q
What admin costs are there?
A
- Attorney fees
- Accountant fees for tax returns
- Administrator/executor fees
- Appraisal costs for things such as real estate, collectibles, and business interests
5
Q
Financial needs for family members during transition period
A
- Important to have liquidty for them to be able pay basic living expenses
- Especially imporatant for when there is a SUDDEN death to a breadwinner in a young family
6
Q
Funeral expenses
A
- Funerals are rising faster than inflation costs
- Cremation is usually cheaper
7
Q
Medical expenses
A
- These need to be planned for, preferably ahead of time
- Need liquiidy to pay of these expenses, especially if the decedant was terminally ill and incurred a lot costs during the last few months of life
8
Q
Taxes
A
- Need liquiidty for taxes such as estate, income tax, GST, and gift tax
- These are all generally due within 9 months of death
- Also need liquidiyt for income generated by estate’s assets and need to be paid annually
9
Q
Potential sources of liquidy from an estate for paying off expenses from estate distribution and estate administration
A
- Savings and investments
- Loans for tax payments and expenses
- Life Insurance
- Distribution of assets instead of cash payments
- Closely held business interests
- Sale of assets or business interest
- Tax-advantaged accounts
10
Q
How can redemptions of shares help?
A
- If in a closely held business or family C-corporation:
- Partial or full redemption of the decedant’s shares at death could meet a substantial portion of the income needed by the dependent family members
- Partial redemption of corporate stock is treated as DIVIDEND distribution for tax purposes
11
Q
How can a buy/sell agreement help?
A
- Because it transfers the decedant’s shares to shareholders for cash, which provides liquiidyt needed for estate and AVOIDS probate
- Also provides a GUARANTEED market for the shares and the reamining shareholders and the business itsself gets greater control and ownership.
12
Q
How can distributing assets from estate instead of paying cash help?
A
- Since these are not as liquid, you could distribute assets instead of cash to pay some creditors off (if they allow it)
- Although, this is NOT ALLOWED for paying any sort of taxes
13
Q
Remember ILIT for life insurance
A
- Because if the decedant is the owner AND the insured, it will be included in their estate (the proceeds)
14
Q
How does an ILIT work?
A
- Make sure to put it in there MORE THAN 3 years PRIOR to death
- ILITs are funded by the grantor either by:
- Transferring an existing policy on his/her life into the trust OR
- Transfers cash for the trustee to purchase a new policy on the grantor’s life
- Typically, grantor transfers annual premium payments to the trust, and the TRUSTEE PAYS THE PREMIUM.
- Bene’s are given Crummey powers so that the premiums qualify for annual gift tax exclusions.
- Upon grantor’s death, the trustee distributes the death benefits to the bene’s based on terms of the trust
15
Q
When can distributions from ILIT be included in gross estate of decedant?
A
- If the money is given to the executor of the estate to pay for TAXES
- A decedant’s will can instruct the ILIT to lend money to the executor to pay taxes
- Can also instruct ILIT to purhcase assets from the estate in excahnge for cash
- Those assets are then held in the trust and managed by the trustee
16
Q
When can a life insurance policy be inluded in the decedant’s estate?
A
- If any of the following happen:
- The decedant was the owner and insured of the policiy at death
- The decedant had incident of ownership in the policy at time of death
- The decedant had transferred the policy OR had any incident of ownership WITHIN THREE YEARS OF DEATH
- A NEW life insurance policy being purchased by a trustee in a ILIT IS NOT SUBJECT TO THE THREE YEAR RULE
- When death benefits are made available to the executor or estate
17
Q
Another strategy for liquidity - Split dollar life insurance
A
- An arrangement between an employer and employee where BOTH PARTIES have OWNERSHIP
- The employee pays premium (and owns) for death benefit
- Employer pays for (and owns) cash value of policy
- REVERSE SPLIT ORDER is the opposite
- Way to avoid gross estate is to put employee’s share of the policy into an ILIT
18
Q
Loans for estate liquidity
A
- Loan can be used if there is really no liquidity left to pay for admin expenses and taxes
- Interest used to pay for those expenses can be DEDUCTED from ESTATE TAXES
19
Q
Sale of personal/business assets
A
- Can be effective if assets are easily liquid
- NOT RECOMMENDED FOR ILLIQUID ASSETS
- Because they generally have to be appraised first and you probably have to do a fire sale to get money, which is very well below fair market value most times
- Should be last resort pretty much
20
Q
Other strategies to provide estate liquidty?
A
- Using strategies such as martial deduction, charitable deductions, estate equalization, special use valuation, alternate valuation date could help REDUCE ESTATE TAXES, which in turn helps with liquidity.
21
Q
What happens to tax deduction for when estate owes no tax?
A
- Some expenses can be deducted on the decedant’s income return rather than estate tax return
