Trusts and Estates Flashcards
define estate planning
planning for the use and disposition of one’s property both during lifetime and death, involving the transfer of property to or for the benefit of chosen beneficiaries
four main components of estate planning
people, property, time, and analysis of transfer tax impact
define people
decedent or donor and beneficiaries
define property
probate non-probate
define time
lifetime and at death
define analysis of transfer tax impact
estate tax, gift tax, generation-skipping tax
a decedent can be…
testate or intestat
define testate
- dies with a valid complete will
- executor is names by decedent to oversee probate process
property would be disposed of as provided in will
define intestate
- dies without a valid complete will
- An administrator is appointed by the court to oversee the probate process
under illinois law how is property disposed of?
- if spouse and descendants: 1/2 to spuse and 1/2 to descendant per stirpes
- if no spouse but at least one descendant: all to descendants per stirpes
if spouse but no descendant: all to spuse - no spouse and no descendants: all to parents, siblings in equal shares except if a parent is deceased then surviving parent gets a double portion and descendants of deceased brother/sister receive share deceased brother/sister would have received
- if none of the above applies, then 1/2 to maternal grandparents (or their descendants per stirpes) and 1/2 to paternal grandparents (or their descendants per stirpes)
define non-probate
property in which the decedent had an interest but which automatically passes to another at the decedent’s death
define probate
property owned solely by decedent that does not automatically pass to another at decedent’s death. Only probate property is subject to court’s administration
examples of non-probate property
- home owned as joint tenants or tenants by the entirety
- life insurance with designated beneficiary
- IRA and retirement plans with a designated beneficiary
bank account POD
property held in trust
formal limitations on power to dispose of property at death
writing, signed witnesses, rule against perpetuity ot qualified perpetual trust
spousal protections limitation on power to dispose of property at death
- surviving spouse in illinois has right to renounce a will and take 1/3 (or 1/2 if no living descendant of decedent) of decedent spouse’s probate estate
- surviving spouse has rights to certain qualified retirement plans
- real property owned in community property state owned half by each spouse
private arrangement limitations on power to dispose property at death
- prenuptial agreements may vary spouses’ rights in each other’s property
- buy-sell agreements may limit power to transfer stock
societal limitations on power to dispose of property at death
- federal transfer (estate, gift, generation-skipping) taxes
- state and local taxes
when is estate tax imposed
imposed on the transfer of property at death
what property is subject to the estate tax
generally, all property owned by or subject to the control of the decedent (probate and non-probate) or power of appointment is subject to tax
what amount is free from estate tax?
13.9 million (to the extent the similar gift tax-free amount is not used during the lifetime)
- and amount passing to a spouse or charity are tax-free
maximum federak estate tax rate
40%
what is the illinois estate tax-free amount
4 million
when is gift-tax imposed?
imposed on the transfer of property by gift during lifetime
what is the annual exclusion from gift tax
$19,000 per donee
- gifts to a spouse and charity are also tax-free, as well as paying tuition and medical expenses
what is the tax-free amount for lifetime gift transfers
$13.9 million
what is the gift tax rate
40% (same as estate tax)
when is the generation-skipping tax imposed?
imposed on certain transfers of property that cross two or more generations
what is the GST exemption
equal to the estate tax free amount (13.9 million)
what is the GST tax rate?
imposed as a flat tax rate equal to the maximum estate tax rate (40%)
What is a Will?
A writing signed by the testator and witnessed by two or more credible persons.
A legal document that outlines how a person’s assets will be distributed after their death.
What does ARTICLE FIRST of a Simple Will state?
Testator directs executor to pay taxes and expenses.
This ensures that all debts and taxes are settled before distributing the estate.
What is outlined in ARTICLE SECOND of a Simple Will?
Testator identifies her marital status and closest family members.
This shows who the objects of the testator’s bounty are.
What is the purpose of ARTICLE THIRD in a Simple Will?
Testator gives personal and household effects to whomever testator chooses.
This provision is often referred to as TPP (tangible personal property).
What does ARTICLE FOURTH of a Simple Will provide for?
Testator gives residue (or balance) of estate to whomever testator chooses.
This includes all remaining assets after debts and specific bequests are paid.
What is specified in ARTICLE FIFTH of a Simple Will?
Testator names the executor and gives various powers to the executor.
The executor is responsible for administering the estate according to the will.
Fill in the blank: A Simple Will includes a __________ signed by the testator and witnessed by credible persons.
writing
True or False: The executor named in a Simple Will has the authority to manage the estate.
True
What is the purpose of creating a Will with a $13,990,000 By-Pass Trust?
To avoid tax on the testator and estate tax, adhering to the rule against perpetuities.
This structure allows for the estate to be managed without incurring immediate tax liabilities.
What does the testator direct the executor to do in ARTICLE FIRST?
Pay taxes and expenses and coordinate with the trustee.
This ensures that all financial responsibilities are handled before distributing the estate.
What information is identified in ARTICLE SECOND?
Testator’s marital status and closest family members.
This helps clarify the beneficiaries and their relationships to the testator.
What does the testator give in ARTICLE THIRD?
Personal and household effects to whomever the testator chooses.
This allows for the distribution of sentimental or personal items outside of the main estate.
What happens to the residue of the estate according to ARTICLE FOURTH?
It goes to the testator’s spouse as trustee under specified terms.
This includes provisions for managing the estate for the benefit of the spouse.
What is the tax status of the $13,990,000 amount held in trust according to ARTICLE FOURTH?
Tax-free amount.
This is significant for estate planning to maximize the benefits to the surviving spouse.
What happens to the income of the Family Trust during the spouse’s lifetime in ARTICLE FOURTH?
All income shall be paid to the spouse and as much principal as necessary for health and support.
This ensures the spouse’s financial needs are met while the trust is active.
What options are available for the Family Trust at the spouse’s death as mentioned in ARTICLE FOURTH?
Continue in trust or terminate and distribute to beneficiaries free of tax.
This provides flexibility in managing the estate after the spouse’s passing.
What happens to any amount over $13,990,000 if the spouse survives according to ARTICLE FOURTH?
It is either given outright to the spouse or held in a Marital Trust.
The Marital Trust is subject to estate tax upon the death of the surviving spouse.
What does the testator provide in ARTICLE FIFTH?
Rules of trust operations and various administrative and managerial powers to the trustee.
This ensures effective management of the trust assets and operations.
What is designated in ARTICLE SIXTH regarding minor or disabled children?
Nominations of a guardian.
This is crucial for ensuring the well-being and care of dependents.
Who is named in ARTICLE SEVENTH?
The executor.
The executor is responsible for managing the estate and ensuring the testator’s wishes are fulfilled.
What is the first step in valuing an estate that includes a closely held business?
To value the business as a whole and then the person’s ownership interest.
If an individual’s interest in a company exceeds 50%, how is the value calculated?
Starts at the percentage of ownership and is increased by a premium for control.
What is a control premium typically range for a majority interest?
10-20% (and higher).
How might a 51% interest in a company be valued if the total company value is $100?
$60.
What happens to the value of an interest that is less than 50%?
It starts at the percentage of ownership and is decreased by a minority discount.
What is the typical range for minority and lack of marketability discounts combined?
25-35%.
How might a 49% interest be valued if the total company value is $100?
About $35.
What should be considered if a person owns more than a 50% interest?
Gift giving of shares to reduce holdings to less than 50%.
What are some methods of gift giving to reduce ownership interest?
- Annual exclusion gifts
- Unified credit amount gifts
- Spousal gifts
- Charitable gifts.
What is the tax status of transfers to a spouse?
Tax-free.
What is the tax-free amount for lifetime gifts to a spouse?
$13,990,000.
What is the benefit of ensuring each spouse can create a tax-free trust at death?
It minimizes federal tax consequences regardless of who dies first.
What is portability in estate planning?
A tax technique that minimizes federal tax consequences of the order of death.
Do Illinois State death taxes have portability?
No.
What is the tax status of transfers to charity?
Tax-free.
What can be advantageous when making gifts to family and charities?
Split gifts that meet statutory requirements.
What is an Administrator in estate management?
The person or entity responsible for the administration of an intestate estate or a testate estate if the will does not appoint an executor
Duties and requirements are similar to those of an executor, with priority given to spouse, beneficiaries, children, grandchildren, parents, siblings, etc.
What is the current Annual exclusion amount for gift tax?
$19,000.00
This amount is indexed for inflation after 1998.
What are ‘Crummey’ rights of withdrawal?
A beneficiary’s right to withdraw a certain portion contributed to a trust in a year to qualify the contribution as a present interest and thus a tax-free gift
This right may be limited to $5,000, $19,000, or $38,000 in a year, depending on individual facts.
Define Decedent.
The deceased person.
What are Descendants?
The lineal progeny of a person, including children, grandchildren, great-grandchildren, etc.
What does ‘Descendants, per stirpes’ mean?
A method of dividing property among descendants where they take the share their deceased ancestor would have received if living
This process of representation can continue indefinitely.
What is Estate Planning?
The planning for the use and disposition of one’s property during lifetime and at death, including disability planning.
Who is an Executor?
The person or entity appointed by the will responsible for the administration of the testate estate
Duties include gathering assets, paying expenses, and distributing remaining assets.
What is GST exemption?
The amount a donor can allocate to transfers that will exclude such transfers and appreciation from the generation skipping transfer tax
Currently set at $13,990,000.
What is the role of a Guardian of the estate?
The person or entity appointed by the court to manage and invest a minor’s or disabled person’s property.
What is a Guardian of the person?
The person appointed by the court charged with the personal custody and care of a minor or disabled person.
Who are Heirs?
Persons who would receive property owned solely by the decedent at the time of death in the absence of a will
Rules of descent and distribution vary by jurisdiction.
What does Intestate mean?
When a person dies without a valid will.
What is a Life Insurance Trust Agreement?
An irrevocable trust that holds a life insurance policy, allows tax-free contributions, and collects insurance proceeds at the grantor’s death free of estate tax.
Define Personal property.
Everything other than real property.
What is Portability in estate planning?
The unused unified credit amount of the first spouse to die added to the surviving spouse’s tax-free amount
Sometimes referred to as the DSUE amount.
What is a Power of appointment?
The right given by one person to another to select the ultimate takers of property from a defined group
If the holder can benefit from it, it is a general power of appointment and is taxable.
What is a Power of attorney?
The delegation by one person to another to act as agent on the person’s behalf.
What is Probate?
The court process by which title to property owned solely by decedent is transferred to its new owner
Involves determining the validity of the decedent’s will if they died testate.
What is a Q-Tip trust?
A trust that qualifies for the Federal estate tax marital deduction and must give the spouse all income for their lifetime.
Define Real Property.
Land and fixtures, real estate.
What does Testate mean?
When a person dies with a valid will.
What are Transfer Taxes?
Taxes imposed on the transfer of property: estate tax, gift tax, and generation-skipping transfer tax.
What is a Trust?
A method of holding ownership to property where legal title is in the name of a trustee, and equitable title is in the name of a beneficiary.
What is a Unified Credit?
The tax-free amount that anyone can give at death, currently $13,990,000.
What is a Will (Testament)?
A writing signed by the testator and witnessed by two or more credible persons, revocable at any time.
