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CFP Review > Estate Planning > Flashcards

Estate Planning Flashcards

1
Q

Gifting Strategies

A

Never gift property when the fair market value is less than the adjusted basis. Rather, sell the property and let the donor recognize a capital loss for income tax. The donor can then gift the cash proceeds to the donee who can then purchase the property with the proceeds.
Consider gifting property with the greatest appreciation potential to the youngest donee available who has the most time for the asset to appreciate.
When making gifts to charities, always gift appreciated property to avoid the capital gain taxes on the difference between the fair market value and the donor’s adjustable taxable basis. For such property, the donor may able to deduct the fair market value as a charitable deduction, subject to the income tax limitations.
Gift income-producing property to the donee in the lowest marginal income tax bracket so that the income is subject to the lowest possible income tax.

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2
Q

How do you value financial securities for estate tax purposes?

A

The fair market value of a financial security is the average of the high and low trading price for the decedent’s date of death or the alternate valuation date.
If the valuation date is a weekend, the valuation of the financial security is the average of the applicable values for the trading day before and the trading day after.

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3
Q

Relevant tax numbers for estate

Gift/Estate Lifetime exclusion

Gift/Estate Lifetime credit

Annual Gifting exemption

Annual gifting to non-citizen spouse

Max gift and estate rate

A

Relevent tax numbers for estate for 2021

Gift/Estate Lifetime exclusion $11,700,00

Gift/Estate Lifetime credit $4,625,800

Annual Gifting exemption $15,000

Annual gifting to non-citizen spouse $159,000

Max gift and estate rate 40%

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4
Q

What does to die “intestate” mean?
What does to die “partially intestate” mean?

A

It means to die without a valid will.
It means to die with some assets not being disposed of through the will.

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5
Q

Characteristics of a Holographic Will

A

Holographic Will’s are: “HANDWRITING UnWITNESSED”

  • Handwritten (not typed) by the testator and include the material provisions of a will.
  • Must be dated and signed by the testator, but most states do not require a witness.
  • Valid in most states.

UNWITNESSED** WILLS BUT WRITTEN ENTIRELY IN TESTATOR’S **HANDWRITING

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6
Q

Characteristics of a Nuncupative Will

A

NONCUPERATIVE WILL’S ARE: WITNESSED DYING DECLARTIONS

  • Oral, dying declarations made before a sufficient number of witnesses.
  • In some states, nuncupative wills may only be effective to pass personal property, not real property, and the dollar amount transferred via this method may be limited.
  • The use of nuncupative wills is fairly restricted and is not valid in most states.
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7
Q

Characteristics of a Statutory Will

A
  • Drawn by an attorney, and comply with the statutes for wills of the domiciliary state.
  • Referred to as witnessed or attested wills.
  • Must be typed or be in writing, be signed by the testator (generally in front of witnesses), and be signed by the witnesses.

Need a will? “Get A SAW”
_A_ttorney drawn, _S_igned, _A_ttested by 2 witnesses, in _W_riting

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8
Q

When is a will valid?

A
  • The will maker is the age of majority in his domiciliary state, or is an emancipated minor.
  • The will maker has legal testamentary capacity, which means that the will maker must understand the consequences of writing the will, including being able to:
    • recognize and recollect the property being disposed of by the will; and
    • recognize the relationships of those friends and relatives who have any claim to the testator’s assets.

A valid will must be SWEPT:
S - SIGNED by an adult testator
W - In WRITING
E - Signed at the END by the testator
P - PUBLISHED
T - TWO witnesses

A will contest can TIE the executor’s hands:
T - Lack of TESTAMENTARY capacity
I - Undue INFLUENCE
E - Improper EXECUTION (improperly SWEPT)

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9
Q

What is the “per capita” method?

A

The per capita method, sometimes called “by the head” allows the deceased person’s heirs to move into the generational slot of the deceased heir and inherit accordingly.

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10
Q

What is the “per stirpes” method?

A

The per stirpes method, sometimes called “by the roots” directs that the deceased person’s designated share flow to their heirs. Per stirpes is also referred to as taking by representation.

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11
Q

Characteristics of a Power of Attorney

A
  • A stand alone document that allows an agent to act for the principal and may include the power to appoint assets
  • Power to act
  • Ends at the death of the principal
  • May be general or limited
  • May be revoked at any time by the principal
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12
Q

Characteristics of a Power of Appointment

A
  • A power, usually included in a trust or power of attorney, allowing the power holder to direct assets to another
  • Power to transfer assets
  • May survive the death of the grantor
  • May be general or limited
  • May be revoked by the principal during life or at death (via last will and testament)
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13
Q

Fee Simple

A
  • Full outright ownership by one person.
  • Transfers via probate by will or intestacy law.
  • The fair market value of property owned as fee simple is fully included in a decedent’s gross estate, but if the property is transferred to the surviving spouse, the fair market value of the property is eligible for the unlimited marital deduction.
  • 100% included in owner’s gross estate and probate estate.
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14
Q

Tenancy in Common

A
  • Joint interest in property between two or more individuals.
  • Owners can choose to partition their interests without the consent of the other owners.
  • Each person holds an undivided, but not necessarily equal, interest in the whole property.
  • The fair market value of a decedent’s ownership interest is included in the decedent’s gross estate.
  • If the property is transferred by probate to the decedent’s surviving spouse, the fair market value of the decedent’s interest is eligible for the unlimited marital deduction.
  • The decedent’s interest in tenancy in common property passes through probate.
  • Note that each tenant in common will generally have an interest proportional to his financial contribution.
  • IF AN INDIVIDUAL’S SHARE OF OWNERSHIP IS GREATER THAN THEIR PRO RATA CONTRIBUTION, THEN A GIFT HAS BEEN MADE FROM ONE PARTY TO ANOTHER
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15
Q

Joint Tenancy with Rights of Survivorship

A
  • Interest in property held by two or more related or unrelated parties.
  • Each owns an undivided, equal interest in the whole.
  • Each owner generally shares in income and expenses in proportion to his interest.
  • At the death of one joint tenant, his interest automatically passes to the surviving property owners, and therefore the property is not included in a decedent’s probate estate. NO PROBATE, DUE TO WROS
  • Individuals can choose to partition their interest without the consent of the other joint tenants even when the joint tenant is a spouse. After the property is partitioned, each owner owns his share as a fee simple.
  • Property is included in the decedent’s gross estate to the extent of the decedent’s original contribution percentage (actual contribution rule).
    • Spouses named as joint tenants are deemed to have each contributed exactly 50 percent of the financial consideration to the property and the value of the property is eligible for the unlimited marital deduction.
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16
Q

Tenancy by the Entirety

A
  • Tenancy by the entirety is joint ownership of property only between a husband and wife that cannot be partitioned without the consent of the other spouse.
  • At the death of the first spouse, the property automatically transfers to the surviving spouse, and therefore does not go through probate.
  • 50% of the fair market value of the property is included in a decedent’s gross estate.
  • Because the property automatically transfers to the surviving spouse, the value of the property is eligible for the unlimited marital deduction.
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17
Q

Community Property

A
  • Ownership form available only to spouses.
  • Each spouse is deemed to have contributed, and to own, 50 percent of the property and the interest cannot be partitioned without the consent of the other party.
  • Decedent’s interest is included in the probate estate and both halves of community property are stepped to fair market value AT FIRST SPOUSE DEATH, even though the decedent only owned 50 percent of the property.
  • No automatic right of survivorship to the surviving spouse, but if the property is transferred to the surviving spouse by will or intestacy, the value of the property transferred to the spouse is eligible for the unlimited marital deduction.
  • Earnings during the marriage are community property.
    • Property acquired before the marriage and property acquired by gift or inheritance during the marriage is separate property.
18
Q

Community Property States and Rules Regarding Moving from Common Law to Community Property State

A
  • Community property states include: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

To receive community property status, go to a:
“CANTINA** that offers _L_arge _W_ells of **Wine”

  • Alaska allows residents and nonresidents to enter into community property agreements permitting in state property to be treated as community property.
  • Moving from a common law (separate property) state to a community property state:
    • Property acquired before the move generally retains its separate property status, unless the couple agrees to treat the property as community property.
    • Property acquired subsequent to the couple’s move into the community property state, is considered community property.
19
Q

What are some examples of property that pass through probate?

A
  • Fee Simple
  • Tenancy in Common
  • 1/2 Community Property
  • Automobiles
  • Household goods
20
Q

What are some advantages of the probate process?

A
  • Implements disposition objectives of testator.
  • Provides for an orderly administration of assets. Provides clean title to heirs or legatees.
  • Increases the chance that parties of interest have notice of proceedings and, therefore, a right to be heard.
  • Protects creditors by insuring that debts of the decedent are paid.
21
Q

What are some disadvantages of the probate process?

A
  • Can be complex and excruciatingly slow - Delays
  • Can result in substantial monetary costs - Costs
  • The process is open to public scrutiny - Publicity
22
Q

How much can individuals gift as a result of the annual exclusion?

A

Individuals may gift, transfer-tax free, up to $15,000 (2021) per donee per year. Any person may be a donee; one need not be a related party.

23
Q

What is the special annual exclusion for noncitizen spouses and citizen spouses?

A
  • The special annual exclusion for noncitizen spouses is equal to $159,000 for 2021.
  • For citizen spouses there is an unlimited deduction for gifts.
24
Q

What is a Crummey provision?

A
  • A Crummey provision is the explicit right of a trust beneficiary to withdraw some, or all, of any contribution to a trust for a limited period of time, generally 30 days, after the contribution. This power of withdrawal is essentially a general power of appointment, or the ability of the power holder to appoint assets to himself.
    • A Crummey provision (called a power to lapse) may limit the withdrawal right to an amount equal to the annual exclusion or less, thus, converting what might have been a gift of a future interest in trust to a gift of a present interest, which will then qualify for the annual exclusion.
25
Q

What is the 5/5 Lapse Rule?

A
  • If a trust has more than one beneficiary, the 5/5 Lapse Rule must be applied to determine if the lapse causes a taxable gift from the beneficiary holding the Crummey power to the other beneficiaries of the trust. Such a taxable gift is a gift of a future interest and is not qualified for the annual exclusion.
  • Under the 5/5 Lapse Rule, a taxable gift is deemed to have been made when a power to withdraw an amount in excess of the greater of $5,000 or 5% of the trust assets has lapsed, or not been used by a beneficiary.
26
Q

Characteristics of transfers resulting in no gift tax

A
  • Gifts made to political organizations are exempt from gift tax. The term “political organization” means a party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function.
  • A qualified transfer is a payment made directly to a qualified educational institution, or medical provider.
  • Payments of legal support obligations are exempt from the gift tax rules.
27
Q

Gifts to Minors (UGMA/UTMAs)

A
  • UGMA’s AND UTMA’s
  • Gifts to minors, excepting small amounts, are usually made either in trust or through a custodian type account.
  • UGMAs and UTMAs are less expensive than establishing trusts.
  • transfers to either are considered gifts of a present interest.
  • The only caution is that UGMA and UTMA’s cannot be used to provide what would otherwise be legal support. No legal support can be provided.
  • The Uniform Gifts to Minors Act (UGMA)
  • provides that gifted property is transferred to a named custodian under the state UGMA.
  • UGMA’S INCLUDE: Permissible gifts are cash, securities, life insurance, and annuities.
  • The custodian is permitted to spend money on behalf of the minor and serves without bond and normally without the need to account.
  • The Uniform Transfers to Minors Act (UTMA)
  • was designed to replace UGMA.
  • UTMA’S include: ANY PROPERTY INTERESTS
28
Q

Examples of Gifts Made within Three Years of Death that are Included in a Decedent’s Gross Estate (IRC Section 2035)

A

IRC Section 2035 requires a decedent’s gross estate to include:

  1. Any gift tax paid on gifts made within three years of the decedent’s date of death,
  2. The value of any property gifted within three years of the decedent’s date of death if the decedent retained an interest, and
  3. The death proceeds of any life insurance policy insuring the decedent’s life that was gifted within three years of the decedent’s date of death.
29
Q

Characteristics of the Alternate Valuation Date

A

To Qualify

  1. The total value of the gross estate must depreciate after the date of death, and
  2. The total estate tax must be less than the estate tax calculated using the date of death values.

Valuation if properly elected

  1. All assets valued at the alternate valuation date EXCEPT:
  • Assets distributed or sold before 6 months which are valued at the date of distribution or sale, and
  • Wasting assets (annuitized annuities, patents, royalties, installment notes, lease income) must be valued at the date of death.
  • Wasting assets will naturally decline over time and would cause a decrease in the estate not connected to a market value decrease.
30
Q

What is deducted from the gross estate to determine the adjusted gross estate?

A
  • Funeral expenses;
  • Last medical expenses;
  • Administrative expenses;
  • Debts of the decedent;
  • Losses during estate administration;
  • State Death Tax Deduction; A deduction for estate, inheritance, legacy, or succession taxes paid to any state or territory.
31
Q

Characteristics of the failure-to-file penalty

A
  • Failure to Pay: 0.5% per month up to a maximum penalty of 25% (50 months)
  • Failure to File: 5% per month up to a maximum penalty of 25% (5 months)
  • Failure to File can be REDUCED by the Failure to Pay up to 5 months.
  • If the failure-to-file is determined to be fraudulent, the penalty is increased by 15% per month up to a maximum of 75%.
  • *FRAUD IS 15% x 5 MONTHS = 75%**
32
Q

Characteristics of the holding period of inherited property

A
  • The holding period of property acquired from a decedent is always deemed to be long-term (i.e., held for the required long-term holding period).
  • This provision applies regardless of whether the property is disposed of at a gain or loss and regardless of decedent’s holding period.

INHERITED PROPERTY - ALWAYS LT HP

33
Q

Characteristics of a 2503(b) Trust

A
  • 2503(B**) Trusts provide: _B_ENEFITS** to the BENEFICIARIES annually
  • A 2503(b) trust may hold property in trust for the lifetime of the beneficiary (or beneficiaries), but must make income distributions to the beneficiary (or beneficiaries) on an annual basis. This means, at a minimum, the interest and dividends received by the trust must be distributed. Once distributed, the income can be placed in a custodial account for the benefit of the child, or may be used for the child’s benefit.
  • Gifts made to a 2503(b) trust will partially qualify for the gift tax annual exclusion. The portion qualifying for the gift tax annual exclusion equals the present value of the income interest that the child will receive over the term of the trust.
34
Q

Characteristics of a 2503(c) Trust

A
  • 2503(C**) Trusts provide: _C_UMULATIVE** benefits to one beneficiary
  • A 2503(c) trust, unlike its counterpart the 2503(b) trust, allows income to be accumulated in the trust, and allows the grantor to qualify the entire gift to the trust up to the annual exclusion amount for the gift tax annual exclusion, but can only have one beneficiary.
  • The trustee of the 2503(c) trust may, but is not required to, make principal and income distributions for the benefit of the child. In order to achieve these benefits, the trust must terminate when the child reaches age 21, or, at a minimum, the child must be given the right to receive the trust assets at age 21.
35
Q

List some IRD assets

A
  • Qualified Plans
  • IRAs
  • U.S. Savings Bonds
  • Installment Notes
  • Annuitized Annuities
  • Accrued Dividends
  • Accrued Wages
  • Net Unrealized Appreciation (NUA)
  • Patents/Copyrights
36
Q

Rules Regarding Alternate Valuation Date

A

If the executor or administrator elects to value the estate’s assets on the alternate valuation date, the fair market value of the assets six months after the decedent’s date of death is included in the gross estate.

37
Q

Definition and Requirements of Disclaimers

A

Definition: A disclaimer is an irrevocable and unqualified refusal to accept a gift or bequest.

Requirements:

  1. the disclaimer must be in Writing,
  2. the disclaimer must be made within Nine months of the date on which the transfer creating the interest was made or the day on which the disclaiming party reaches the age of 21,
  3. the disclaimant cannot Specify the party to whom the property will be transferred as a result of the disclaimer, and
  4. the disclaimant cannot Accept any interest or benefit in the property prior to disclaiming.

In Writing, 9 Mo or Age 21, No specifications, No acceptance of interest

38
Q

Qualified Medical and Educational Transfers

A
  • A taxpayer can pay unlimited amounts for medical and educational expenses provided they are paid directly to the medical or educational provider.
  • These qualified medical and educational transfers are in addition to the taxpayer’s annual exclusions and unified credit amounts.
39
Q

Ascertainable Standard

A

Distributions made subject to an ascertainable standard include distributions for: HEMS

  • Health
  • Education
  • Maintenance
  • Support

Distributions made not subject to an ascertainable standard include: CHW

  • Comfort
  • Welfare
  • Happiness
40
Q

Summary of the common objectives of life insurance

A
  • Protect income stream for beneficiaries.
  • Source of funds for education.
  • Provide liquidity at death.
  • Source for retirement income.
  • Create or sustain family wealth.

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