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CFP > Estate Planning > Flashcards

Estate Planning Flashcards

1
Q

Community vs. Common Law Property

A

Community Property:
- Form of ownership only held by spouses in community property states
- Each owns a separate/undivided equal interest in property acquired after marriage
- No survivorship rights (subject to probate)
- NO TBE
- Watch out for life insurance owned (only 50% is included in GE)

What is not community property?
- Gifts kept in a separate account
- Inheritance kept in separate account
- Assets obtained before marriage

Key Advantage of Community Property
- Entire LTCG property gets a full step-up in basis upon death of one spouse if one half is included in GE

Common Law Property:
- Get half step up in basis on LTCG property

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2
Q

Sole Ownership

A

Individually owned property & subject to probate

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3
Q

Joint Tenancy with Rights of Survivorship (JTWROS)

A

JT means JTWROS

JTWROS Rules
- Property is shared equally by all tenants
- Survivorship feature - upon death of a tenant, the property passes to the surviving joint tenants
- Not controlled by the will and skips probate
- If JTWROS is broken, it becomes TIC property

Spousal JTWROS:
- Always 50% is included in GE

Non-Spousal JTWROS
- Full values of JTWROS is included in first to dies GE unless ownership can be furnished (keep meticulous notes)

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4
Q

Tenancy by Entirety (TBE)

A
  • Can only be held by spouses
  • Need consent of both spouses to fund, withdrawal, or dissolve
  • Divided amongst the spouses equally (50/50)
  • Protected from each spouses creditors (subject to JOINT creditors)
  • NOT AVAILABLE in community property states
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5
Q

Tenancy In Common (TIC)

A
  • Each owner has a unique percentage of ownership (I can own 10% and someone else can own 90%)
  • You own a percentage not actual piece (I dont own 10% of a room)
  • Entitled to division of income based on respective percentage ownership
  • Free to transfer respective share (dont need permission)
  • No survivorship rights (will go through probate) and percentage ownership is included in GE
  • Percent of FMV is shown on statement
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6
Q

Probate

A

Assets Subject to Probate
- Singly Owned Assets (no beneficiary)
- TIC
- Assets where beneficiary is the estate
- Community Property (50% attributable to each spouse)
Trusts DO NOT pass through probate - testamentary trust does not go through probate, but the assets used to fund the trust go through probate

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7
Q

Estate Tax Roadmap

A

Gross Estate - Includes everything an individual owns + life insurance transferred within 3 years + Gift taxes paid within 3 years
- ** Adjustments (A**dmisnitrative, Burial Costs, Casulty Loss, Debts, Emergency)
= Adjusted Gross Estate (AGE)
- Unlimited Marital Transfers & Unlimited Charity Deductions
= Taxable Estate
+ Taxable Gifts (Notes on 709)
= Tax Base
- Exemption Amount (12,920,000)
X 40%
= Tentative Tax
- Gift Taxes Paid
= Net Estate Tax

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8
Q

When should form 706 be filed?

A

Only when the total taxable estate equals or exceeds the amount of exemption ($12,920,000)

Executor generally responsible for paying the tax

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9
Q

Life Insurance Included in Gross Estate

A
  • Life insurance on the decedent transferred within 3 years of death (only gifting not selling)
  • Life insurance payable to the decedents estate
  • Decedent possessed incidents of ownership in policy upon death (could change beneficiary, borrow)
    Paying the premium is not a right of ownership
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10
Q

Transfers with Retained Life Estate

A

Property that has been transferred but the decedent still retains incident of ownership or right to income/right to enojoy
- Retaining a right to assign and designate property will be included in GE

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11
Q

Unlimited Marital Deduction

A

Unlimited amount of property can pass to spouse through the unlimited marital deduction if the below requirements are met:
- Property must be included in the decedents gross estate
- Property must actually pass to the surviving spouse (exception is the C/QTIP trust)
- Recipient spouse must be a US citizen unless a QDOT

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12
Q

Recommendation for Gifting Property

A

Highly Appreciate Property = Give to charity or a donee in a lower tax bracket (pay capital gains)
- could also keep the property until death to eat a step up, if under estate tax threshold

Property Likely to Appreciate = Gift; remove from estate

Income Producing Property = Gift; lower tax bracket

Lost Property = SELL then gift cash

Property Subject to Depreciation = Keep (get depreciation)

Fully Depreciated Property = SCIN or Gift Lease-back

Out-of-State Property = Gift, Sell, avoid ancillary probate

Life Insurance = Gift; the gift is based on the cash value

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13
Q

Calculating Amount of Gift

A

Value of Gifted Appreciated Property = Amount of FMV (retains donors basis)
- Taxable gift to the Donor = Gift - Annual Exclusion $17,000
- DO NOT MISS THIS

Value of Gifted Loss Property = FMV (double basis)

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14
Q

Exempt Gifts / Deductible Gifts / Qualified Transfers

A

The below gifts are fully exempt form gift taxes - no taxable gift amount:
- Unlimited Marital Deduction
- Qualified payments made directly to an educational institution for someone’s tuition
- Payments made to a medical institution on behalf of an individual
- Gifts to AMERICAN political parties (organizations, not candidates)

This is just for the estate tax portion, still limited to income tax thresholds

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15
Q

When to File a Gift Tax Return (709)

A

When to File 709 in Common Law State
- Giving more than annual exclusion amount ($17,000) - non-spouse
- Gift Splitting - when under 2X annual exclusion amount ($34,000) only one return and spouse signs
- Gift of future interest

When to File 709 in Community Property State or JTWROS Account
- Over 2X annual exclusion ($34,000)
- Gift of future interest

Dont have to file gift tax return when giving straight to college or hospital

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16
Q

Present Interest Rule

A

First $17,000 of the total annual value of PRESENT INTEREST gift to each donee is excluded from the donors taxable estate

What is a present interest gift?
- 2503(c)
- UTMA/UGMA
-529 Plans
- Crummy Trust
- Direct Gift

What is a future Interest Gift?
- 2503(b)
- Remainder Interest
- Irrevocable trust where income will be accumulated (hence 2503(b))

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17
Q

Gifting Life Insurance

A

Gifts of Life Insurance During Lifetime = Interpolated Terminal Reserve + unearned premium (replacement value)

Watch out for when someone puts someone else as beneficiary on a policy of a third party - death benefit becomes a gift
- Ex. Mom puts daughter as beneficiary for a policy on Dad. If Dad dies, daughter gets DB and Mom has a taxable gift of the DB

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18
Q

Powers of Attorney (Durable vs. Non-Durable)

A

Durable Power of Attorney
- Not affected by principals incapacity; however, ended by death
- Principal must be capacitated when drafting DPOA
- Can be sprinting - effective upon incapacity of the Principal

Non-Durable Power of Attorney
- Does not survive incapacity; will not be valid

Powers that can not be given to another
- Execute or revoke a will (has to be done by that person)
- Execute a living will or right to die - Must sign a document before incapacity

Revocable trust is great with incapacity planning as wants/needs can be written into the trust document and continues after death

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19
Q

Guardianship / Conservatorship

A

Guardian: Makes healthcare and personal decisions on behalf of another

Conservator: Guardian of property; makes financial decisions

Both are appointed by a court

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20
Q

Elements of a Trust

A
  • Trusts must have property - unless they are just a piece of paper
  • Must have a Grantor/Trustor - transfers property to the trust - Grantor must be competent
  • Trustee - holds legal title - could be the Grantor
    • Becomes fiduciary when get control of assets
  • Beneficiary - holds equitable title (not legal title)
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21
Q

Irrevocable Grantor Trust (IDIOT Trust)

A

Grantor trust happens when the maker of the trust holds to much control or to many strings over the property for tax purposes - deemed tainted or defective
- Wealthy client might want trust to be tainted for income tax purposes but not estate purposes - lower tax bracket than trust tax bracket

When is a trust tainted for estate purposes?
- A reversionary interest that exceeds 5% of the trust value at the time of creation is retained by the grantor or grantors spouse at death
- The power to control the beneficial enjoyment of the trust principal or income held by the grantor or grantors spouse (holding right to dictate income)

Beneficial enjoyment typically involves a grantor of an irrevocable trust who retains control as the trustee. The grantor or grantors spouse should not e the trustee of the trust or it will be tainted. This effects UTMAs/UGMAs

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22
Q

Simple vs. Complex Trust

A

Simple Trust: Trust that distributes all income (and deductions) in the year it is received (income is reported with the same character)
- Income is taxed at the beneficiary rates
- May be called a conduit trust as it is merely a conduit for income
- Not a separate tax entity but separate entity with EIN
- NO CHARITABLE GIFTS

Distributable Net Income (DNI) = only dividend and interest should be distributed, capital gains are retained/reinvested

  • 2503(b), QTIP, QDOT, Dynasty

Complex Trust: Trust that can either accumulate income or distribute income
- Income accumulated is taxed at trust rates
- Income distributed is taxed at beneficiary rates
- Own tax id/EIN

  • 2503(c)

Only Irrevocable Trusts

23
Q

Revocable Trust with Crummey Provisions

A

Crummy Trust = irrevocable trust with demand rights
- Each time a gift is made to the trust, the beneficiary has a temporary right (30 days) to withdraw the greater of $17,000 or the gift made to the trust

24
Q

Five or Five Power (5 X 5 or 5 by 5)

A

Five or Five Power allows beneficiaries to withdraw the greater of $5,000 or 5% of the trusts corpus on an annual basis
- Only the amount allowed to be withdrawn is included in the beneficiary estate for tax purposes
- If the amount is already withdrawn that year, then its not included

Greater than five or five power would amount to a general power over the trust corpus

25
Q

Health, Education, Maintenance, and Support (HEMS)
(Ascertainable Standard - limited by some unit of measurement)

A

Beneficiary can access corpus of trust for HEMS
- Must be same standard of living
- Can be told no by trustee
- NOT a general power
- Not subject to estate or gift tax

26
Q

Bypass (B) Trust

A

At death, amount transferred to trust is the amount of the estate exemption ($12,920,000)
- Gives the decedent control after death as this income is paid to spouse (income beneficiary) and corpus is passed to who they assigned as the remainder beneficiary
- Unlike the QTIP, income can be split between many beneficiaries
- Can give income beneficiaries 5/5 and or HEMS
- As long as they dont have more rights then that to the corpus, the corpus is not included in their estate
- Can be a simple or complex trust

27
Q

Martial (A) Trust

A

Property transferred to the surviving spouse
- passes using the unlimited marital deduction
- only main advantage may be creditor protection

28
Q

Qualified Terminal Interest Property (C Trust, QTIP)

A

Wishes to provide the spouse with a stream of income for life (not access to corpus) and use the unlimited marital deduction to pass the assets
- Must provide Lifetime Income, Annual Income, Mandatory Income, Exclusively for the benefit of the spouse
- If the above is met, the decedent has control after death to provide the corpus to a remainder beneficiary when the surviving spouse dies
- The corpus is still included in the estate of the surviving spouse
- In order for the property to be treated as QTIP property, the executor must make the election on the decedents tax return
- May also provide 5/5 and or HEMS

29
Q

Reverse QTIP

A

Reverse QTIP is when the remainder beneficiary is a skip generation (ex. Grandpa to grandchildren) and the estate gets to use the GSTT exemption as well

30
Q

Qualified Domestic Trust (QDOT or QDT) (Simple Trust)

A

When spouse is not a US citizen, they do not get the unlimited marital deduction
- if the spouse is a resident alien, they can get the $12,920,000 exemption amount
- JTWROS is not considered 50% each, based on consideration
- Super annual exclusion of $175,000 per year (instead of $17,000)

If using a QDOT, you can use the marital deduction
- USE EXEMPTION AMOUNT FIRST, then fund the trust

31
Q

Dynasty Trust (Simple Trust)

A

Built on the B trust chassis, intended to benefit multiple future generations.
- Passes free of estate, gift, and GST taxes
- Can last for lives being + 21 years and 9 months (rules against perpetuities)
- Beneficiary interests are limited to life estates

32
Q

Gifts to Minors: Gift of a Future Interest

A

2503(b) Trust
- Two part gift, income (present interest) and remainder (future interest)
- WATCH OUT for kiddie tax

33
Q

Gifts to Minors: Gift of a Present Interest
(Subject to Kiddie Tax)

A

UGMA/UTMA
- UTMA you can invest in real estate
- Distributed at 18 and 21 respectively
- Can be included in the custodians estate if the donor is also the custodian

34
Q

Gifts to Minors: Gift of a Present Interest
(Other Taxes)

A

2503(c) Trust
- Allows grantor to make a gift to a minor in a trust and still obtain the annual exclusion
- Donee gets the trust at 21
- If the Donee dies, the assets are payable to the Donees estate
- Funded with any asset

Section 529

35
Q

529A Plan (529 ABLE)

A

Tax-free savings account established for beneficiaries disabled before age 26 without disqualifying the beneficiary from government benefits
- Intended to be a supplement for a special needs trust (SNT) - trusts can be costly to set up and maintain
- 529 education can be rolled over to 529 ABLE
- Contributions (including 529 roll-over) is limited to $17,000 per year
- Money in 529 ABLE is exempt from $2,000 limit for Medicaid eligibility

36
Q

Charitable Transfers: Income to Donor

A

Income to Donor in all of these vehicles:
- Income tax deduction based on PV of remainder
- Still subject to income tax deduction
- Not subject to gift tax

Need Trust

Charitable Remainder Annuity Trust (CRAT)
- Income beneficiary (not charity) and remainder beneficiary (charity)
- If term of years, it must not exceed 20 years
- Only one initial transfer to the trust
- Must payout at least 5% of the corpus
- Payments are fixed once the initial payments are calculated
- Payable to any charity
- Must have 10% of original corpus remaining at end

Charitable Remainder Unit Trust (CRUT)
- Income beneficiary (not charity) and remainder beneficiary (charity)
- If term of years, it must not exceed 20 years
- CAN add more (re-up)
- Must payout a fixed % (at least 5%) (like CRAT) of the revalued corpus
- Payable to any charity
- Must have 10% of original corpus remaining at end

Both options pair well with a Wealth Replacement Trust (ILIT)

Dont Need Trust (Stuck w/ Charity):

Pooled Income Fund (PIF) - Variable Payout
- Donor places money into common trust operated by one charity
- Property is commingled (pooled) with others
- NO MUNICIPALS
- Public charity controls and manages assets
- No specified amount of income, and can not change the charity

Charitable Gift Annuity - Fixed Payout
- Transfer to charity in exchange for commitment of specified amount of income each year
- No minimum required amount
- No trust, transferred directly to organization
- Charity receives money now

37
Q

Charitable Transfers: Income to Charity (Remainder is any non charitable beneficiary)

A

Charitable Lead Trusts (CLAT & CLUT)
- Estate can take the present value of the payment stream as an estate tax deduction

Private Foundation
- Can make grants to non charitable individuals for study, scholarship, fellowship, prize, or award to improve/enhance literary, music, scientific, teaching, or other similar skills
- Subject to 5% distribution rule

Donor Advised Fund
- Custodian hold money in escrow until you are ready to donate it, while giving immediate tax deduction today
- Poor mans private foundation

38
Q

Installment Sale (Property Owner Needs Income)

A
  • Device to spread out and defer the taxable gain
  • Can remove an appreciating asset from estate and spread out installment payment
  • STRING - if seller dies during installment period, PV of remaining payments is included in estate
  • If installment sale is forgiven, estate must report all remaining gain
  • DEPRECIATION = must be recaptured as OI in year of sale
39
Q

Self-Canceling Installment Note (SCIN)
(Seller Need Income)

A
  • Variation of installment sale
  • Payments after sellers death are canceled - seller desires to retain an income stream that will not continue after death
  • Buyer pays a premium / More tax needs to be paid by the seller
  • Removed from the estate upon death
  • No depreciation recapture
40
Q

Grantor Retained Annuity/Unit Trust (GRAT/GRUT)
(Owner Needs Income)

A
  • Irrevocable trust in which the grantor transfers appreciating property or income producing property in exchange for a right to receive income for a fixed number of years
  • When the term of the trust end, it is transferred to remainder beneficiary
  • Gift is calculated based on PV of initial value
  • STRING - brought back into estate if you dont outlive the term
  • GRUT payout is fixed based upon revalued assets
41
Q

S-Corporation
(Property Owner Want to Gift Assets or Income to Family)

A
  • S-Corp can be attractive as income passes through to its shareholders
  • Gifts of shares can be made to younger family memebers to take advantage of annual exclusion (income or losses shifted to family members)
    • Kiddie tax can apply
    • Must be capital sensitive unless its like shifting income
42
Q

Family Limited Partnership
(Property Owner Want to Gift Assets or Income to Family)

A
  • FLP operates among family members and shares many of the same benefits of the S-Corp
  • Shift income from parents to children in lower tax bracket
  • General partner may be paid for service
  • Capital must be a material income producing factor
  • May qualify for a valuation discount
43
Q

Gift-Leaseback
(Property Owner Want to Gift Assets or Income to Family)

A
  • Wants to gift but has lack of liquid assets
  • Gives fully depreciated assets and then leases them back
  • Parent continues using assets and pays child (income) for the use
44
Q

Qualified Personal Residence Trust (QPRT)

A
  • Large residence ($2 million +)
  • Reasonable life expectancy (has a string on it) of at least 10 years
  • Donor continues to live in the residence
  • Should have a large estate
45
Q

Generation Skipping Transfer Tax (GSTT)

A

40% tax just like the estate/gift tax

Skip Person:
- related person at least two generations younger (grandchild) - unless parent is deceased
- Unrelated person more than 37 1/2 year younger than transferor

Exemption & Annual Exclusion
- Each donor gets $12,920,000 in GST exemption
- Annual exclusion amount ONLY for direct skips (present interest) - $17,000 for single or double if splitting

How is it taxed?
- Direct skip = transferor pays tax
- Taxable termination = trust pays tax (no annual exclusion)
- Taxable distribution = beneficiary pays tax (no annual exclusion)

46
Q

Prenuptial Agreement / Elections Against the Will

A

Elective Share = right to a minimum percentage provided by the state if spouse did not inherit enough assets

Prenuptial Agreement Must Meet The Below Requirements:
- In writing (not oral) and signed by both parties
- Must be preceded by a full and accurate disclosure of each party’s net worth
- Must be willingly executed by both parties

47
Q

Income in Respect of a Decedent

A

Only impacts when estate tax is paid and OI has to be paid on the assets
- will lower tax burden by amount of estate tax

48
Q

Alternate Valuation Date (AVD)

A
  • Executor may file election for AVD to value the assets 6 months after the decedents death
  • Must cause a reduction in the value of the gross estate
  • Amount of federal tax liability must be reduced as a result of filing the election

When can you not elect AVD?
- when assets pass to the spouse via unlimited marital deduction
- Assets are less then the exemption amount

Waisting Assets:
- Assets that experience a reduction in value by the mere laps of time
- Annuity Payouts, Pension/IRA payouts, Mortgage payouts, notes receivables
- Date of death value would be shown on 706

49
Q

Disclaimer

A

Refusal by primary beneficiary to accept the property - no taxes due
- must be an irrevocable refusal to accept the interest
- refusal must be in writing
- refusal must be received within 9 months of death
- The person refusing can not have accepted any interest in the benefits
- The disclaiming person does not get to direct to someone else

Disclaimer Trust
- Possible for the spouse to disclaim the property yet still receive a stream of income
- Must be irrevocably transferred into a trust
- Can not invade corpus except for: HEMS or 5/5

50
Q

Section 303 Stock Redemption

A

Allows for a corporation to purchase a portion of stock from a decedents estate and tax at capital gain (would be low due to the step up)
- Business must be a closely held corporation (C or S corp)
- The value must be more than 35% of the AGE
- Only amount of stock equal to total estate taxes/administrative expense can be redeemed

51
Q

Installment Method (6166)

A

If estate has closely held business (does not matter type), estate tax attributable to the business can be spread out over 14 years (4 years accumulation of interest and 10 years paid)
- First $1,750,000
- GE must have closely held business that is more than 35% of AGE
- Aggregation is allowed as long as they owned more than 20% of each business

52
Q

Special Use Valuation (2032A)

A

Valuation method used for eligible real estate in connection with a closely held business or farming operation
- Max reduction of $1,310,000
- At least 50% of the GE must consist of Real Estate or Personal Property devoted to the business
- The value of the Real Estate must be 25% of the GE
- Property must have been held for qualified use by the decedent in 5 of the 8 prior years
- Qualifying property must pass to heir and be continued to use for at least 10 years after death

If you can use 2032A then also can use 6166

53
Q

Estate Planning for Unmarried Partners

A

Partners that are unmarried wont be entitled to advantage provided by state law such as unlimited martial deduction or elective share

Watch out for guardianship

Revocable trust or tenancy in common are good answers

Will is wrong because it can be contested

JTWROS has problems as one partner can sever

CFP (9 decks)

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