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Estate Planning > Sources for Estate Liquidity > Flashcards

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
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2
Q

When are estate taxes due?

A

Within 9 months after death

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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
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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
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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
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6
Q

Funeral expenses

A
  • Funerals are rising faster than inflation costs
  • Cremation is usually cheaper
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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
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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
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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
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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
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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.
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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
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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)
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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
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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
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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

Estate Planning (10 decks)

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