Dalton Review

Question 1

Qualifying for Installment Payments of Estate tax

Answer 1

closely held business - sole proprietor or small partnership or corporation with 20%+ interest included in gross estate and

Question 2

Special Use Valuation characteristics

Answer 2

FMV is for property at highest / best use
can be reduced up to $1.1M if not used as such, and continue
US citizen at death,
Farming or business operated by decedent for 5+ of 8 previous years
value (real and personal) is 50%+ of decedent’s estate
real prop value >25% of estate
heirs must continue to use for at least 10 years directly thereafter

Question 3

corp stock redemption characteristics

Answer 3

IRC #303
stock redeemed for estate costs (funeral, taxes, admin…) withOUT being treated as a dividend.
business MUST be a Corporation and value in corp 35%+ in estate

Question 4

characteristics of probate

Answer 4

retitle assets at death
- get clear title & orderly process, BUT
costly, time consuming, public
SO, Avoid probate

Question 5

Estate elections

Answer 5

choose tax yr (non-calendar?), which form, if executor will waive fees, bonds (dist to beneficiaries or cash first), and tax reporting status (MFJ, S, WW…)between
706 estate return (take what you can here)
1040 tax return (typically

Question 6

stock valuation if not traded daily

Answer 6

avg of hi/ low on days traded and multiplied by other’s days to trade -
M 1/2 hi 25 low 21,

Question 7

SCIN characteristics

Answer 7

OWNER holds a Secured Interest
requires actuarial life expectancy term
installment sale with pmts of P&I for term
note cancels at seller death
no gift if PV= value
interest is deductible (by buyer)
used when seller in poor health and may die before full term

Question 8

Private Annuity Characteristics

Answer 8

no Gift tax or Estate tax
UNsecured purchase
uses IRS life expectancy/ pmts
transaction between 2 private parties
seller canNOT be terminally ill
risk is that seller lives longer (buyer keeps paying for life)

Question 9

characteristics of imputed interest

Answer 9

taxable gift from donOR to donEE
taxable income on donOR’s tax return
may be deductible interest on donEE’s return (home)

Question 10

Maximum gift not triggering gift tax in 2015

Answer 10

$5458k (5430k + individual 14k gift)

Question 11

gift valuation characteristics

Answer 11

FMV (even if lower, as the double basis adjustment will come at sale)

Question 12

how are taxable gifts computed when opting for gift splitting

Answer 12

first add up FMV of gifts (by recipient)
next SPLIT the sum of each recipient’s gifts in half
finally, reduce by annual exclusion to get tax by recipient
sum total gifts to see what the donor’s taxable gifts are

Question 13

requirements to exclude trust from taxable gift status

Answer 13

Must be a present interest in a completed gift -

if in a trust, must have a CRUMMEY provision & 5x5 power

Question 14

valuation of a GRAT or CRAT for taxable gift value

Answer 14

amount transferred LESS retained value

Question 15

Where is a revocable trust included in estates?

Answer 15

included in gross estate, NOT in probate estate (as passe by trust doctrine)

Question 16

What does an income beneficiary earn?

Answer 16

dividend income and other income, but, not capital gains or corpus which goes to the remainder beneficiary

Question 17

Characteristics of a Power of Appointment Trust

Answer 17

• Qualifies for unlimited marital deduction if spouse is given general POA over assets, BUT not if POA is limited
• POA trusts are irrevocable, but, can be created during lifetime or at death
• a General POA trust qualifies the grantor’s contributions for the gift tax annual exclusion if the beneficiary is allowed to take withdrawals at their discretion

Question 18

differences between 2503 b and c

Answer 18

2503b (bad boy) requires trustee to offer distribution at age 21 or terminate the trust
2503c (choir boy) may hold property throughout the child’s life - allows trustee to accumulate income

Question 19

characteristics of bargain selling

Answer 19

when selling for significantly below FMV, the discount rate is also applied to the adjusted basis offsetting the proceeds. If sold for 10% of FMV, then, gain/loss is determined based on 10% of basis
e.g. - sell an asset with FMV $100k for $10k (10%)
must reduce basis to 10% of basis to calc gain -
if basis was $30k, new basis is $3k, and
gain is based on both adjusted = $10k - $3k = $7k

Question 20

Estate property exclusions

Answer 20

Life Estate in Home with NO QTIP election

suggests that the home is only theirs during life, not at death or in estate value!

Question 21

bypass trust and marital deduction impact on estate taxes

Answer 21

gift bequests are removed from estate credit available ($5.430M - bypass bequests) to determine amount for bypass trust. Use marital deduction to park remaining assets - EXAMPLE…
$8M estate with gift bequests of $2.1M total ($600k, 700k & 800k), leaves $7M in estate. $2.1M gifts reduce exclusion from $5430 to $3330K)…
$8M estate less $3.330M = $4,670,000 remaining to gift as marital deduction

Question 22

impact of life insurance transferred for valuable consideration

Answer 22

death benefit in excess of basis of consideration provided will be subject to ordinary income tax.
EXAMPLE - client cannot pay a debt and transfers a policy with a cash basis to cover debt. When insured dies, beneficiary’s benefits are taxable for all dollars beyond original basis. Client transfers $50k cash value policy to new beneficiary. when insured dies, all proceeds in excess of $50k are taxed as income. If the face amount is $250k, then $200k is income.

Question 23

Death benefits are taxable when

Answer 23

• policy is transferred for value / consideration
• policy sold to an individual rather than company for cross-sell arrangement (thereby removing the possible exception of insurance for value for partnerships and corporations…)

Question 24

characteristics of an ILIT

Answer 24

• if executor can demand a distribution from the ILIT for estate taxes, the ILIT value is included in gross income
• Executor can sell assets to the ILIT without causing ILIT to be included in estate value
• if owner releases rights to revoke ILIT, the ILIT would be included in the gross estate
• Cash contributions to an ILIT (e.g. paying for insurance premiums) do NOT cause the ILIT to be included in the estate
• gift taxes paid on contributions to the ILIT will be added back to the estate