Estate

Question 1

Non-Community Property Interest

Answer 1

• Income earned by spouses prior to marriage
• Property received as a gift by one spouse
• Property inherited by one spouse
• Interest earned on separate assets held by one spouse as a sole owner

Question 2

Joint Tenancy with Rights of Survivorship (JTWROS)

Answer 2

• Property can be held by husband and wife, parent and child or children, siblings, and business partners
• Control, ownership, and enjoyment shared equally by all joint tenants
• Upon death of each tenant, property immediately passes to surviving joint tenants in equal shares.
• Property NOT controlled by terms of the will
• NOT subject to probate
• Can be disclaimed
• Half step up in basis

Question 3

Tenancy by the Entirety

Answer 3

• Ownership can only be held by a husband and wife
• Transfer of property can only occur with the mutual consent of both parties
• In most states, property is protected from the claims of each spouse’s separate creditors, but NOT protected from the claims of both spouse’s joint creditors

Question 4

Tenancy in Common

Answer 4

• Two or more owners each own an undivided interest in the property
• Any Income is distributed according to each owner’s respective share in the property
• Owners are free to transfer their respective share of the property to other individuals
• Ownership stake goes through probate upon death

Question 5

Assets NOT Subject to Probate

Answer 5

• Property conveyed by Deeds of Title (IRA)
• Property held by Joint Tenancy with Rights of Survivorship
• Government Savings Bond - co-ownership
• Revocable Living Trusts
• Payable on Death Accounts (PODs)
• Totten Trust

Question 6

Assets Subject to Probate

Answer 6

• “Singly” owned assets
• Property held by Tenancy in Common
• Assets where the beneficiary is the “Estate of the Insured”
• Community Property (CP)

Question 7

Calculating Net Estate Tax

Answer 7

Gross Estate
– Funeral exp., admin exp, debts, taxes, and casualty losses =
Adjusted Gross Estate
– Maritable and charitable deductions (unlimited) =
Taxable Estate
++ Adjusted taxable gifts =
Tax Base
– 13,610,000
xx 40% =
Tentative Tax
–Gift taxes paid =
Net Estate Tax

Question 8

Assets Included in the Gross Estate

Answer 8

• Singly Owned Assets
• Tenancy in Common
• Beneficiary is the Estate
• Community Property
• JTWROS/Entirety
• Life Insurance
• General Powers
• 3-year gross-up on gift taxes paid (but NOT GST taxes paid)

Question 9

Life Insurance Added to the Estate

Answer 9

• Proceeds are paid to the Executor of the Decedent’s Estate
• Decedent at Death possesses an Incident of Ownership in the policy
• Decedent transferred a policy with an Incident of Ownership within 3 years of death

Question 10

Life Insurance Incident of Ownership

determines if included in estate

Answer 10

• Only UL or UVL adds CV

Decedent is Insured
1. You own the policy… DB is included in estate
2. Spouse is owner of policy
* Gifted w/in 3 yrs … in your estate
* Gifted and never changed the bene (your estate)… in your estate

Someone else is Insured
1. You own the policy and you die… Replacement cost is in your estate
* term - unused premium
* whole life - terminal reserve + unearned premium

Question 11

Valuation of a Gift

Answer 11

FMV at the date of gift.

Question 12

Basis of a Gift

Answer 12

• If FMV on the date of gift is greater than the donor’s Adjusted Basis, use the donor’s Adjusted Basis.
• If FMV of the gift is less than the donor’s basis, use Client’s Substituted Basis/Dual/Double Basis:
  
  • Above Original Basis - Gain
  • Between Original Basis and Gift FMV - NO Gain or Loss
  • Below Gift FMV - Loss

Question 13

Deductible Gifts (Not Taxable Gifts)
Also called Exempt Gifts or Qualified Transfer

Answer 13

• Gifts to a US spouse, provided they are not a Terminal Interest
• Gifts to qualified charities
• Qualified payment in any amount made directly to an educational institution for tuition
• Qualified payment in any amount made directly to a medical care provider on behalf of any individual
• Gifts to American political parties

Question 14

Summary of Rules Regarding Gifts and the Donor’s Estate

Answer 14

Generally, gifts given are simply “Taxable Gifts” to the extent such gifts exceed the Annual Exclusion.
Taxable Gifts are added to the Taxable Estate
Gift Taxes paid (or payable) are generally allowed as credit against the Tentative Tax
Gift Taxes paid on any gifts within three years of death are added to the Gross Estate

Question 15

Present Interest Gift Vehicles

Answer 15

Present Interest is when donee can enjoy it now
* UGMA
* UTMA
* 2503(c) Trust
* Section 529 College Savings Plan
* Gift to a 2503(b) Trust is a gift of a future Interest

Gets 18k exclusion if not present interest gift no 18k exclusion must use exemption

Question 16

Taxable Life Insurance Gift

Answer 16

If done during lifetime…
gift = cash value + unused premium

CV aka interporlated terminal reserve

Question 17

Powers of Attorney

Answer 17

• Traditional, Non-Durable Power of Attorney: Power ceases when the principal is no longer legally competent
• Durable Power of Attorney: Authority of agent continues when principal become incompetent
• Springing Durable Power of Attorney: Main strength is the agent has no authority over the principal’s assets until incompetency.

No power to execute or revoke a will; or execute a living will

Question 18

Living Will

Answer 18

aka advanced medical directive
discontinues life sustaining procedures

Question 19

ILIT

Answer 19

Unfunded
* Common
* Put in life policy on grantor
* yearly gift to pay premium
* No tax

Funded
* rare
* One lump sum gift aka the investment
* Income from investment pays premium… taxable to grantor

Question 20

Grantor Trust Rules (Tainted / Defective Trusts)
Income Tax & Estate

Answer 20

Defective / Tainted for Income Tax purposes if the Grantor retains:
* Power to control beneficial enjoyment
* A Reversionary Interest exceeding 5% (Retained Interest)

Defective / Tainted for Estate Tax purposes if the Grantor retains:
* A Right to Income or the Right to Use/Enjoy Trust property (Beneficial Enjoyment)
* A Reversionary Interest exceeding 5% (Retained Interest)

Tainting can lead to double taxation… income and estate tax

Question 21

Elements of a Trust

Answer 21

• In order for a Trust to exist, there must be Property (also known as Principal, RE, or Corpus)
• There must be a Grantor. This is any person who transfers Property to and dictates the terms of a Trust.
• There must be a Trustee who received legal title to the Property placed in the Trust, and who generally manages and distributes income according to the terms of a formal written agreement (Trust Instrument).
• There must be a Beneficiary who has Equitable Title to the property.
• The Grantor and Trustee must be legally competent.

Question 22

Simple

vs.

Complex Trusts

Answer 22

Simple Trusts (2503(b), Marital, QTIP) are considered merely a “conduit” for forwarding income to the Beneficiaries (Pass-Through)
* Gotta pay the income out… bene gets taxed
* DNI = max taxable amount paid to benes of a trust
* Corpus distributed at termination
* No charitable gifts

Complex Trusts (2503(c)), are separate Tax Entities and taxed as such if it meets two requirements:
* It is irrevocable, and the Grantor has not retained any control
* Income is accumulated… taxed to trust
* corpus distributed per trust terms
* Charitable gifts allowed

Question 23

Crummey Trust

Answer 23

• Irrevocable Trust with Demand Rights
• Demand Right given to a minor through his/her guardian
• Right to Demand a withdrawal from the Trust that is the lesser of the amount of the Annual Gift Exclusion or the value of the gift transferred

Question 24

Power of Appointment (Trusts)

Answer 24

• Special Power: Exercisable only with the consent of the creator of the power or a person having a Substantial Adverse Interest
• Ascertainable Standard: Relating to health, education, maintenance, or support (HEMS)
  
  • maintenance = support… not limited to necessities of life
  • not subj. to estate or gift tax
• General Power: Holder may exercise the power in any manner he/she wishes

Question 25

“5 or 5” Power

Answer 25

Property subject to a General Power will be included in a donee decedent’s Estate (or considered a “Taxable Gift”) only to the extent that the property 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 **only available after crummey right is settled**

Question 26

Gift and Estate Tax Implications (General Power)

Answer 26

**Gift Tax Implications (General Power)** * Exercised, Released, or Lapsed → Taxed * Lapsed with a “5 or 5” power →Not Taxed **Estate Tax Implications (General Power)** * Exercised, Released, or lapsed →Taxed * Exercised, Released, or Lapsed with a “5 or 5” power → Greater of the “5 or 5” is taxed

Question 27

Marital Trust

Answer 27

* Aka "**A** Trust" * Assets pass by marital deduction... no tax * Second spouse dies... subj. to estate tax * Assets pass to second spouse's bene **Remeber: A** - Above Ground so SS has control

Question 28

Qualified Terminal Interest

Answer 28

* Aka "C Trust or current income interest trust" * Assets pass by marital deduction... no tax * Second spouse dies... subj. to estate tax * Assets pass to trust benes * Can Have HEMS or 5 or 5 provision * Must be US citizen **Remember: C** - Below B so below the ground so dec'd has control **Keyword for QTIP - L.A.M.E.:** * **L**ifetime income for the spouse * **A**nnual payments to spouse * **M**andatory payments to spouse * **E**xclusively for spouse

Question 29

B Trust

Answer 29

* Aka "Bypass trust.non-marital" * Assets pass by estate exemption * Second spouse dies... no estate tax * Assets pass to trust benes * Can Have HEMS or 5 or 5 provision **Remember: B** - Below the ground so dec'd has control

Question 30

Reverse QTIP

Answer 30

Qtip where after the death of 2nd spouse goes to grand children doesn't use GSTT exemption

Question 31

Qualified Domestic Trust (QDT / QDOT)

Answer 31

* No Unlimited Marital Deduction bc spouse not US citizen * However, no Estate Tax due * Jointly held property between spouses is not considered one-half owned * Limited gift between spouses of only $100K (Indexed) per year | Simple trust

Question 32

UGMA v. UTMA

Answer 32

**UGMA** * **G** for gifts so cash, or stocks only no real property * Normally distributed at 18 * can beincluded in custodian's estate **UTMA** * **T** for Transfer, Testamentary, Trump (RE) * Normally distributed at 18 * can beincluded in custodian's estate | Counts as present interest gift

Question 33

2503(c) Trust

Answer 33

* **c** stands for **c**hildren and current so present gift * Kids get money at age of majority aka 21 * can be inlcuded in grantor/tte's estate * funded with any asset * Costs to set up and maintains

Question 34

2503(b) trust

Answer 34

* **b** stands for bad boy * Can't touch the corpus and only gets the income because they are bad boys * Income is a gift of present interest * corpus for is a gift of future interest * best for adult children bc if minor the kiddie tax

Question 35

Dynasty

Answer 35

* Lasts for 21 yrs and 9 monts or as long as local laws allow * Beneficiary interest are limited to life estates * Gets kicked down each generation until time is up and then distributed

Question 36

Charitable Contributions/Transfers

Answer 36

**Income to donor until donor's death** * Charitable Remainder Annuity Trust (**CR**AT) - 5% * Charitable Remainder UniTrust (**CR**UT) - 5% * Pooled Income Fund - no 5% required * Charitable Gift Annuity - no 5% required **Income to the charity:** * Charitable Lead Trust (**CL**AT/**CL**UT) - no 5% required * Private Foundation - 5% - can give money to individuals Remember: * **CR** - **c**ash **r**eceives * **CL** - **c**ash **l**eaves | If private foundation doesn't dist. at least 5% there wil be excise tax

Question 37

Charitable Remainder Annuity Trust (CRAT) v. Charitable Remainder Unitrust (CRUT)

Answer 37

**Charitable Remainder Annuity Trust (CRAT)** * Min. 5% dist. rule * No additions * fixed payments based on initial transfer to trust * remainder payable to any charilty 10% ending value **Charitable Remainder Unitrust (CRUT)** * Min. 5% dist. rule * No additions * fixed payments based on initial transfer to trust * remainder payable to any charilty 10% ending value

Question 38

Wealth Replacement Trust

Answer 38

* Donors want to give to charity but also give some money to kids * Is an ILIT

Question 39

Intrafamily Transfers | (Property owner needs income)

Answer 39

Remember: **PIGS Need Income** * **P**rivate Annuity * **I**nstallment Sale * **G**rantor Annuity Trusts (GRAT/GRUT) * **S**elf Canceling Installment Note (SCIN)

Question 40

Installment Sale

Answer 40

* Not a good answer if you have an estate issue * PV of remaining pmts included in owner's estate * Property is secured * Gain is capital gain... don't use if subject to recapture (145 depreciation)

Question 41

Self Cancelling Installment Note (SCIN)

Answer 41

* Good answer if you have an estate issue * No value included in owner's estate * Gain is capital gain * Assets can be depreciated * Interest can be deducted * Higher payout than installment

Question 42

Private Annuity

Answer 42

Sale of property in eschange for periodic pmts * No value included in owner's estate * Property is exchanged for a promise * Taxed in the year the annuity is established

Question 43

Grantor Retained Annuity Trust (GRAT/GRUT)

Answer 43

Irrevocable trust that allows grantor to gifts property while keeping income * Best assets to gift are ones to appreciate * At end corpus is distributed to remainder person * Value of gift is discounted * Owner must outlive term or the asset is brought back into the estate at date of death value

Question 44

Intrafamily Transfers | (Property owner wants to gift assets and/or income to family members)

Answer 44

* Partnership / S-Corp * Family Limited Partnership (FLP) * Gift Leaseback * Qualified Personal Residence Trust (QPRT)

Question 45

Family Limited Partnership

Answer 45

Gift interest to limited partners to reduce the estate * Qualifies for various valuation discounts allowing for a lower gift tax * General partner maintains control * Income' cant come from personal services

Question 46

Gift Lease-back

Answer 46

Gift of **fully depreciated property** * Lease payments are a business deduction, income to family member * Do not use if child is under age 24

Question 47

Qualified Personal Residence Trust

Answer 47

Works similarly to GRAT/GRUT * At end of term the residence is eliminated from grantor's estate * Value of gift is discounted * Grantor must outlive term or the asset is brought back into the estate * Max 2 properties but one must be primary home

Question 48

Generation-skipping Transfer Tax (GSTT)

Answer 48

* Is the 2nd estate tax * tax rate 40% * Lifetime exemption: $13,610,000 * $18k annual exclusion/donee * For skip persons **Shortcut:** taxable estate amount x .24

Question 49

Skip Person

Answer 49

* Usually grandchildren (2 generations down) * If child dies, the grandchildren move up one generation... no longer skip person * Unrelated person younger by 37.5 years old or more

Question 50

GSTT Transfers

Answer 50

**Direct skip:** * 18k exclusion * transferor pays the GSTT **Taxable termination:** * Non-skip person gets the income... remaining goes to skip person * GST is paid by TTE * No 18k exclusion **Taxable distribution:** * Distribution of property from a trust to a skip person * Usually has 2 or more generations (kid + grandkid) * TTE is paid by transferee * No 18k exclusion | Transferor can elect out of automatic exemption

Question 51

Alternate Valuation Date

Answer 51

* Alternate value date: 6m after death * Can only be used if both are met * Causes a reduction in total value of gross estate * Federal tax liability must be reduced bc of filing

Question 52

Elective Share

Answer 52

Spouses who have not inherited the state minimum % has the right to demand a share of dec'd estate

Question 53

Disclaimer

Answer 53

* In order to Disclaim Property, the following requirements must be met: * Disclaimer must be an Irrevocable Refusal to accept the interest * Refusal must be in writing * Refusal must be received within 9 months * Intended donee cannot have accepted any interest in the benefits * As a result of refusal, the interest will pass, without the disclaiming person’s direction, to someone else | Simple trust

Question 54

Post-mortem Planning Techniques | (Estate Liquidity)

Answer 54

**Stock Redemption (Section 303):** * Business must be Incorporated (Closely Held) * Value of business must exceed 35% of the decedent’s Adjusted Gross Estate * Redemption cannot exceed the sum of the estate taxes plus administrative expenses **Installment Payment of Estate Taxes (Section 6166):** * Value of business must exceed 35% of decedent’s adjusted gross estate * During the first 4 years (of 14 years) can pay interest only on taxes due * Safe answer

Question 55

Port-mortem Planning Techniques | (Estate Tax Reduction)

Answer 55

**Special Use Valuation (Section 2032A):** * 25% of the Gross Estate consists of real property * Must be in Qualified Use: 5-out-of-8 year rule before death and 10 years after death.