Estate Flashcards
Probate
Process of orderly distribution of property to beneficiaries from deceased. Court supervised, filing of claims against the estate by creditors and publication of last will by deceased dying with a will.
Will is made by testator, it creates a testamentary transfer (accomplished by probate).
Testamentary Trusts do not go through probate, only property in the will
If no will, client has died intestate
Assets Included in Probate:
- Singly owned property (fee simple)
- Property held by tenancy in common (TIC)
- Community property (half at first death)
- Assets designating the beneficiary is as the “estate of the insured”
Advantages and Disadvantages of Probate
Advantages:
- Administration of the estate by court supervision
- Marshalling of all assets (inventory/valuation)
- Paying of bills and resolving of credit issues
- Overseeing distribution of the estate as directed by will or intestacy law
Disadvantages:
- Loss of privacy
- Possibility of a will contest
- Court, other costs and delays
- Possible multiple state proceedings (ancillary probate)
Ancillary probate
Double probate procedure when real property is located in a separate state from which the deceased was domiciled
Probate strategies
Avoidance: done by revocable or inter vivos trusts (effective)
Transfer by operation of law: done by joint tenancy with rights of suvivorship
Transfer by contract: done in pursuant to a contract typically with beneficiaries , property conveyed by deed or title, and co-ownership (government savings bonds)
Election against the will (elective share):
A surviving spouse who does not receive a certain minimum amount provided by state law has the right to take a share of the deceased spouse’s estate.
Uniform Simultaneous Death Act (USDA)
If any person dies within 120 hours of the other they are deemed to have died together. Keeping their assets together instead of going through separate probates
Transfers Trusts
Revocable Living Trust: May be altered or canceled by the grantor
Totten Trust: Only operates in a few states, but kept in a bank account and depositor is named the trustee
Payable/Transfer on Death: Funds deposited for the benefit of another, depositor has complete control over the funds. At death funds are transferred to the other person named (if depositor becomes incapacitated nobody can withdrawal funds on their behalf without DPOA)
Community Property
9 states have community property laws (California big one). Spouse owns equal interest in all property acquired during the marriage.
No survivorship rights, thus a will is needed in these states.
Tax Advantages:
- Full step up in basis for long term cap gain property (not ordinary income property) for entire property if at least 1/2 is includable in deceased spouse estate
Interests for equal parties:
- Income earned during marriage
- Appreciation of solely owned property attributable to contributions of nonowner
- Separate assets that have commingled with community assets and can no longer be determined which are separate and which are community
Noncommunity Property in community property states:
- Property received as gift by one spouse
- Property inherited by one spouse
- Income earned by one spouse prior to marriage
- Interest on separate assets held by one spouse
Sole Ownership
Property described as outright ownership or fee simple by deceased. It is subject to probate and can be disclaimed.
JTWROS (Joint Tenancy with Rights of Suvivorship
Property is not subject to probate and can be disclaimed. Can be held by spouses, parent and child/children, siblings or business partners. Must be adults.
Characteristics:
- Property held is shared by adult owners and is controlled/shared equally by all tenants
- Upon death of one tenant the property immediately passes to remaining tenants equally
- The property is not controlled by the terms of the will
- Excluded from probate estate of the deceased
Estate Tax:
Non-Spouse joint tenant
- Full value of jointly held property is included in gross estate of the 1st to die, unless the survivor/survivors can establish (consideration) some portion of property before joint tenancy was created. * Gifts of property are not a contribution or consideration
Spousal joint tenant
- When the first spouse dies, their gross estate must include 1/2 of the property’s fair market value as of date of death
Tenancy by Entirety
Not subject to probate and cannot be disclaimed. Can only be held by spouses, and can only occur with the mutual consent of both parties.
In most states, the assets held in Tenancy by entirety are protected from claims of each spouses separate creditors, but are not protected from claims of joint creditors
Tenancy in Common
Subject to probate and can be disclaimed. Property can be owned unequally by several owners simultaneously.
Characteristics:
- Undivided interest in the property but does not equalize each tenants interest in the property
- Tenants are entitled to a division of income from income producing properties with respect to their percentage of interest
- Tenants can transfer their respective shares of property to other parties
- Upon death of one of the tenants, the deceased shares will go to probate and be included in their gross estate
Estate Planning Documents
Will: Disposes of a deceased’s property when they die if validly executed (deceased is said to have died testate)
- It must conform to specific legal requirements to the state it is created in, generally in
writing and witnessed (
- Some states require attestation clause to validate will (follows states guidelines and is
witnessed)
- Can be amended or revoked at any time, if revoked a new will must state it is intended
to revoke prior will. Can be revoked by being destroyed or torn up. Depending on
state, some wills may or may not revoke certain portions of the will
- To avoid will contestation, attorneys will videotape signing of the will. Some will’s
include a no contest clause, meaning person contesting will gives up rights to
decedent’s property
POA: Written document which owner of assets empowers another person to act on their behalf
Trusts:
Revocable
- Trustees are given authority to act in managing assets in the trust
- Trust continues after the death of the grantor, where DPOA expires at death
Testamentary Trust
- Created by a will
- Designates a person to serve as trustee, they designate beneficiaries of the trust and
how assets are to be administered.
- Only becomes effective if the will creating it is admitted to probate. The trust itself
doesn’t go to probate
Key Elements of Form 706
Gross Estate: all probate assets + all non probate assets
Probate Assets = fee simple, tenancy in common, estate of beneficiary, community
property
Nonprobate assets= JTWROS, Life insurance, general powers of appointment, gift taxes
paid within 3 years of death
(Generation skipping transfer taxes paid within 3 years are not added back)
- Less funeral expenses, administration expenses, debts, taxes and casualty losses ↓
Adjusted Gross Estate:
- Less marital and charitable deductions
↓
Taxable Estate:
- Plus adjusted taxable gifts (amounts exceeding annual gift tax exclusion)
↓
Tax Base:
- Less estate tax deduction (12,920,000 for 2023, remainder at 40%
↓
Tentative Tax:
- Less gift tax paid
↓
Net Estate Tax:
Gross Estate
Fair market value of all probate and non probate assets at the time of death.
Probate Assets = fee simple, tenancy in common, estate of beneficiary, community
property
Nonprobate assets= JTWROS, Life insurance, general powers of appointment, gift taxes
paid within 3 years of death
(Generation skipping transfer taxes paid within 3 years are not added back)
3 year rules: If made within 3 years of deceased death, its included in gross estate
- Certain transfers of life insurance by the insured
- Any gift tax paid out-of-pocket on gifts (not generation skipping trust tax)
Survivorship annuities are includable in deceased gross estate, as well as property that is transferred during their life that the deceased retained the right to use or enjoy (529’s are an exception to this rule)
Exclusions from Gross Estate
- Life insurance owned by others (even when the deceased is the insured)
- Completed gifts (donor parted with dominion and control)
- Life estate for the deceased’s own life only (retained life estate is included)
Adjusted Gross Estate (Net Estate)
Gross estate less funeral expenses, administration expenses, debts, taxes and casualty losses.
Taxable Estate
Net estate less marital and charitable deductions.
Marital Deductions: unlimited amount of property passing to spouse estate tax free if
- Property is included in deceased gross estate
- Property actually passes to the surviving spouse
Charitable Deductions: Outright transfers to qualified charities, are 100% deductible for
both estate and gift tax purposes.
State estate taxes: State level death or inheritance taxes may also be deducted from net
estate
Tax Base
Amount used to calculate estate tax due (if any).
Adjusted taxable gifts: taxable gifts made after 1976, they are added to taxable estate
Tentative Tax
12,920,000 (exemption) - Tax base = Excess
Excess x 40% = Tentative tax liability
Net Estate Tax
Tentative Tax less gift taxes paid = Net estate tax
Lifetime Gifts and Testamentary Transfers
It’s easy to confuse gift tax on lifetime gifts and estate tax on testamentary transfers because….
- share same tax rate, exemption amount, provide unlimited marital deductions and
provide unlimited charitable deductions. It can be used in full while living and again
in full at death.
However, it cannot be used twice because the taxable gifts must be added back to the taxable estate
Sources for Estate Liquidity
Sale of Assets: Assets need to be liquidated to pay the taxes of the estate
- Appreciated assets generally receive a step up in basis.
Life Insurance: If the insured possesses any incidents of ownership on a policy covering his or her own life, the full proceeds are included in the gross estate
Powers of Appointment
Use and Purpose:
Interest held by a person (the holder) providing them with the ability to determine who shall enjoy, use and possess the property. They generally occur in trusts
5 or 5 power
Technique used by estate planners to provide flexibility and financial security for beneficiary with minimal tax consequence.
- property subject to general power will be included in the donee decendents estate
only to the extent it exceeds the greater of $5,000 or 5% of the total value of the fund
subject to the power as measured at the time of lapse.
General and Special (limited) Powers
Special Power: Exercisable only with the consent of the creator of the power or a person having substantial adverse interest (not a general power of appointment. No gift tax or estate tax implications
Ascertained Standard: Limited by some unit of measurement
- A power that is limited by ascertained standard relating to Health, Education,
Maintenance or Support (HEMS) determined by the power holder. No gift tax or estate
tax implications
General Power: allows holder to exercise the power in any manner they wish, virtually the same as outright ownership. Can appoint property to basically anyone.
- If power is exercised, released or lapsed then gift tax implications is that it is taxed
and estate tax implication is that it is taxed as well.
- If power is exercised, released or lapsed with a 5 or 5 power then there is no gift tax
implication and estate tax implication is the greater of 5% or $5,000 is taxed
Lapse: not exercised in a given period of time
Exercise: used in favor of one or more beneficiaries
Release: relinquishes all control to determine who the beneficiaries will be
Prior transfer credit
A tax credit is allowed when property passes through two taxable estates, when the transforer dies and passes to a transferee who dies within 10 years, the transferees property received is credited as it was already taxed
Inter-vivos gifting
Made while the transferor is alive.
A gift includes: Sale, exchange or other transfer of property from one person to another without adequate consideration in money or the money’s worth
A valid gift requires:
- Donor being capable of transferring property
- Donee capable of receiving and possessing property
- Must be delivery and acceptance to the donee or their agent
- A valid gift usually requires donative intent on donor’s part
Federal Gift Tax Requirements:
- All valid gift requirements except donative intent is not required for transfer to be
subject to gift tax
- Gift must be a complete gift. Meaning donor has given up complete control and has no
powers to change its disposition
Appropriate Gift Property: Recommendation & Justification
(Type): Highly appreciated property
(Donee Consideration): Best for charity or a donee in lower tax bracket. May also want to keep this property until death to get step up in basis.
(Type): Property likely to appreciate
(Donee Consideration): Good to gift to remove future value from donor’s estate
(Type): Income producing property
(Donee Consideration): Good to gift only if donee is in a lower tax bracket
(Type): Loss property
(Donee Consideration): Sell to take the loss then gift the cash proceeds from the sale
(Type): Property subject to depreciation
(Donee Consideration): Keep property until it is fully depreciated
(Type): Out-of-State property
(Donee Consideration): Gift to avoid ancillary probate
(Type): Life Insurance
(Donee Consideration): Excellent to gift. Tax based on replacement value, benefit based on face value
Gift Tax Exclusion
The first $17k of the total annual value of gifts of present interest to EACH donee is excluded from the donor’s taxable gifts
Super Annual gift tax exclusion from U.S. Spouse to non-US spouse: $175k
Gifts of Present and Future Interests
Present Interest: Enjoyment by the donee can start immediately
Future Interest: Recipients possession and enjoyment are delayed. They do not qualify for annual gift exclusion
Exceptions to future interest:
- Gifts in trust of future interests on behalf of minors
- 2503(c) trusts
- Crummey trusts
- 529 plans
Basis of Gifts
Appreciated Gifts:
Value of the gift for tax purposes is its FMV on date of gift. If the FMV is > the donor’s adjusted basis on the date of the gift than the donee will use the donor’s adjusted basis for future gains and losses
Depreciated Gifts:
If the FMV on the date of gift is < the donor’s adjusted basis, then use the below scenario for calculating gain or loss during sale of the gift.
- If sale price is > donor’s basis there is a gain
- If sale price is < FMV on date of gift there is a loss
- If sale price is between donor’s basis and FMV on date of gift, no gain or loss
Increasing Basis On Appreciated Gift
Donee is permitted to increase the basis by the amount of gift tax paid by donor if two conditions are met.
- Gift must be appreciated property
- Gift tax must have been paid by the donor
Gift Subject to Indebtedness
When gifting property with debt attached, follow the calculations below
Gift = FMV - mortgage amount still owed
Capital Gain = Debt - Donor’s original basis
Donee’s Basis = Donor’s basis + capital gain
Taxable Gifts and Estate Tax
Rules regarding gifts and the donor’s estate include the following. (all in chapter 2)
- Adjusted gifts exceed the $17k annual exclusion applied in the year of the gift
- Adjusted taxable gifts are added to the taxable estate
- Gift taxes paid (or payable) are generally allowed as a credit against tentative estate
tax - Gift taxes paid on any gifts within three years of death are added to the gross estate
- Gift tax exemption is $12,920,000
Gift Tax Filing Requirements
Form 709 must be filed by donor who in any calendar year gives any of the following.
- More than $17,000 in to any non-spouse donee
- A gift of a future interest in any amount
- A gift for which spouses elect gift splitting
Gift Splitting
Gift splitting requires non-donor spouse consent.
- Two annual returns must be filed for the gift, if after the gift split, the amount of the
gift exceeds the annual exclusion (one exclusion for each)
- Only one donor needs to file if the gift is below the annual exclusion limit
Deductible (exempt) Gifts
These gifts are fully deductible for gift tax purposes, reducing the taxable gift amount to zero.
- Qualified payments in any amount made directly to institution for tuition
- Qualified payments in any amount made directly to provider of medical care
- Gifts to a spouse
- Gifts to a qualified charity
- Gifts to a political organization for its use
- Gifts to the president of the United States
Incapacity & Incompetent
Incapacity: lack of physical or intellectual power or of legal qualifications
Incompetent:
- Not legally qualified
- Lacking the qualities needed for effective action
- Unable to function properly
