Strategies to Transfer Property

Question 1

The Probate Process

Answer 1

• any property that a person has the complete power to dispose of at death is subject to probate
• the deceased property is transferred according to the instructions of a will; or, if there is no will, the property is distributed according to the rules of the state’s intestacy laws.

Question 2

Operation of Law

Answer 2

• property owned JTWROS passes automatically to the other joint tenant(s).
• this property passes outside of probate, and a will is ineffective for transferring this property.

Question 3

Trusts

Answer 3

• property placed in either a revocable or irrevocable trust is subject to the provisions of the trust document, and does not pass through probate, and is not affected by the provisions of a will.
• testamentary trusts created by the will are subject to probate.

Question 4

Contracts

Answer 4

• life insurance contracts provide for payment by the insurance company to the designated beneficiary, so death benefits do not pass through probate
• exception is when the trust is named as the beneficiary, then the death proceeds are added to the probate estate.

Question 5

Testamentary Distribution

Answer 5

-property transferred at death either by testamentary distribution or by intestacy are subject to probate

Question 6

Intestacy

Answer 6

• Any property that does not pass by operation of other laws, by contract, or by will passes to the persons specified by the intestacy statutes.
• under the Uniform Probate Code adopted by some states, a surviving spouse inherits the entire intestate estate even when all of the decedent’s children are also descendants of the surviving spouse.

Question 7

Inadvertent Intestacy

Answer 7

-If the will does not meet the state law requirements for a valid will, the will is unenforceable, and the state’s intestate succession laws will determine the distribution of the estate.

Question 8

Partial Intestacy

Answer 8

• arises when a testator fails to provide directions in a will as to the disposition of a particular item of property.
• can be avoided by means of a residuary clause that disposes of any remaining property not specifically mentioned in the will.

Question 9

Probate Process

Answer 9

• major feature is judicial supervision of the decedent’s estate
• the court is given the responsibility for overseeing the administration and distribution of the deceased owner’s property until it is transferred to beneficiaries

Question 10

Ancillary Probate

Answer 10

• if a decedent dies owning real estate in a state other than the decedent’s state of residence, ancillary probate is required.
• this is an additional probate proceeding administered in any state in which the decedent owned real estate.

Question 11

Assets Subject to Probate

Answer 11

• property over which the decedent has a power to transfer to heirs at their death, either through the direction of their will or by intestacy, is subject to probate
• property placed in revocable or irrevocable trusts is NOT subject to probate
• in community property states, the decedent’s share of community property is subject to probate.

Question 12

Techniques For Avoiding Probate

Answer 12

• Titling Assets as JTWROS
• Joint Bank Accounts
• Revocable Living Trusts
• Government Savings Bonds (EE Bonds)
• Contract provisions taking effect at death
• Deeds

Question 13

Advantages of Probate

Answer 13

• provides systematic, orderly, and judicially supervised method of distributing a decedent’s estate
• court supervision provides fair treatment of the parties and proper administration of the estate
• useful to establish the title to property when disputes are anticipated.
• can bring closure to claims and disputes

Question 14

Estate Tax Impact of Joint Tenancy

Answer 14

• at the death of the first joint tenant, the entire joint asset is included in the decedent’s estate when the joint owners are not spouses unless there is proof that the surviving joint tenant contributed to the purchase price.
• a gift is not counted as a contribution
• if the surviving joint tenant is the decedent’s spouse, one-half of the joint tenancy asset will be included in the decedent’s estate, regardless of the decedent’s contributions to the acquisition of the asset.

Question 15

Advantages of a Revocable Living Trust

Answer 15

• significant savings on the probate process
• control is maintained
• management can be observed
• provide for incapacity

Question 16

Disadvantages of a Revocable Living Trust

Answer 16

• Titling assets to the trust is often forgotten

- there is no income splitting or income tax reduction

Question 17

Estate Planning Weaknesses and Pitfalls

Answer 17

• Leaving everything to the spouse and not taking advantage of the unified credit (all JTWROS titling)
• Lack of liquidity
• Failure to have a buy-sell
• inappropriate ownership of life insurance
• failure to name contingent beneficiaries and alternated fiduciaries
• failure to avoid ancillary probate
• excessive use of joint ownership of property
• failure to write or update a will
• failure to execute durable powers of attorney
• selection of wrong executor
• failure to leave separate funeral instructions

Question 18

Inter Vivos Gifts

Answer 18

-gifts made during the lifetime

Question 19

Bargain Sales

Answer 19

-in a bargain sale, the owner sells an asset below the FMV, so a gift is made of the difference

Question 20

Uniform Gifts to Minors Act (UTMA)

Answer 20

• no restrictions on the type of property permitted to the transfer
• can provide lifetime and testamentary gifts
• broad investment powers to the custodian
• if the parent is selected as the custodian and is serving in the capacity at the time of death, the assets will be subject to inclusion in the parents gross estate, due to the retained power of the custodian-parent over the assets.
• the transfer to the child is an irrevocable gift. The minor is deemed to have both legal and equitable title to the account assets
• the gift is a completed gift of present interest, which will be eligible for the gift tax annual exclusion
• the income from the account will be taxed to the minor and is subject to the kiddie tax until the minor reaches age 19 (24 if student).

Question 21

Gifts Subject to Debt

Answer 21

• the value of the gift of property subject to indebtedness is the donors equity in the property
• if the donor remains personally liable on the debt, the amount of the gift is the entire value of the property, without the reduction of the debt.

Question 22

Reverse Gift

Answer 22

• giving property with a low adjusted basis to a less wealthy donee who is likely to predecease the donor and leave the property to the donor
• there is a one year look back
• Estate planners can avoid the one year look back by having the donee leave the property by will to the donor’s child or to another person so the property receives a step-up in basis.

Question 23

Property Below Basis as a Gift

Answer 23

• This should be avoided

- IRS rules do not permit an owner to make a gift of a tax loss

Question 24

Gifting Depreciated Property

Answer 24

• the donee will carry over the donor’s adjusted cost basis, but the full amount of the donor’s recapturable depreciation or cost recovery must also be passed on to the donee. When the donee sells the property, the recapture rules require that any cost recovery be added as taxable ordinary income.
• the donor receives the benefit of depreciation deductions and the donor will pay tax in a lower taxable marginal bracket

Question 25

2503 (b) Trusts

Answer 25

• required to distribute all income each year to the minor beneficiary, who will pay taxes on the income.
• The value of the gift for gift tax purposes is the full market value of the assets passed to the trust.
• the present value of the income interest will be a present-interest gift, eligible for the annual exclusion, and the remainder is a future-interest gift not eligible for annual exclusion.

Question 26

2503 (c) Trusts

Answer 26

• a gift to the minor under age 21 of age is not treated as future interest gift if the income and property will pass to the beneficiary when he or she reaches age 21.
• thus a gift for a minor will be eligible for the annual exclusion even when the trust accumulates income

Question 27

Crummey Trusts

Answer 27

• by giving the beneficiary a concumulative right to withdrawal the annual contribution to the trust, the donor will be able to take advantage of the annual exclusion.
• the crummey powers give the trust beneficiary the right to withdrawal the annual contribution to the trust. These powers are often limited to the annual exclusion amount or the greater of $5,000 or 5% of the corpus.