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2012 CFP > Estate Planning > Flashcards

Estate Planning Flashcards

1
Q

What are the “laws if intestate succession” (or “laws of descent and distribution”)?

A

The process by which the state determines who gets (and in what amount) a decadent’s estate.

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2
Q

What does it mean to pass by the “operation of law?”

A

The property was passed via a will substitute - joint with rights of survivorship.

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3
Q

What is the difference between P.O.D. and T.O.D.?

A

Payable on death usually applies to bank accounts, transfer on death usually applies to securities.

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4
Q

What is the difference between “legal” and “equitable” (or “beneficial”) interest in a property?

A

Someone with legal interest can manage and transfer property. Someone with an equitable interest has the right to use, consume, or enjoy property.

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5
Q

What are some of the names of demand rights (which create a present interest)? (3)

A
  • Crummey power
  • power of appointment
  • power of invasion
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6
Q

What is a “life estate?”

A

An interest that terminates at someone’s death.

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7
Q

What are the various types of property interest? (4)

A
  • legal vs. beneficial (equitable) interests
  • present vs. future interests
  • interests limited in time
  • vested vs. contingent interests
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8
Q

What is “power of appointment?”

A

It is a clause where the granting party (donor or creator) gives authority to another person (donee or holder) to, at the donee’s discretion, transfer title to a specified portion of the donor’s property to a recipient (appointee).

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9
Q

What does “fee simple” mean?

A

Sole ownership

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10
Q

What is a decedent’s probate estate?

A

The decedent’s property that passes by will or the state’s laws of intestate secession.

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11
Q

What common registrations bypass probate? (2)

A
  • JTWROS

- tenants by the entirety

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12
Q

What is a will substitute?

A

An instrument that accomplishes the same thing as a will but bypasses probate.

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13
Q

What are the objectives of probate? (3)

A

1) distribute decedent’s property
2) payment to legitimate creditors
3) collect taxes

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13
Q

What are the duties of the personal representative? (5)

A
  • marshaling the decedent’s assets
  • processing payments to valid creditors
  • attend to tax obligations
  • manage estate assets
  • distribute estate assets
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14
Q

What is the “spousal elective share” or the “election against the will?”

A

The percentage of property that the spouse is entitled to according to statutory law.

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15
Q

What is the “homestead allowance” statute?

A

This statute gives a dependent spouse (and/or children) either an ownership or an occupancy interest in real property used by such parties as a personal residence.

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16
Q

What is the “homestead exemption” statute?

A

This statute exempts a property from the claims of the general (not secured) creditors of the residence.

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17
Q

What are family allowance statutes?

A

Statutes that allow an estate to pay the maintenance costs of the family that cannot wait until the distribution process is complete. These payments are a priority over general creditors.

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18
Q

What is “adeemed” property?

A

Property that cannot be distributed because it no longer exists in he estate.

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19
Q

What is “equitable apportionment?”

A

When the taxes from an estate are paid by each beneficiary’s share in proportion to the tax burden it creates.

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20
Q

What are the requirements for a valid will? (4)

A
  • minimum age
  • valid form
  • testamentary capacity
  • execution requirements
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21
Q

What is a holographic will?

A

A will that is written, signed and dated in the testator’s handwriting.

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22
Q

What is a nuncupative will?

A

A will which is originally given orally and usually written down within a specific period of time. It requires at least one witness.

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23
Q

What is a primary characteristic of the unified transfer tax system (except in 2010)?

A

It imposed an identical amount of tax liability on lifetime (taxable gifts) and death-time (taxable estate) transfers of equal value.

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24
Q

For 2012, what is the gift and estate tax rate?

A

It is a progressive rate that caps at 35%.

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25
Q

Other than the tax rate, what are other commonalities of the unified tax system? (4)

A
  • unlimited marital transfers
  • the charitable deduction applies to both testamentary transfers and lifetime gifts
  • a tax liability must be absorbed by the “applicable credit amount” (formerly unified credit)
  • Computation of both taxes are cumulative
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26
Q

What is the “applicable exclusion amount” or “exemption equivalent?”

A

It refers to the dollar value of a taxable gift or taxable estate that will not cause payment out of pocket of gift or estate tax liability.

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27
Q

What are the two conditions required to use alternate valuation date?

A

Decreases in BOTH:

1) the value of the decedent’s gross estate
2) the decedent’s estate tax liability

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28
Q

What are the qualifications for special use valuation?

A

1) real property used as a farm or closely held business owned on DOD and 5 of last 8 years
2) prop & use personal prop must be 50% of estate value AFTER debts
3) prop must be 25% of estate value AFTER debt
4) must pass to a qualified heir
5) material participant in farm or business 5 of last 8 years

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29
Q

What is a defining characteristic of a general power of appointment?

A

The ability to benefit the holder without restriction of HEMS or prior consent.

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30
Q

What is the defining characteristic of a special (or limited) power of appointment?

A

The holder cannot benefit themselves unless subject to one of the following limitations:

1) an ascertain able standard such as HEMS
OR
2) prior consent of donor or another party with an interest

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31
Q

What is IRC Section 2033?

A

This section of the code pertains to the decedent’s property interests at death.

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32
Q

What is IRD?

A

Income in respect of the decedent. This is the income to which a decedent is entitled but which is not properly includible in computing taxable income for the tax year in which the decedent died (I.e. deferred comp, precedes from an installment sale, etc.)

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33
Q

What is IRC Section 2042?

A

The section of the tax code that pertains to how life insurance ownership interest is handled in an estate when the decedent is not the insured.

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34
Q

What is IRC Section 2040?

A

The section of the tax code that deals with how joint property is handled by an estate.

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35
Q

What is IRC Section 2041?

A

The section of the tax code that deals with how powers of appointment are handled by an estate.

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36
Q

What is IRC Section 2039?

A

The section of the tax code that deals with how annuities and pensions (with a survivorship interest) is handled by an estate.

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37
Q

What is IRC Section 2031(c) and what are the requirements?

A

The section of the tax code that deals with how qualified conservation easements are handled by an estate. Requirements include:

1) descendent and/or family must have owned property 3 years prior to death
2) interest must be granted in perpetuity to a qualified charity
3) no development rights

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38
Q

What is included in IRC Sections 2035-2038?

A

These sections are called the “transfer sections” and define what lifetime transfer items must be brought back into the gross estate. These are retaining:

2036: lifetime interest
2037: reversionary interest of over 5% of property value
2038: Rights to Alter, Terminate, Revoke or Amend

Or

2035: 3 year inclusionary rule

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39
Q

What is the adjusted gross estate (AGE)?

A

The gross estate minus these deductions:

1) debts
2) funeral expenses
3) admin expenses
4) casualty & theft losses
5) foreign death taxes actually paid

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40
Q

What is the taxable estate (TE)?

A

Adjusted gross estate (AGE) minus:

1) state death taxes paid
2) marital deduction
3) charitable deduction

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41
Q

What is a terminable interest?

A

A terminable interest is an interest in property that will end at a set time or upon the occurrence or nonoccurrence of an event.

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42
Q

What qualifications must be met in order to get the MD when giving a spouse a terminable interest? (4)

A

1) a life estate with a general power of appointment,
2) a QTIP arrangement with an election,
3) naming one’s spouse as the sole income beneficiary of a CRT, and;
4) conditioning the transfer upon the spouse’s survival for a period not to exceed six months.

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43
Q

What is a CRAT?

A

Charitable remainder annuity trust

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44
Q

What is a CRUT?

A

Charitable remainder unitrust

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45
Q

What is a QTIP?

A

qualified terminal interest property

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46
Q

What use IRC Section 2055?

A

It pertains to the charitable deductibility of assets given by an estate.

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47
Q

What are the criteria needed to take a charitable deduction (Section 2055)?

A
  • cash or property ONLY (no service)
  • contribution must exceed amount rcvd from the charity
  • property must be part of the gross estate
  • transfer cannot be of a partial interest unless it qualifies for an exception (CLTs and CRTs)
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48
Q

What is an estate’s tax base?

A

The sum of the taxable estate plus the decedent’s adjusted taxable gifts.

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49
Q

What is IRC Section 2001?

A

It defines adjusted taxable gifts for a decedent’s estate after 1976.

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49
Q

What is IRC Section 2010?

A

It pertains to the applicable credit amount applied to an estate.

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49
Q

What does DSUEA mean?

A

The “deceased spousal unused exclusion amount.”

50
Q

What is PTC and when can it be applied?

A

Prior transfer credit can be taken only when

1) the donee decedent died within 10 years of the grantor decedent (or two years after the donee decedent if it is a vested remainder interest);
2) the transferor decedent gave property to the current decedent; and
3) both decedents had net estate tax due without application of the PTC.

51
Q

What is the gross-up rule?

A

Gift taxes paid out of pocket in the 3 years prior to death are brought back into the estate

52
Q

What is an overqualified estate?

A

An estate in which all or part of the applicable credit amount is wasted because too much property has qualified for the marital deduction is said to be “overqualified” for the marital deduction.

53
Q

What requirements must be met for a recipient spouse to have a qualified income interest (QII)?

A

LAME.

Lifetime, Annual, Mandatory, and Exclusive right to the trust income

54
Q

What is an “A” marital trust?

A

A marital trust that includes a general power of appointment.

55
Q

What is a “B” marital trust?

A

A bypass trust that does not qualify or the marital deduction so allows the decedent to use his/her exclusion amount as opposed to losing it by using unlimited marital transfer.

56
Q

What is a “C” marital trust?

A

A QTIP trust which requires an election to qualify for the marital deduction.

57
Q

What are “takers in default?”

A

Residual beneficiaries of an “A” trust is the surviving spouse doesn’t assign assets away.

58
Q

When should an “A” trust be used? (4)

A

When the grantor spouse wants:

1) a trust rather than outright;
2) to use the MD;
3) to give the surviving spouse max control; and
4) doesn’t care who gets the remainder

59
Q

What types of marital trust have a mandatory payout of income to the surviving spouse?

A
  • the power of appointment trust (“A”)

- the QTIP trust

60
Q

When should an estate trust be used? (4)

A

When the transferring spouse:

1) wants a trust rather than outright;
2) definitely wants to get the MD;
3) wants the recipient spouse to rcv discretionary income; and
4) doesn’t care who gets the remainder

61
Q

When should a QTIP (“C”) trust be used? (4)

A

When the transferring spouse wants:

1) wants a trust rather than outright;
2) flexible use of the MD;
3) wants all trust income to go to the surviving spouse on a mandatory basis; and
4) control of remainder beneficiaries.

62
Q

When should you use a bypass (“B”) trust? (4)

A

When the transferring spouse:

1) wants a trust rather than outright;
2) doesn’t want to use the MD;
3) wants to include others besides the spouse as income beneficiaries; and
4) wants control of remainder beneficiaries.

63
Q

What is the 5% probability of exhaustion test?

A

There must be at a more than 5% chance that the income beneficiaries won’t exhaust the assets. This applies to CRATs not CRUTs!

64
Q

What is the MAP limitation?

A

It is the maximum allowable income (50%) out of a CRT (CRAT or CRUT).

65
Q

What is the MRI limitation?

A

The value of any remainder interest in a qualified CRT must be at least 10% of the net fair market value of any property transferred in trust on the date of the contribution to the trust.

66
Q

What is a NICRUT?

A

When invasion is not mandated, and the shortage will not be “made up” at a later time, the CRUT is known as a net income charitable remainder unitrust.

67
Q

What is a NIMCRUT?

A

If the shortage will be made up at a future time out of excess income (not principal), the CRUT is known as a net income makeup charitable remainder unitrust.

68
Q

What are the differences in the estate and gift tax systems? (4)

A

1) gift splitting (each spouse can give 1/2)
2) annual exclusion of $13k
3) Tax inclusive/exclusive nature
4) stepped-up basis for estate not gift

69
Q

What is form 709 used for?

A

Reporting gift taxes. NOTE: no such thing as a joint 709 so each spouse must have there own form.

70
Q

What are IRC Section 2701-2704 (the Chapter 14 rules)?

A

The special uses governing intrafamily gilt transfers.

2701: corporate or partnership interests (w/no established mkt)
2702: transfers in trust or of term interests
2703: buy, sell, & use of property for less than FMV or buy-sell agreements
2704: lapsing voting or liquidation rights

71
Q

What is a blockage discount?

A

A valuation method for public company securities where selling the entire position would adversely affect its value.

72
Q

What are the prerequisites specified for a section 2701 transfer? (4)

A

1) involves transfer of an equity interest in a closely held corporation or partnership.
2) transfer must be made to a family member
3) the transferor or family member must retain an applicable retained interest in the business
4) there are senior and junior equity interests in the entity

73
Q

What are the prerequisites to use transfer section 2702? (2)

A

1) There must be a transfer to a family member

2) The transferor or applicable family member must retain an interest in the trust.

74
Q

What percentage of undervaluing FMV will generate a penalty when gifting?

A

65% or less

75
Q

What is section 2518 and what are its requirements? (5)

A

To avoid gift taxes on disclaimed property:

1) in writing
2) irrevocable
3) cannot accept the interest or it’s benefits
4) with 9 months of gift or reaching 21
5) cannot direct where the disclaimed interest goes

76
Q

For non-lineal descendants, what age difference is required to trigger GSTT?

A

> 37.5 years

77
Q

Under IRC Section 2036, how can assets be brought back into the decedent’s estate?

A

1) decedent has right to income or use for an unspecified time frame or dies before a specified time frame is up
2) decedent retains the power to assign income beneficiaries
3) decedent retains voting rights to a controlled company (>=20% voting rights for all share classes).

78
Q

Under IRC Section 2035, what transfers can be brought back into the estate? (3)

A

Section 2035 is the 3 year rule and pertains to:

1) a transfer of a retained interest (Sections 2036-2038)
2) life insurance interests ON THE DECEDENT’S LIFE
3) gift taxes paid out of pocket (“gross-up” rule)

79
Q

In what ways are the estate and gift taxes “unified?” (4)

A

1) MD availability
2) CD availability
3) cumulative in nature
4) applicable credit amount

80
Q

Can you gift a future interest?

A

Yes, but the annual exclusion is not permitted and a 709 must be filed even in the value is less than the annual exclusion.

81
Q

In what situations MUST a gift tax return be filed? (4)

A

1) gift of future interest
2) gift splitting even if the result is no taxes due
3) gift to spouse over the annual exclusion
4) gift to charity over the annual exclusion only if is not deductible

82
Q

In what cases does IRC Section 2701 not apply? (5)

A

1) transactions between strangers
2) transfers of the donor’s (and all applicable family members’) entire interest in the asset,
3) only one class of equity OR if the only difference between classes is voting rights
4) market valuation is readily available (public stock)
5) if the retained interest is of the same class as the transferred interest
6) if the retained interest is proportionately the same as the transferred interest (“vertical slice”)

83
Q

What is the subtraction method of asset valuation?

A

Under IRC Section 2701, this method takes the difference of the transferor’s interest before and after the transfer to arrive at the total

84
Q

What interests are excluded from IRC Section 2702? (7)

A

1) incomplete gifts
2) QPRTs
3) PIFs
4) CLTs
5) CRTs
6) divorce transfers
7) transfers to a non-citizen spouse

85
Q

What are the qualified retained interests subject to IRC Section 2702? (3)

A

1) qualified annuity interest
2) qualified unitrust interest
3) qualified remainder interest

86
Q

What is a GST Trust?

A

a trust that could have a generation-skipping transfer with respect to the transferor unless the trust provides

1) that more than 25% of the trust corpus must be distributed to, or may be withdrawn by one or more non-skip parties before such party attains age 46;
2) that more than 25% of the trust corpus must be distributed to, or may be withdrawn by one or more non-skip parties who are living on the DOD of another person identified in the trust instrument, and who is more than 10 years older than such non-skip parties;
3) that if non-skip parties die on or before a date or event described in the previous two bullets, more than 25% of the trust corpus either must be distributed to the estate(s) of such non-skip parties, or is subject to a general power of appointment by such parties;
4) any portion of the trust would be included in the gross estate of a non-skip party if such person died immediately after the transfer; or
5) the trust is a CRT or CLT

87
Q

What is ETIP?

A

The estate tax inclusion period which is the period during which, if death occurs, the transfer would be included in the GE (other than be IRC Section 2035).

88
Q

What is a SCIN?

A

A self canceling installment note which is an agreement that the buyer can stop making payments if the seller dies during the term.

89
Q

In which estate planning scenarios would an individual be responsible for the tax on the gain from the discharge of debt? (3)

A

1) when forming a new business entity and transferring individually owned ENCUMBERED assets to a business (and no longer personally liable).
2) net gift and the encumbrance assumed and/or the gift tax paid out of pocket exceeds the donor’s basis in the property, the donor will have recognizable gain to the excess
3) if the seller of an asset requests the buyer to assume indebtedness against the asset as part of the transaction, then the seller will incur gain if the indebtedness assumed exceeds the seller’s adjusted basis.

90
Q

What is a net gift?

A

A gift occurs when a condition of the gift that the donee either assumes an encumbrance against the gifted property and/or pays the gift tax due on the transfer.

91
Q

What is a RIT?

A

In a remainder interest transaction, the owner of property sells a remainder interest in property to someone else but retains a life estate in the property.

92
Q

What is a SPLIT?

A

In a split interest transaction, an asset is purchased by having one person purchase part of the asset by paying for the actuarial present value of a life estate interest, and having another person pay for the actuarial present value of the remainder interest.

93
Q

What transfers are exempt from gift tax?

A

Political Organizations
Educational - tuition only
Health

94
Q

What powers cause a trust to be taxed to the grantor? (8)

A

1) the grantor (or spouse) has the power to amend, alter, or revoke the trust;
2) trust income may be distributed to the grantor (or spouse);
3) trust income may be accumulated for future distribution to the grantor (or spouse);
4) trust income may be used to pay premiums on insurance on the life of the grantor (or spouse);
5) trust income is used to discharge a legal support obligation of the grantor;
6) trust income may be used to discharge any legal obligation of the grantor;
7) the grantor retains a reversionary interest that exceeds 5% of the value of the trust as measured at the time the trust is created; and
8) the grantor (or spouse) has the power to control beneficial enjoyment of trust principal or income

95
Q

What is DNI?

A

Net distributable income (from a trust)

96
Q

What is UNI?

A

Undistributed net income of a trust.

97
Q

What are throwback rules?

A

Rules were designed to prevent a trustee from making distributions in years when beneficiaries were in low income tax brackets and accumulating income when they were in higher income tax brackets. These rules accomplished this purpose by requiring the recipient of UNI to recompute his or her income taxes for the last three years in an attempt to approximate the tax that would have been assessed on the UNI if it had been distributed in the year in which it was earned.

98
Q

When do the throwback rules NOT apply? (3)

A

1) to any accumulations for a beneficiary under the age of 21;
2) when the trust instrument requires a distribution to be made to a charity; and
3) to a distribution that under the terms of the trust instrument is paid as a gift or bequest of a specific sum of money or of specific property.

99
Q

What is a reverse gift?

A

A gift given to a donee that should predecease the donor in order to take advantage of the step up basis rule. Donee must live a year or no step up is given.

100
Q

What is a net gift?

A

A gift where the donor makes a conditional outright gift. The condition is that the donee assumes some obligation of the donor (i.e., give property but donee takes on the mortgage also).

101
Q

What are the three (3) exceptions to the self-settling trust rules?

A

1) special needs trust
2) “Miller” or “Utah gap” trust
3) pooled trust

102
Q

Why are joint or mutual wills usually inadvisable? (2)

A

1) restrictions on surviving spouse may only give that spouse a terminable interest thus disqualifying the transfer for the MD
2) the restrictions may make gifting of the surviving spouse taxable

103
Q

What is a bequest?

A

Disposal of personal property.

104
Q

What is a device?

A

A disposition of REAL property.

105
Q

What is a legacy?

A

An alternate term for a bequest that usually applies to cash.

106
Q

What percentage of the JTWROS (with spouse) or TBE accounts are included when calculating the gross estate?

A

50% no matter what the contribution is

107
Q

What percentage is includable in the gross estate for a joint account between NON-spouses?

A

100% unless proportion can be proved

108
Q

Can the annual exclusion be used for a gift of a future interest?

A

No

109
Q

In what scenarios must form 709 be filed? (4)

A

1) when the gift exceeds the annual exclusion amount
2) when gift-splitting is used
3) when a future interest is given
4) gift that require a QTIP Election

110
Q

True/false: if gift splitting is used, it must be applied to all gifts in that calendar year.

A

True

111
Q

Do partial interest gifts to a charity qualify for a charitable deduction?

A

No. Unless the partial interest is an authorized type (CLT, CRT, etc.)

112
Q

What is the difference between UGMA and UTMA? (3)

A

1) UGMA usually involves cash whereas UTMA places no restriction on property type.
2) UGMA allows only lifetime gifts, UTMA also allows testamentary gifts
3) custodian has greater investment powers in UTMA

113
Q

What criteria must be met in order for a supplemental needs trust to avoid damaging a beneficiary’s Medicaid support? (4)

A

1) irrevocable
2) for supplemental items NOT for support
3) beneficiary cannot have any control
4) trust can only have one lifetime beneficiary

114
Q

What is the transfer for value rule?

A

Life insurance DB becomes taxable to beneficiary as OI if the policy is transferred for valuable consideration (I.e., selling it)

115
Q

What are the incidents of ownership for transfer tax purposes? (7)

A

The rights to:

1) name/change beneficiary
2) cash in, surrender, or cancel a policy
3) receive policy dividends
4) borrow against policy
5) use policy as collateral
6) assign any of the above or the policy itself
7) revoke a assignment

116
Q

What are the exempt resources when trying for Medicaid support? (6)

A 
Primary Residence up to $500k
Personal Property
One Vehicle
Life Insurance (maybe if high cash value)
Annuities
Burial Policies
117
Q

What are the exempt transfers when qualifying for Medicaid? (6)

A 
between spouses
to a Medicaid exempt trust
transfer of a home
transfer to buy immediate annuity
loans if actuarially sound
transfer to a life estate in another's residence
118
Q

What is the income cap to qualify for Medicaid LTC?

A

300% of max SSI benefit ($2094 for 2012)

119
Q

What are the major categories when discussing estate liquidity? (5)

A

1) admin costs
2) debts and claims
3) misc cash needs
4) cash bequests
5) death taxes

120
Q

What are the purposes of premortem planning? (2)

A

1) reduce the cash needs the estate will require

2) ensure the estate has the cash to cover remaining needs

121
Q

What does usufruct refer to?

A

The right to use a property that belongs to another

122
Q

What is a QDOT?

A

Qualified domestic trust which is for transfers to noncitizen spouses (which don’t get MD)

123
Q

What is IRC Section 6166?

A

Time extension for paying estate taxes

124
Q

What is IRC Section 303?

A

Decedent can redeem stock in a closely held business if that business is OVER 35% of the GE and the estate has the cash to redeem. The goal is to get capital gains treatment NOT dividend income (OI)

128
Q

Minority interest discount

A

Discount applied from inability to control decisions in closely held business

129
Q

Control premium

A

Opposite of minority interest

2012 CFP (7 decks)

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