Estate Flashcards

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1
Q

What is the 121 exemption for a widow/widower?

A

Sale of primary residence

  • Within 2 years of death: $500k
  • After 2 years (and still single): $250k
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2
Q

More on Tenancy by Entirety (TBE)

A
  • Only spouses
  • No probate
  • CANNOT BE DISCLAIMED
  • Not available in community property states
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3
Q

Probate Reminder

A

ICE T

I - Individually Owned
C - Community Property
E - Estate as Beneficiary

T - Tenants in Common

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4
Q

Key Elements of form 706 (estate tax calculation)

A

[Gross Estate]

Less funeral expenses, administration expenses, debts, taxes and casualty losses

[Adjusted Gross Estate (AGE)]

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 taxes paid

[Net Estate Tax]

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5
Q

Gross Estate Includes The Following

A

All probate assets:
- Singly owned (fee simple) assets
- Tenancy in common
- Estate as beneficiary
- Community property

All non-probate assets:
- JTWROS and tenancy by the entirety
- Life insurance - With Incidents of Ownership
- General powers of appointment
- Gift taxes paid within 3 years of death*

*Generation Skipping Transfer Tax (GSTT) paid within 3 years of death are not added back into the gross estate.

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6
Q

Life insurance in estate and Incidents of Ownership

A

There are three circumstances causing life insurance to be included in the decedent’s estate:

  • The proceeds are paid to the executor of the decedent’s estate
  • The decedent at death possessed an incident of ownership in the policy
  • The insured transferred a policy with an incident of ownership within three years of death.

Incidents of ownership
- Incidents of ownership include the right to assign, to terminate, to borrow against the cash reserves, to name beneficiaries, and to change beneficiaries.
- Premium paying is NOT an incident of ownership.

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7
Q

Basis on gifted appreciated securities
(When gift taxes are paid)

A

If you pay gift tax on a gain, the tax paid adds to your basis.

Example - Gifting Appreciated Stock
Basis - $1,017,000
FMV - $1,117,000
(Excl - $ 17,000)
—————————
$1,100,000 Taxable Gift
x 40% Tax Rate
——————
$440,000 Gift Tax

$40,000 of that tax was on the gain

New basis - $1,057,000 (old basis plus gift tax paid on gain)

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8
Q

Deductible gifts for GIFT TAX PURPOSES

A

Also called exempt gifts or a qualified transfer. Reduce estate tax to zero

Gifts to:
- U.S. citizen spouse
- Qualified charities
- American political parties (organizations)

Qualified payments in any amount made directly to
- an educational institution for tuition (only)
- a provider of medical care

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9
Q

Form 709 (gift tax form) must be filed by individual donor who gives

A
  • More than $17,000 (2023) to any non-spouse donee
  • A gift of a future interest in any amount
  • A gift from a non-community/individual account for which spouses elect gift splitting
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10
Q

Federal Gift Taxation

Not a Completed Gift

A

Examples:
- revocable trusts
- disclaimer
- disclaimer trust

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11
Q

Federal Gift Taxation

Completed Gift

A

Transferor gives up dominion and control of the property

Gift of a future interest
- doesn’t qualify for the $17,000 annual exclusion.
- Must use $12.92mm exemption
- Examples:
- 2503 (b) trust “bad boy”
- remainder interest
- a trust in which income will be accumulated for a period of years

Gift of a present interest
- qualifies for the $17,000 annual exclusion and gift splitting
- Examples:
- 2503 (c) trust
- direct gift
- Crummey trust
- 529 plans
- UGMA/UTMA

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12
Q

Powers which cannot be given to another

A
  • Power to execute or revoke a will
  • Power to execute a living will (right to die)
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13
Q

Crummey demand right amount

A

The annual right of withdrawal is equal to the lesser of:

  • the amount of the annual exclusion ($17,000)

OR

  • the value of the gift transferred
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14
Q

Ascertainable standard

A
  • HEMS - health, education, maintenance, and support
  • it is a limited, not a general, power
  • The terms “maintenance” and “support” are synonymous and not limited to the necessities of life.
  • The grantor can specify “support in reasonable comfort,” “support in his or her accustomed manner of living,” “maintenance in health and reasonable comfort,” as well as “medical, dental, hospital, nursing expenses, and expenses of invalidism.”
  • Distributions for ascertainable standards are not subject to estate tax or gift tax
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15
Q

Five or five power

A
  • This is a general power (limited to $5k or 5% of the property), this included in the donee’s estate (or considered a taxable gift)
  • the $5,000 or 5% ARE ANNUAL
  • This withdrawal is available only after Crummey right is settled
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16
Q

Bypass Trust (B Trust)

A
  • bypass, non-marital, “B,” non marital “B,” family, applicable credit amount, and applicable credit amount shelter trust
  • can be simple or complex
  • First spouse to die controls
  • contains property transferred to the trust at the time of the decedent’s death.
  • Amount of property transferred to the trust is usually an amount equal to the exemption ($12,920,000)
  • Can be structured to provide a stream of income to the surviving spouse only.
  • Unlike the QTIP trust, the income stream can also be split among the spouse and other individuals if the decedent so chooses.

In special circumstances, the surviving spouse may be able to exercise limited rights of invasion over the corpus and income of a bypass trust. As long as the spouse is not given more than a 5 or 5 provision and/or HEMS withdrawal right, the bypass trust will not be included in the surviving spouse’s estate.

At the surviving spouse’s death or termination of the trust, the remaining assets pass estate tax free to the remainder beneficiary.

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17
Q

Why use a B Trust (bypass trust)?

A
  • Control (1st spouse to die)
  • Growth is out of estate
  • Income can be to surviving spouse, kids, or other beneficiaries
  • Can have 5 or 5, HEMS
  • Remainder passes TAX FREE
18
Q

Marital Trust (A Trust)

A
  • Second spouse to die controls
  • generally operates as a “power of appointment” trust (general power, outright owner)
  • consists of property transferred to the surviving spouse at the decedent’s death.
  • The surviving spouse has a right to all income and the right to invade the entire amount of the corpus of the trust.
  • The property placed in the marital trust qualifies for the unlimited marital deduction in the gross estate of the decedent.
19
Q

QTIP - (C Trust)

A
  • “current income interest” trust or the “C” trust.
  • First spouse to die controls
  • used when the decedent wishes to provide the surviving spouse with a stream of income for life yet also wishes to qualify the property for the marital deduction.
  • The main advantage is it allows the decedent to have postmortem control over the property when the surviving spouse dies.
  • must be included as an asset in the gross estate of surviving spouse

To qualify for QTIP property
- executor must make an election on decedents federal estate tax return
- surviving spouse may be given limited power of invasion over income/corpus
- must be US spouse

Keys for QTIP - Payments are:
- L - Lifetime
- A - Annual
- M - Mandatory
- E - Exclusively for Spouse

20
Q

Qualified domestic trust

(QDT or QDOT)

A
  • “glorified C trust”
  • simple trust
  • spouse is NOT a U.S. citizen.

Limitations imposed on transfer to non-citizen spouses are the following:
1. There is no estate tax marital deduction.
2. The exemption amount is available if the spouse is a resident alien.
3. Jointly-held property between spouses is not considered one-half owned (Ownership is based on consideration.)
4. There is a limited (non-taxed) gift between spouses of only $100,000 (indexed) per year. It is called a “super” annual gift tax exclusion. It is $175,000 (2023).

To qualify for the marital deduction, the property must pass to a qualified domestic trust (QDT).

The trust is similar to a QTIP, but it is for a non-citizen spouse.

21
Q

Reverse QTIP

A
  • A QTIP that goes to the grandkids
  • GSTT tax exemption is not lost if a reverse QTIP is elected
22
Q

Dr. Betsy Ross, a U.S. citizen, is married to Toronto Tom, a Canadian citizen living in the U.S. She has a gross estate of $14,920,000.

  1. If she dies in 2023 and no QDT is in place, what will be the taxable estate?

A. $800,000
B. $2,000,000
C $14,920,000

  1. If Betsy dies first and the $14,920,000 is held in joint tenancy with Tom, how much will be included in her gross estate?
A
  1. Answer: C
    There is no estate tax marital deduction. Her taxable estate will be $14,920,000.
  2. Answer: $14,920,000 unless Tom can prove he provided consideration (same as JWROS with a non-spouse) .
23
Q

Michele Vargas is married to a Mexican citizen. She is a U.S. citizen. He dies in 2023, leaving her $14,920,000 of stock. Other than a will, he did no planning. She has a QDT.

Which of the following is true?

A. A tax of $800,000 is due ($2,000, 000 @ 40%) .
B. No federal estate tax is due.
C. She can use her QDT.

  1. If Michele made a reverse gift to her husband before he died, how much could she give to him without incurring a taxable gift?
A
  1. Answer: B

He died. The U.S. Treasury cannot impose estate tax on a foreign citizen.

  1. Answer: $100,000 (indexed) per year ($175,000 in 2023) .
24
Q

Gift to Minors - Gift of a Future Interest

A

2503(b) trust (bad boy)
- income distributions only
- must use $12,920,000
exemption to fund
- Income payout can be subject to kiddie tax.

25
Q

Gifts to Minors - Gifts of Present Interest

Ones subject to Kiddie Tax

A

UGMA
- must be funded with EEs securities, mutual funds, annuities, etc. but not real estate
- normally distributed at age 18
- can be included in custodian’s estate

UTMA
- can be funded with any type of asset including real property
- normally distributed at age 21
- can be included in custodian’s estate

26
Q

Gifts to Minors - Gifts of a Present Interest

ones not subject to kiddie tax

A

2503(c) trust (children)
- Trust tax rate (37% @ $14,450) 2023
- can be funded with any type of asset
- normally distributed at age 21
- costs to set up and maintain (legal and accounting)
- can be included in grantor/ trustee’s estate

Section 529 college savings plan
- flexible distributions/donor retains control
- lump sum gift up to $85,000/$170,000 if split
- can be used for K-12 ($10K/year)
- can be used to pay student loans ($10K/lifetime/student)

27
Q

Can munis go in Pooled Income Funds?

A

No - No municipal pools

28
Q

Generation Skipping Transfer Tax - GSTT

definition

A

Generation-skipping transfer tax (GSTT)
- An objective of federal wealth transfer taxation is to tax all individual wealth in excess of a certain amount each time it passes to the next generation.
-The GSTT rate is the same as the federal estate tax rate (40% in 2023).
- It is a flat tax.

29
Q

GSTT - Skip person defined

A
  • A beneficiary (related person) who is at least two generations younger than the transferor is a skip person (typically a grandchild).
  • If an individual’s parent who is a lineal descendent of the transferor is deceased, then the individual and all succeeding generations move up one generation.
  • Unrelated persons who are more than 37½ years (18 years + 9mo gestation times two) younger than the transferor are skip persons.
30
Q

GSTT - Direct Skip

A
  • Outright gift - the only Skip with the $17,000 annual exclusion

Example of a direct skip
Grampa gifts $12,937,000 to a grandchild. There is no GSTT, but there is a taxable gift of $12.92M.

31
Q

GSTT - Taxable Termination

A
  • indirect skip
  • future interest - no $17,000 annual exclusion
  • “terminator” -> dead
  • Generation 2 has to be dead for Gen 3 to get $
  • A taxable termination is a termination of a non-skip person’s interest in income or principal of a trust with the result that skip persons become the only remaining trust beneficiaries.

Example
Grampa Z places $12,937,000 property into a trust with income to his daughter for life and the remainder to his grandchildren. Z’s daughter dies. Then Z’s grandchildren receive the property at the termination of the trust. There is a GST tax of $17,000 @ 40%, ($12,920,000 exemption) and there is a taxable gift of $12,937,000 (no annual exclusion-not a direct lifetime).

32
Q

GSTT - Taxable Distribution

A
  • No $17k annual exclusion
  • When Gen 2 and Gen 3 get income together
  • any distribution of property out of a trust to a skip person (other than a direct skip or taxable termination).
  • When a trust has beneficiaries in two or more generations and the trustee makes a distribution to a skip person, it is a taxable distribution.

Example

Grampa places $12,937,000 property into a trust with income to his daughter. In addition, $75,000 is distributed to his granddaughter this year. This is different from a taxable termination because Grampa’s daughter didn’t die before his granddaughter took a distribution. The granddaughter will get the benefit of the $12,920,000 exemption (no annual exclusion-not a direct lifetime gift). When the taxable distributions exceed $12,920,000, his granddaughter must pay the GSTT. The transfer is also subject to gift taxes ($12,937,000), no $17,000 annual exclusion is available. Transfers in trust are generally not present interest gifts.

33
Q

GSTT - Tax liability for each payment type

A

Direct Skip: Donor/estate pays the GST

Taxable Termination: Trustee pays the GST

Taxable Distribution: Transferee (recipient) pays the GST

34
Q

Alternate valuation date (AVD)

A

** ONLY for taxable estate**

The personal representative or executor of a decedent’s estate may file an election to have the assets included in the decedent’s gross estate valued at their alternate value which is the FMV 6 months after the decedent’s death.

Both outcomes below must occur before AVD method can be elected.
1. Using it must cause a reduction in the total value of the gross estate.
2. The amount of federal tax liability must be reduced as a result of filing the election.

Exception: no wasting assets
- notes receivable, annuity payments, mortgage payouts, etc.

35
Q

Disclaimer Trust

A
  • similar to bypass trust
  • spouse can disclaim the property yet receive a stream of income from the disclaimed bequest
  • The trust is usually included as a clause in the decedent’s will, making it testamentary in nature.
    Should the surviving spouse decide to disclaim a portion of the bequest or the entire bequest, it is transferred to the irrevocable trust and income is paid to the surviving spouse.
  • For the disclaimer trust to be effective, the disclaimed property must be irrevocably transferred to the trust.
  • The spouse may retain a life estate in the trust’s assets.
  • However, the surviving spouse generally cannot retain any power to invade the corpus.
    -The corpus may be invaded using an ascertainable standard (HEMS) but no 5 or 5 rights are allowed.
36
Q

706 - Adjusted Gross Estate

A

Gross Estate minus
- Funeral expenses
- Administration expenses
- Taxes
- Debts
- Casualty losses

37
Q

706 - Taxable Estate

A

Adjusted Gross Estate minus
- Marital deductions
- Charitable deductions

38
Q

706 - Tax Base

A

Taxable Estate PLUS
- Adjusted taxable gifts (amounts exceeding annual exclusion)

39
Q

706 - Tentative Tax

A

Tax Base minus
- Estate tax deduction ($12.92mm exemption)
- Multiply remainder by 40%

40
Q

706 - Net Estate Tax

A

Tentative Tax minus
- Gift taxes paid