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Specialization Exam > Tax Planning > Flashcards

Tax Planning Flashcards

1
Q

Transfer Taxes - General Purpose

A
  • Freezes current value and shift future appreciation. When we make a transfer out, the gift tax value is frozen in time – at the time of the gift. The appreciation will be outside of the estate.
  • To apply discounts and not pay a pro rata percentage of the value of the property
  • Time value of money – defer the payment or use the time value of money to drive the discount
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2
Q

Income Tax Planning - General Purpose

A

*A step up for basis – an upward adjustment for property that has appreciated. This occurs on the date of death and will wipe out any gain.

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3
Q

Retirement Asset Planning - General Purpsoe

A

*Stretch out the payment of benefits and avoid income tax at higher rates.

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4
Q

Gift Tax - General Purpose

A
  • Tax on transfer of property, whether tangible or intangible, real or personal, by gift made during the calendar year.
  • Shift to donees who have a lower tax bracket.
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5
Q

Taxable Transfers - § 2511

A

*Completed transfers where the donor parts with “dominion and control” or the power to change who can take the property or the ability to take back the property.
Exception: Transfers that are not complete

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6
Q

Gift Tax - Excepted Transfers

A

Why are they exempt? Policy reasons

  • Legal obligations of support
  • Transfers to political organizations
  • Annual exclusion
  • Educational / Medical Expenses
  • Transfers of intangibles by nonresidents
  • Transfers in the ordinary course of business
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7
Q

Are non-qualified disclaimers subject to gift tax?

A

Yes

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8
Q

Disclaimers § 2518 - Requirements for Excepted Transfers

A

Requirements:

  • In writing
  • Irrevocable and unqualified
  • Delivery to transferor or personal representative of transferor
  • No acceptance of benefits of disclaimed interest
  • The disclaimed interest passes without direction
  • Within a 9 month time limit
    • From the date of decedent’s death
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9
Q

Transfers by Gift § 2512(b) - definition

A

This occurs when property is transferred for LESS than “adequate and full consideration in money or money’s worth

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10
Q

Fair Market Value - definition

A

TR code - the price at which the property would change hands between a willing buyer and a willing seller, and neither are under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts. It is an objective standard

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11
Q

What if a transfer occurs for less than fair market value

A

It is a transfer by gift

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12
Q

Taxable gifts § 2503 - definition

A

Total gifts made during the calendar year less any deductions.

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13
Q

Annual Exclusion - why are they excluded

A

These are technically gifts, but for policy reasons, these annual gifts are excluded from the tax base.

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14
Q

Annual Exclusion - Key Requirement

A

The donee must have a present interest. An unrestricted right to the immediate use, possession, or enjoyment of property or the income from property.

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15
Q

Insurance Trusts - gifts made into the trust

A

Is typically not a present interest because the trustee must exercise discretion to make distribution to the beneficiary.
The beneficiary does not have an immediate access.

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16
Q

Insurance Trust - How to qualify for the annual exclusion

A

The trust must either:

  • Provide Crummy withdrawal rights - The right to withdrawal assets in the trust.
  • Grant the beneficiary a lifetime general power of appointment
  • Create a 2503(c) Trust - Mandatory payout
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17
Q

Education / Medical Expense Exclusion § 2503(e) -

Requirements

A

These are unlimited
They must be paid directly to the educational organization or medical care provider
Educational - tuition payments only
Medical care

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18
Q

Charitable Deductions § 2522

A

These can be for public, religious, charitable,

scientific, literary, and educational charities.

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19
Q

Marital Deduction § 2523

A

Unlimited marital deduction and passes to surviving spouse and surviving spouse must be a U.S. Citizen

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20
Q

Marital Deduction to a non-marital spouse - Enhanced Annual Exclusion

A

If a transfer to a non-citizen spouse is qualified for an annual exclusion, then can leave up to $155,000

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21
Q

Form 709

A

Must be filed when the gifts exceed annual exclusion; gift splitting; or a future interest in property has been transferred.
Return is due April 15th following the calendar year - it can be automatically extended for 6 months.

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22
Q

Unified or Applicable Credit § 2505

A

Donor is entitled to an applicable credit amount

  • Basic exclusion amount; and the
  • DSUEA - Deceased Spousal Unused Exclusion Amount
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23
Q

Gift Tax - Form 709

A

Must be filed for a calendar year

Can receive an automatic 6 months to file, but the payment is due on April 15th, regardless if an extension is granted.

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24
Q

Estate Tax - what does it include

A

Tangible, intangible, real or personal property owned at death.

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25
Q

Retained Life Estate § 2036, requirements

A
  • The decedent gratuitously transferred during life
  • while retaining a prescribed interest; and,
  • for a prescribed period (generally for the life of the decedent
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26
Q

Retained Life Estate § 2036, retained interests

A
  • The right to income from the property
  • The right to possession of the property
  • The right to enjoyment of property
  • The right to designate who shall receive income, possessor enjoy the transferred property
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27
Q

Reversion § 2036

A

The decedent has made a transfer but has retained an interest.

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28
Q

Revocable Interests 015537

A

If a decedent retains a power to revoke, alter or amend a transfer, then the decedent still has control over the transferred property.

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29
Q

Inclusion - 2035(a)

A

Gifts made with three years of death are re-included in the gross estate

  1. Life Insurance
  2. Gift of an interest in property that would have caused inclusion under 2036 and 2038, if the interest was held until death
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30
Q

Gift Tax - 2035(b)

A

Gift taxes within three years of death

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31
Q

Joint Interests 2040

A

Is includable in the estate, unless decedent is survived by a U.S. citizen spouse. It does not matter whether it was community property or separate property and the amount of consideration provided by decedent.

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32
Q

Power of Appointment - 2041

A

Taxation is triggered if there is an exercise or a release that is includable under 2036 or 2038.

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33
Q

Power of Appointment Taxation - Exemptions

A

HEMS
Exercisable only in conjunction with power creator
Exercisable only in conjunction with substantial adverse interest.

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34
Q

Life Insurance, 2042

A

Death benefits are includable where:

  1. the death benefits are payable to the insured’s estate
  2. the insured has any incidents of ownership over the policy - e.g. power to change beneficiary, cancel policy, revoke, pledge the policy to creditors, borrow against policy, change beneficiary enjoyment of trust owned policy.
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35
Q

Marital Deduction Property, 2044

A

For any property where a marital deduction was taken, the surviving spouse must include it in their gross estate.

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36
Q

Valuation 2031

A

This value must be based on the fair market value

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37
Q

Qualified Real Property 2032A

A

Fair market value must be based on its “highest and best use.”

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38
Q

How can premiums and discounts be used? Examples

A

FMV is based on what a hypothetical buyer would pay - so adjustments can be made. For example, lack of marketability, blockage discount, lack of control discount

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39
Q

2053 Discounts

A

Payment for funeral expenses and trust administration, e.g. payment of debts, collection of assets - must be actually and necessarily incurred.

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40
Q

Estate Tax - Deductions

A

Expenses, Losses, Indebtedness, marital deduction, charitable deduction

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41
Q

642 Election

A

Can claim on state and federal income tax return

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42
Q

2054 Losses

A

Deductible - fire, storms, shipwrecks or other casualties

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43
Q

Marital Deduction - 2056

A
  1. Passes to the surviving spouse from the decedent
  2. Surviving spouse is a U.S. Citizen
  3. Interest is not a terminable interest
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44
Q

Terminable Interest Requirement

A

No marital deduction is allowed, where, due to the lapse of time or on the occurrence (or failure to occur) of an event or contingency.

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45
Q

DSUEA - Section 2010(c)

A

If a portability election is made, the decedent may utilize the predeceased spouse’s unused basic exclusion amount of DSUEA.
This amount is NOT indexed for inflation.

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46
Q

Credit Shelter and Marital Trusts - Formulas

A
  1. Pecuniary (easier to administer, postmortem value changes do not affect funding but may raise income tax issues.
  2. Fractional - generally avoids income tax issues but more difficult to administration due to fluctuations postmortem value. If the trust asset increases postmortem, then capital gains will not occur.
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47
Q

Form 706

A
  1. Must be filed 9 months from the date of death, and will be automatically extended an additional 6 months.
  2. Payment of death is due 9 months from the date of death.
48
Q

Generation Skipping Transfer Tax

A

Applies in addition to estate or gift tax

Common - Grandparent to Grandchild.

49
Q

GST - Concepts

A
  1. Transferor is the decedent or donor subject to estate or gift tax.
  2. Transferee - must be two generations (lineal descendants_ below the transferor or spouse or for non-lineal descendants is 37.5 years or younger than the transferor.
50
Q

Three types of GST

A
  1. Direct skips
  2. Taxable Terminations
  3. Taxable Distributions
51
Q

Personal Income Tax - Basis - 1014

A
  1. Basis of property acquired from a decedent is equal to fair market value as of the date of death or an alternate valuation date. 1014(a)
  2. The entire basis of CP is adjusted to fair market value upon the death of the first spouse. 1014(b)(6)
52
Q

Personal Income Tax - Basis - Exceptions

A
  1. Income in respect of decedent 1014(c) - examples, installment sales, retirement income. They do not receive a basis step-up
  2. Appreciated property given to decedent within one year of death and passing back to donor 1014(e)
53
Q

Section 645 Election

A

A qualified revocable Trust may be eligible to make this election on the estate’s first time filed tax return.
Benefits:
1. May elect fiscal year
2. Avoid estimated payments for two years following death

54
Q

Property Tax Exclusions

A

Prop 58 - primary residence (unlimited) / not the primary residence (up to 1 million)
The exclusion must be filed within 3 years

55
Q

Proportionate Transfer Exclusion - R&TC 62(a)(2)

A

Excludes from a change in ownership any transfer between individuals, individuals and a legal entity or between legal entities.
This exclusion automatically applies

56
Q

Interspousal Exclusion R&TC 63

A

Exclusion automatically applies

May include transfer of an entity with real property subject to proportionate transfer

57
Q

Property Tax - Entity Transfers

A

Change of ownership occurs where:
1. Change in Control R&TC 64(c) - Occurs when a person obtains control of more than 50% of the voting stock of a corporation or obtain more than 50% of the ownership interest in any partnership, LLC or other legal entity.
2. Cumulative Transfers R&TC 64(d) - Occurs were property was transferred to a legal entity, that was excluded under R&TC 62(a)(2), and more than 50% of
the original co-owner’s interests were cumulatively transferred.

58
Q

Deadlines for Property Tax Reporting

A

Individual - 150 days of death or at the time of filing the probate inventory (BOE-502)
Legal Entity - 90 days with a change of ownership (BOE-100)

59
Q

General POA

A

*Included in the estate of the decedent if exercised at death. If exercised during life, then it is considered a taxable gift subject to the gift tax.

60
Q

Limited POA- Example

A

The grantor creates a trust to pay the income to child life and then remainder to grandchildren, in equal shares.

61
Q

How to avoid a general POA

A

HEMS
Power is held jointly with the creator of the power.
Power is held with an adverse party

62
Q

Control and how it relates to POA

A

Depends on how much control that the power holder has.

63
Q

POA - Conversion

A

Exercise of a limited power by creating a presently exercisable general power turns the initial limited power into a general power.

64
Q

Taxation of POA

A

The exercise of a general POA causes the property subject to the power to be taxed.

65
Q

Release of POA

A

This is considered a taxable gift.

66
Q

Unexercised POA

A

If the power holder dies without having exercised or released the power, the property is taxed in the powerholder’s estate.

67
Q

POA - Two most common exceptions

A

5x5 power

HEMS

68
Q

Avoiding unnecessary taxes - irrevocable trusts

A

Do not create a general POA
Name a trustee who is not a beneficiary
Divide trustee duties so discretionary
Discretionary distribution should be the ascertainable standard

69
Q

Qualified Personal Residence Trust (QPRT)

A

It allows the settlor to transfer their personal home to an irrevocable trust. They can live in the home and then it is transferred to the beneficiaries via the trust. Once transferred, they have to pay rent to the beneficiaries. It is no longer part of their estate. It protects the home from increased value over time. You remove the property when it is at a lower value. Removed asset from the estate and protected it from additional increases in value.

70
Q

QPRT Negatives

A
  • Must pay rent and this is awkward.
  • Must follow all of the requirements for it not to fail.
  • Mortgage payments made will affect the amount of the QPRT gift - it will need to be calculated and is complicated.
71
Q

QPRT - what if the property is sold?

A

Must purchase a replacement residence within 2 years.

Alternatively, could convert to a GRAT.

72
Q

GRAT

A
  1. Retained interest to pay a benefit to the settlor.
  2. Putting property into a GRAT and in return will receive the annuity payments. At the end of the GRAT period, the value of the gift is the remainder interest.
  3. Must pay the annuity payment annually.
  4. Should be funded with assets that are anticipate to increase in value.
  5. Appreciation goes to the beneficiaries.
73
Q

GRAT - Strategy

A

Short term GRATS favored for volatile assets
All income generated by the trust is taxed to the grantor
If the Grantor dies during the GRAT period, the asset is returned to the grantor’s estate.

74
Q

ILIT - Purpose

A

Establish an ILIT to avoid bringing the insurance policy into the estate.
Removes the property from the gross estate.
The value of the life insurance proceeds is includable in the estate unless there is an ILIT and you have no control over the assets.

75
Q

Unfunded ILIT

A

Unfunded ILIT - There is no fund in the ILIT to pay the premiums. The grantor will pay the premium. Can take an existing policy and transfer it to the ILIT or purchase a life insurance policy for the ILIT. Typically, fund it up to the exclusion amount and there is no gift tax.

76
Q

ILIT - Cost and Benefit

A 
Cost = premium
Benefit = Taking assets out of the estate
77
Q

Crummey Powers

A

You give the beneficiaries a period of time to opt to take the money. If they do not object, then this money can be used to pay the premium.

78
Q

Funded ILIT

A

You put a fund of money and the trustee uses that money to pay for the premium.

79
Q

3 Year Rule

A

Applies to transfer of existing policy to ILIT - grantor must survive the transfer by 3 years or the insurance proceeds will be included in the taxable estate - Section 2053(a)

80
Q

Intentionally Defective Grantor Trusts (IDGTs)

A

Remove property from your gross estate and goes to your beneficiaries.
Creditor protection - except for child support
Can purchase an asset, such as a FLP

81
Q

Modification / Termination of Irrevocable Trust

A

Common example - there is no reason to have a Bypass trust.

82
Q

PC 15403

A

If all beneficiaries consent, they may compel modification or termination of an irrevocable Trust on petition to the court, 2 exceptions:

  1. Continuance is necessary to carry out a material purpose of trust
  2. There is Spendthrift Clause.
83
Q

PC 15404(a)

A

If the settlor and all the beneficiaries consent, they may compel the modification or termination of the trust. The settlor must be alive to use this provision.

84
Q

PC 15404(b)

A

If any beneficiary does not consent, the other beneficiaries, with the consent of the settlor, may compel a modification or a partial termination of the trust if the interests of the beneficiaries who do not consent are not substantially impaired.

85
Q

PC 15404(c)

A

If the disposition is to a group of persons, the court may limit the class whose consent is needed to beneficiaries who are likely to take.

86
Q

PC 150408

A

Principal is uneconomically low. If $50,000 can terminate the trust immediately without approval by the court.

87
Q

PC 15409

A

Can modify either administrative or dispositive provisions or terminate the trust under changed circumstances.
Example: Mandatory allocation of assets between a credit shelter and survivor’s trust may be cost prohibitive in light of increased applicable exclusion amount.

88
Q

Cy Pres Doctrine

A

If the charity no longer exists or has changed significantly.

89
Q

Disclaimers, PC 260-295

A
  • Is a POA.
  • The disclaimant can remove that property for their estate.
  • Never owned it - so it is not a gift.
  • It is irrevocable.
  • Is binding on creditors and does not constitute a fraudulent conveyance.
90
Q

Disclaimer - Requirements

A
  • In writing
  • Must be made within 9 months from the date the interest was created - Starts running from the date of death.
  • The IRS will view this property as never transferred to the disclaimant.
  • Cannot use any benefits from the property.
  • No property control - it will be distributed via the terms of the trust. You cannot state how it will be distributed.
91
Q

Disclaimer - Result

A

The disclaimant is deemed as not receiving the property and not making a gift.

92
Q

Disclaimer - Other uses

A
  • Accelerating distributions to remainder beneficiaries
  • Fixing unfair distributions
  • Dead or dying beneficiary
  • Unexpected creditor problems
93
Q

IRS Form 2848

A

Power of Attorney

  • Stating that you are qualified to practice in front of the IRS - Atty, CPA, Enrolled Agent
  • The client has authorized you
  • What matter you are representing the client on - need to be specific - which returns/what dates?
  • *The taxpayer can revoke it - there is no form, the taxpayer just needs to send a letter
94
Q

IRS Form 8275

A

If you are going to file an aggressive return, you need to provide disclosure and believe that you have a 1/3 chance of your position being sustained - reasonable success on the merits.

95
Q

IRS 6701 - Aiding and Abetting

A

$1,000 penalty if you aid and abet in the underreporting on the tax return.

96
Q

Tax Opinion - purpose

A

The purpose is to get out of tax penalties. Evidence and legal analysis - it is very detailed.

97
Q

Tax Opinion - Requirements

A

Reasonable Statement of the facts and legal assumptions, as well as future facts
Ascertain the facts as it relates to each federal tax matter
Cannot rely on arguments of the taxpayer, unless it is reasonable
You cannot take into consideration the audit risk

98
Q

Tax Opinion - Reliance on other professionals

A

If it was reasonably relied on and the individual is competent and there is no conflict of interest.

99
Q

Correspondence Audits

A

The service center sends a letter with one or multiple items that they want explanation about. There is a due date. You will never have an auditor assigned to you.

100
Q

Field Audit

A

The revenue agent comes to you and goes through your returns, usually for a small business.

101
Q

Office Audit

A

You go to their office and submit documents and information.

102
Q

SOL - Federal Tax Return

A

3 years

103
Q

Audit Cycle

A

The IRS is not going to start an audit if it is a few months before the 3 year SOL. Example, the trustee is sitting on a large “reserve” for a possible tax payment.

104
Q

Form 4549

A

This is how the tax return is re-assessed. It includes the additional amounts due.

105
Q

Form 870

A

The taxpayer is waiving all due process rights. It is effective upon receipt. You are accepting the audit in full.

106
Q

Notice of Deficiency - 90 day letter

A

Summarizes the IRS change to the return.
The taxpayer can object to the assessment within 90 days. (US Taxpayer Court) The taxpayer can pay and then file in court for return of the assessment (Federal Court)
5th Amendment Rights - Due Process
If the taxpayer is outside the US, it is extended to 150 days

107
Q

Tolling of the SOL

A

If a petition is filed with the Tax Court

108
Q

What happens after the assessment is made?

A

It goes to collections and penalties and interest will be due.

109
Q

Private Letter Ruling (Sample format 20015-1)

A

This is conservative
You go to the IRS on an uncertainty of the law and you need to know before you file the return.
Another reason, the IRS has taken a contrary position and you want them to reconsider.

110
Q

Form 706

A

Must be substantiated - there needs to have all of the appraisals and relevant documents attached.

111
Q

Form 706 - When is the payment is due

A

9 months after the date of death - you can get an extension

112
Q

Form 706 - Additional time to pay the estate tax - Reasons, 6161 and 6163

A

There must be reasonable cause.

  1. The estate consists mainly of a chc or farm and does not have liquidity.
  2. The estate is being sued.
  3. The estate consists primarily of annuities, contingent fees, etc.
  4. The estate must sell assets
  5. The estate would have to borrow money at a high percentage (hard money loans)
  6. Probates are ongoing in multiple jurisdication
113
Q

Form 706 - how many times can you request an extension?

A

You can get an extension every year for four years.

It still accrues interest.

114
Q

Gift Taxes and Gift Tax Return

A

These are due April 15 the year after the gift was made.
You will first want to use your annual exclusion
then your unified credit. Very few people are paying gift taxes.
Gift tax return needs to substantiated - appraisal, etc…

115
Q

Does the 15,000 gift require a return?

A

No, if it is the annual exclusion amount, then a return is not required.

Specialization Exam (9 decks)

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