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ALU 202 > Chapter 6 > Flashcards

Chapter 6 Flashcards

1
Q

what is estate planning?

A

distribution of the estate after death, dealing with the acquisition of wealth and estate maintenance as well as the delivery of estate assets upon death to beneficiaries.

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2
Q

What are some advantages to having a well-planned estate?

A
  1. max wealth
  2. efficient use of estate capital
  3. tax savings
  4. appropriate asset ownership
  5. assurance thay estate property wishes
  6. adequate estate liquidity
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3
Q

define the federal estate taxation rules

A

typically applies to large estates. Small estates been exempt by means of the exclsuion amount which allowed small estates valued below a certain amoutn to go untaxed.

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4
Q

What are some arguments for the estate tax?

A
  1. assist in the redistributuion of wealth via goverment programs
  2. financial support for american democratic institutions of government and national programs
  3. encourages support for charitable gifting as a strategy for reducing the taxable estate.
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5
Q

What are arguments against the estate tax?

A
  1. disproportionally affects society’s most succesful and prodcutive citizens and penalizes business entrepreneurs looking to safe guard their lifes work and passit to their heirs.
  2. money and financial resources removed from the general economu via the estate tax cause a loss of jobs
  3. tax-supported institutions are generally less effective at promoting economic prosperity than a free-market economy.
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6
Q

during the estate planning process, what is the purpose of “net worth”

A

used as a basis from which to estimate an individual is subject to estate tax.
its computed on the taxable estate which is an amount determined by subtracting certain allowable deductions from the gross estate.

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7
Q

What is the gross estate?

A

starting point for the computation of the estate tax. Defined by the IRS as the valye of all property interest, real or personal, tangible or untangible of an individual on the date of death to the extent of his or her interest in the property.

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8
Q

Most property is valued at Fair market value (FMV) what is this?

A

the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion.

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9
Q

What are some exceptions to FMV asset valuation?

A
  1. Real property may not always have a ready market from which to estimate a FMV.
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10
Q

How can real property be valued?

A

at the higher of the highest prices available or its salve valye.
1. may be subject to a special use valuation which is designed to value the property according to its current use, not its potential vlaue. ie farms or small family businesses that are passed to an heir with no intent to change its function of the property

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11
Q

What are some examples of special valuation situations.

A
  1. publicly traded stock and corporate bonds that are valued on the date of death as an alternate valuation date.
  2. US state bonds are valued at the date of death redemption price
  3. closely closely held corporation stock not subjected to special use valuation is valued according to either the adjusted book valye method of the capitalizatrion of adjusted earnings method.
  4. life insurance proceeds set aside for the benefit of the decedents estate or proceed from policy owned by the decedent are taxed as part of the estate.
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12
Q

From the gross estate certain allowable deductions are made to arrive at the adjusted gross estate. What are they (5)?

A
  1. allowable debts (such as mortgages)
  2. funeral expenses
  3. medical expenses
  4. administrative expenses.
  5. losses during estate administration
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13
Q

How are MArital and charitable deduction applied to estate calculations?

A

they are substracted from the adjusted gross estate to arrive at the taxable estate.
1. property passing to the spouse of the decedent can be deducted completely from an adjusted gross estate.

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14
Q

What is the purpose of the marital deduction?

A

acts to PP the imposition of any estate tax until the death of the surviving spouse.

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15
Q

What are factors to consider when using a marital deduction?

A
  1. value of property rights, (power of appointment)
  2. partial interest in property, where property is owned/cotnrolled by +1 person
  3. charitab le remainder trusts, where beneficiary receives income from the property, but charity gets property on the death of the beneficiary
  4. guarentee anuitity interrest.
  5. split gifts
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16
Q

What is a power of appointment

A

a property right reserved by the property donor that allows the donor to control who receives the property or benefits from the property

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17
Q

What is estate growth.

A

the side of the taxable estate dertermines the amount of the estate tax and the insurance policy needed to cover this expense.
- estamate of estate growth is a function of time and the interest rate by which the estate assets are expected to grow.

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18
Q

What is the u/w challange in dealing with estate growth?

A

determining the appropriate time frame and interest rate assumptions for any given estate.

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19
Q

When chossing/evaluating estate growth projections in a developeping global economy which is not entirely stable, what should you be looking for?

A
  1. strive to adopt a reasonable rate of return commensurate with the average return on assets in the estate over time
  2. reflect the types of investments that make-up the estate
  3. adjust to the age of the estate owner
  4. assume that at least some investment income will be consumed by the estate owner and will not be completely reinvested.
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20
Q

Define estate taxation in Canada

A

there is no estate tax.

  • the Canadian income tax act provides that a deceased tax payer is considered to have “sold” all capital property at fair market value immediately before death.
  • any capuital gain thus realized will be subject to tax on the terminal income tax return of the deceased.
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21
Q

Capital property is broken down into two categories. Name and define them

A
  1. depreciable capital property: the value of which declines over time, (buildings/furniture/machinery)
  2. non-depreciable capital property, such as land, stock and mutual funds.
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22
Q

When would you see a Capital gains tax?

A

will be incurred in situations where the FMW exceeds the owner’s adjusted cost basis of the property.
50% of the gain will be included on the deceased’s estate terminal income tax return, beyond that the estate canuse any remaining portion of a lifetime capital gain exemption of 750k available for farms properties and shares of small business.

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23
Q

What happens if a property is actually worth more than its depreciated value?

A

some or all of the depreciation can be added back to the value of the property through a tax provision called the recapture of captial cost allowance. The “recaptured” depreciation is taxable as income on the terminal tax return.

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24
Q

Does estate growth impact both capital gains and recaptures of capital cost allance?

A

yes.

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25
Q

How is marital duductions deplicted in canada?

A

law provides that property “rolled-over” to a spouse directly or through a spousal thrust does not incur capital gains tax until the death of the second spouse.

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26
Q

Why has chariatable donations for estate planing purposes received attendion from financail planners in canada?

A

result of canadian legislation intended to shift support for charities frm the public to private sector.
- people can claim a federal tax credit of 15% on the first 200$ charitable donation and 29% on any donation above that amount.. when combinated with an insurance plan, the donations (as premiums) can provide a tax benefit and bequest for charitable foundations.

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27
Q

What are the 3 seperate jusristictional premises employed by the internal Revenue Service, of which can trigger the imposition of the estate tax?

A
  1. US citizenship
  2. residency or domicile
  3. situs or location of estate assets.
28
Q

the IRS code states that “a tax is hereby imposed on the transfer of the taxable estate of every decendent who is a citizen or resident of the US”. Citizens of the US are taxed on the value of their estate assets worldwide. What is the definition of a citizen?

A
  1. all native-born citizens
  2. all naturalized citizens
  3. all citizens living abroad.
  4. all individuals who have multiple citizenship status, as long as one of those citizenships is that of the U.S
  5. former citizen and expatriates- .
29
Q

What is a resident? As per the US treasury Department Regulations and how is a Residentcy or Domicile proven?

A

a resident decedent is a decedent who at the time of his death had his domicile in the US.

  1. Physical presence
  2. Intention to remain in the country
30
Q

The IRS tax code states that : the value of the gross estate of every decedent nonresident noncitizen of the US shapp be that part of his gross estate which at the time of his death is situated in the US” what does this mean?

A

assets owned in the US by foreign decedents are subject to estate tax, even if the decedent has never visited the US and has no residence in the country.

31
Q

What are the special rules that govern the imposition of the estate tax on foreigners?

A
  1. estate tax exclusion for non-residents is 60K. Estate tax is due when a non-resident aliant;s estate is transfers US situs assets above 60K
  2. charitable deduction applies ONLY to US citizens
  3. no marital deduction if the spouse is not a US citizen, if they become one before the estate tax return is filed then it can be applied.
  4. foreign death fax credits can be applied agaisnt the US estate tax.
32
Q

why do estate treaties exist between coutries?

A

to help insure agaisnt the risk of “double taxation: on the same estate assets. They enable the use of foreign death tax credits agaisnt the US estate tax.

33
Q

What is income with respect of a decedent? (IRD)

A

the income the decedent earned but did not receive before his or her death.

34
Q

What are some examples of IRDs?

A
  1. uncollected salaries, wages, bonuses, commissions, vacation pay and sick pay,
  2. interest and dividends accrued but unpaid at time of death
  3. uncollected lottery winnings.
  4. assets held in deferred compensation benefits.
  5. outstanding stock dividends still owed to th decedent
  6. accounts receivable of a cash basis sole proprietor
  7. rents and royalties accrued but not paid before death
  8. unreceivd gain from the sales of property.
35
Q

IRD is taxexd twice. How?

A
  1. subject to income tax on either the deceased term income tax or if the income has been passed by arrangement to an income beneficiary. then it will be taxed on thiers.
  2. s/t estate tax pas part of the decedent estate
36
Q

What are other benefits to usuing life insurance as a funding vehicle for estate planning?

A
  1. protecting agaisnt estate tax and income replacement sales.
  2. source of funds tgo replace financial losses created at death ,
  3. tax benefits
  4. sujpport retiremen t planning
  5. welth shifting oppertunities.
37
Q

What is a Trust in terms of estate planning?

A

a legal arrangement whereby property is held and managed for the welfare of a beneficiary. T

  • provides an oppertunity for competent asset management.
  • acts as independent taxpayer,
  • reduce estate tax liabilty and
38
Q

The internal Revenue code in the US requires that the gross estate include an interest in any property that was what?

A
  1. transfered by the decedent within 3 years of death and 2) would have been included in the estate had such interrest been retained by the decedent.
39
Q

Name some types of trusts

A
  1. revocable trust
  2. irrevocable trust
  3. charitable trusts
  4. generation-skipping trusts
  5. dynasty trusts.
40
Q

What is a revocable trust?

A

type of living trust that is set up before death of the grantor.

  • no estate tax savings,
  • liable for income tax due to income generate within the trust and trust assests
  • used to avoid income tax libability
  • grantor can select professional asset managers or can personally manage trust assets.
41
Q

What is an irrevocable trusts

A

living trust and provides sig opportunity for tax savings as well as wealth and income shifting
- grantor cannot control
-

42
Q

What are the grantors benefits to an Irrevocable trust

A
  1. assets removed from the estate and put into the trust reduce the size of the estate and thus the estate tax.
  2. appreciation in the trust asset happens outside the estate. This also helps reduce the ultimate size of the estate at death
  3. income generated by the trust assets is tacxed to the tust, often at lower rate thant received by the grantor.
  4. the trust assets are not vulnerable to the grantors creditors.
43
Q

What are Irrevocable life insurance trusts (ILITs) are often used in family estate planning. why

A

the life policy is effectively removed from the estates of both the grantor and the beneficiary who is often the spouse.
- can also loan the estate money to pay estate taxes or arrange to purchase liquid assets from the estate.
-

44
Q

What are charitable Trusts and Charitable life Insurance Sales

A

they can exist forever.

  • subject to state laws regardings the rule against perpetuities, which stipulate that private trusts can exist for a period of time not to exceed 21 years after the creation of the trust.
  • public trust and can hypothetikcally exist for an ulimited period because they serve the betterment of sociatey, and not a specific individual or a small group.
45
Q

Are charitable trust are irrevocable?

A 
Yes  and they must not name a specific individual or individuals.
- they must name a class of beneficiaries
46
Q

How do Charitable trusts create tax benefits?

A

shifting assets out of the estates, reducing the estate tax. The CRT (charitable remainder trsut) allows for a percentage of the trust assets to be paid out annually to a non-charitable beneficiary over time.

47
Q

What criteria should be reviewed when a Life insurance sales for charitable purpose supports the wishes to an individual to make a bequest and continue contribitions to a charity for a short period of time beyong their demise

A
  1. what is the past hx of giving
  2. what has been the amount of the annual contribution
  3. is the amount of the annual premium an unresonable percentage of the individuals income?
48
Q

What is a Generation skipping trust?

A

GST- avoid of cost of repeated estate tax payments when assets are transfered and address any concerns the grantor can have about the efffect that unearned wealth may have on the charater of their descendants.

  • acts by maintaing assets in the trust to an amount equal to certain exemptions to the generation tax.
  • can use trust contribution to purchase an insurance plan.
  • subject to the rule agaisnt perpetuities.
49
Q

What is the purpose of multi-generation planning?

A

allows for the use of estate assets by grand-children, and beyong.
- used where wealthy adult children of wealthy elders would not substantially benhefit by an act of inharitance.

50
Q

What are dynasty trusts?

A
  • flout the rule agaisnt perpetuities by creating a private trust that can last indefinitely.
  • can be funded tax free wit the geneeration-skipping exemption or the annual gift exclusion amount,
  • life insurance can be purchase to complete or augment the trust funding when the grantor dies.
51
Q

What are the two types of personal trusts in Canada?

A
  1. Living (Inter Vivos) trusts

2. Testamentary trusts (est at death.)

52
Q

What is an intervivos trust?

A
  • set up during the lifetime of the trust created and are treated as a separate taxpayer.
  • life insurance had an acception to the rule of trust paying income rates.
  • LI avoids Canada’s 21 rule
53
Q

What is Canada’s 21 rule

A

Equivalent to the US rule agaisnt perpetuities and provides that all trusts must normally distribute their assets within 21 years after the trust is created. Trust involving LI are an exception to the 21 year-rule.

54
Q

What are the common type of Inter Vivos Trusts?

A
  1. Sousal trusts- takes advantage of marital rollover law.
    2, Akter EGO and joint partner trusts are intervivos trusts targeted to citizens >64. An alter ego trust has one grantor.
55
Q

How are testamentary trusts different from inter Vivos trusts

A

They com into existence as a direct result of the death of the grantor.
- Death benefits paid to a testamentary trust avoid probate fees while also receiving special graduated income tax rates which are more advantageous than the usual rates.

56
Q

What are the advantages offshore Trusts and private Placement Insurance- US?

A
  1. Many foreign justrisdiction are tax havens. teh trust may not be required to pay an income, capital gains, or estate tax.
  2. dosnt recognize foreign judgements. Creditors must file suite in the jurisdiction in which the trust is located, whch can be difficult
  3. offshore trusts can avoid or extend the rule agaisnt perpetuities.
  4. the trustee of an offshore trust can purchase foreign securities without adhering to the SEC reporting requirements.
  5. the trustee can pruchase life insurance from either a domestic or an offshore carrier because life insurance can accumulate cash value tax-free, it is an ideal vehicle to use in conjunction with an offshore trust.
57
Q

Are offshore carries subject to mainland regulations ?

A

No, and they have lower internal costs, more flexible investment options for UL plans, and lower ocmmisions rates.

58
Q

What are private placement variable univeral life contracts? (PPVUL)

A

they offer investment oppertunities not available to the general piublic.
- involve private offerings and are made available to accredited investors and groups of up too 100 persons. Accredited investors are individuals with invesments of 5M% or more or an institution with investments of >25M$

59
Q

What is a Family limited partnership (FLP) ?

A

a modified business partnership comprised solely of family members and has characteristics common to both regular partnerships and corporations.

60
Q

Name the two classess of partnership for FLPs

A
  1. general partners - the elders who contribute the property held withint he SLF.
  2. limited partners- passive role and have no daily management responsibility. These are often children and other younger family members.
61
Q

Who are FLPs designed for

A

attractive estate planning tool for same-sex couples are their flexible membership requirements.

62
Q

Whats a major advantage of SLF?

A

its like corporate stockholders, partners enhoy liabiklity protection agaisnt creditors.
- as an irrevocable trust, assets places in the FLP are shifted out of the estate of the grantor with subsequent drop in estate value and additional tax benefits created due to wealth and income shifting

63
Q

What are the two roles played by life insurance in the FLP?

A

As a funding vehicle for the SLP or as a apart of the buy-well arrangement that exist between partners themselves. The FLP is an adaption of the common business partnership. Buy-sell agreements can be used in FLP estate planning just as they are used in traditional business continujation sales.

64
Q

What are some examples of financial justifications for u/w the elderly.

A
  1. estate transfer
  2. continuing income
  3. funds for final expenses
  4. stock repurchase
  5. mangement and protection of accumulated assets
  6. changing investments from growth to quality
  7. long term care needs.
65
Q

The purpose of life insuranfcef in estate planning is 3-fold. state this

A
  1. LI can replace assets lost due to estate transfer cost.
  2. Life insurance an transfor assets, as is the case in a buy-sell agreement for a FLP or the purchase of an illiquid asset from an estate by a trust, with LI proceeds.
  3. LI can increase as increase assets, as happens in private placement insurance.

ALU 202 (15 decks)

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