Estate Planning Flashcards
(80 cards)
1
Q
How long after death can a widow claim the $500k Section 121 exclusion?
A
2 years
2
Q
Realized gain when it comes to Section 121 exclusion
A
Sales price - basis
3
Q
Recognized gain when it comes to Section 121 exclusion
A
Sales price - basis - exclusion
4
Q
When does the partial Section 121 exclusion not apply?
A
When the move is less than 50 miles
5
Q
What types of property are considered community property?
A
All property acquired by spouses during marriage, separate assets commingled, and appreciation on solely owned property where nonowner spouse contributed
6
Q
If purchased with earned income in a common law state, is the asset considered community property?
A
Yes
7
Q
Probate and disclaimed status for sole ownership/fee simple/absolute ownership
A
Subject to probate
Can be disclaimed
8
Q
Uniform Simultaneous Death Act (USDA)
A
Persons dying within 120 hours of each other are said to predecease each other so assets pass to family members instead of each other
9
Q
JTWROS
A
Not subject to probate
Can be disclaimed
Joint tenants must be adults
One of the owners can sever the joint tenancy without the approval of the other or just drain the account
Property shared equally amongst owners
10
Q
Nonspousal joint tenants
A
Full value of jointly held property is included in gross estate of first tenant to die unless survivor can prove contribution
A gift of property if not deemed to be a contribution (need to prove contribution to the purchase price)
11
Q
Tenancy by entirety
A
Not subject to probate
Cannot be disclaimed
Ownership can only be held be spouses
Mutual consent needed by both parties, death of either spouse, or divorce settlement needed to terminate ownership
Joint creditors can sever ownership (protected from separate creditors)
Not available in community property states because it’s redundant in those states
12
Q
Tenancy in common
A
Subject to probate
Can be disclaimed
Each tenant’s interest can be unequal
Right to transfer share of the property to other parties
Undivided interest (owner doesn’t have exclusive rights to a specific part of the property)
13
Q
Testamentary trust
A
Created by a will and made effective at death
Trust itself doesn’t go through probate
The property in the trust does go through probate
14
Q
When does a Form 706 need to be filed?
A
o When a citizen or resident has a taxable estate
o When portability is elected
15
Q
Gross estate inclusions
A
- Joint tenancy property with spouse is half includable
- Joint tenancy property with non-spouse is dependent upon contribution
- Life insurance subject to three year rule
- Incidents of ownership in life insurance (DEATH BENEFIT VALUE)
- Gift taxes paid within three years of death (NOT GSTT)
- Survivorship benefits (retirement, pensions, annuities) that continue after death
- Gifted assets with a retained interest (right to use or enjoy property and right to designate who will possess property or its income)
- General powers of appointment
16
Q
Gross estate exclusions
A
- Life insurance owned by others
- Completed gifts
- Life estate for the decedent’s life only (right to possess, enjoy, or derive income from the property during lifetime, terminating at death)
17
Q
Incidents of ownership in a life insurance policy
A
right to assign, terminate, borrow against cash reserves, name beneficiaries, or change beneficiaries NOT PAY PREMIUMS
18
Q
For who and when does the three year rule apply?
A
o Applies to gifts within three years of death (NOT SALES)
o Must be the insured for three year rule to apply
19
Q
If you own a life insurance policy on your own life, what amount is included in your estate?
Does the three year rule apply?
A
Death benefit and three year rule applies
20
Q
If you own a life insurance policy on your wife, what amount is included in your estate?
Does the three year rule apply?
A
Replacement value and three year rule doesn’t apply
21
Q
General POA and gift and estate tax implications
A
Gift and estate taxable
22
Q
Special/limited POA and gift and estate tax implications
A
Not includible in estate and no gift tax implications
23
Q
Double basis rules
A
- Gain recognized as (sales price – donor’s basis) if price is higher than basis
- No gain or loss if sales price is between FMV on date of gift and donor’s basis
- Loss recognized as (sales price – FMV on date of gift) if price is lower than basis
24
Q
Form 709 filing requirements for gift splitting (DEPENDS ON THE AMOUNT GIFTED)
A
If value of gift is greater than $38,000, each spouse needs to file a gift tax return and consent on the other spouse’s return
If value of gift is $38,000 or less, the gifting spouse must file gift tax return and spouse must consent
* No gift tax return needed if IT’S COMMUNITY PROPERTY OR JOINTLY HELD PROPERTY because it’s already considered half owned
25
Form 709 filing requirements
o Present interest gift of more than $19,000 to any non-US citizen spouse donee
o Future interest gift of any amount
o A gift in which spouses elect gift splitting
26
Durable power of attorney for health care (DPOAHC)
o Medical decisions only
o Drafted separately from DPOA
o Always springing (only goes into effect when patient cannot communicate his wishes)
27
Advanced medical directive/living will
States a patient’s directions concerning end of life decisions
28
Guardian
makes residential, health care, and personal decisions for children (court appointed)
29
Conservator
Makes financial decisions for adults (court appointed)
30
Keys for a tainted/defective trust
Tainting is desirable for income tax purposes (grantor to pay the income taxes) but not desirable for estate tax purposes (goal is to remove assets from the estate)
31
Unfunded ILIT
Gift to the trust pays the insurance premium
32
Funded ILIT
Investment income from trust investments pays the insurance premium
33
For grantor trusts, what creates estate taxability to the grantor?
Power to control beneficial enjoyment of the trust principal or income is held by grantor and spouse
Reversionary interest that exceeds 5% measured at the time of death
34
2503(c) Trust
o Interest is accumulated
o Can be funded with any type of asset
o Normally distributed at age 21
o Can be included in grantor’s estate
o Gift of present interest
o Subject to kiddie tax
35
2503(b) Trust
o Interest distributions are mandatory
o No mandatory distributions of corpus
o Income is a gift of present interest and corpus is a gift of future interest (no annual exclusion)
o Must use applicable credit to fund
o Income payout may be subject to kiddie tax
36
Grantor
Transfer property to and dictates terms of the trust
Legally competent at trust creation
37
Trustee
Receives legal title to the trust property
Must be legally competent
38
Beneficiary
Holds equitable title (beneficial interest), doesn’t need to be legally competent
39
Simple trust
Must pay income to beneficiaries
No distribution of corpus and no charitable gifts
40
Complex trust
Corpus can be distributed and may make charitable gifts
Income retained is taxed to the trust and income distributed will be taxed to the beneficiary
$300 income tax exemption if required to distribute income
$100 income tax exemption if not required to distribute income
Separate taxable entity if irrevocable and income is accumulated
41
5x5 power and estate inclusion
If no exercise, greater of 5% of trust value or $5,000 is included in gross estate
If exercised and spent, nothing from the trust is included in gross estate
If exercised and not spent, nothing from the trust but the distribution proceeds are in gross estate
Trustee cannot stop this from happening
42
Crummey Trust
o Can be a simple or complex trust
o Irrevocable trust with demand rights
o Demand right given to a minor through the guardian
o Withdrawal amount in that year is equal to the lesser of the annual exclusion amount or the amount contributed in that year
o Makes a gift into an unfunded ILIT a gift of present interest
43
Bypass/credit shelter/family/nonmarital trust (B Trust)
o Gives decedent postmortem control over the transferred property
o Unlike QTIP trust, income stream can be split among the surviving spouse and other individuals that the decedent chooses
o At surviving spouse’s death, assets pass estate tax free to the beneficiaries (property not included in surviving spouse’s estate)
o Surviving spouse does NOT have general power of appointment
o Portability of unused exemption to the surviving spouse
o Property passes via the applicable exclusion amount (NOT the marital deduction)
44
Power of appointment/marital trust (A Trust)
o Property passes via the marital deduction
o Surviving spouse has general power of appointment (has total control of assets)
o Property is included in gross estate of surviving spouse
45
Qualified terminable interest property trust (C Trust)
o LAME
Lifetime income interest for spouse
Annual payments to spouse
Mandatory payments to spouse
Exclusively for spouse
o Decedent has postmortem control over the property
o Surviving spouse does NOT have general power of appointment
o Property qualifies for marital deduction
o Mainly used for second marriages (income for life to surviving spouse, principal to decedent’s children when surviving spouse dies)
46
Reverse QTIP
Keywords: extra generation, GSTT exemption isn't lost
47
Limitations on donee non-citizen spouse
o Super annual exclusion for gifts from a US citizen spouse to a non-US citizen spouse ($190,000)
o No marital deduction unless through QDOT
o No estate tax due for foreign citizen at death
o Joint property held between spouses is NOT considered half owned (full estate inclusion unless you can prove noncitizen spouse provided consideration)
48
QDOT
o Allows donee noncitizen spouse to qualify for marital deduction
o Simple trust
o If no QDOT, no marital deduction is allowed
49
Donor non-citizen spouse
No federal estate tax due
50
UGMA
o Must be funded with cash type assets
o Normally distributed at age 18
o Included in custodian’s estate if custodian predeceases the minor
o Permits lifetime gifts only
o Income is taxable to the minor (kiddie tax)
51
UTMA
o Can be funded with any type of asset including real estate, partnership interests, patents, royalty interests, and intellectual property
o Normally distributed at age 21
o Income is taxed to the minor (kiddie tax)
o Considered child’s asset for financial aid
o Included in custodian’s estate if custodian predeceases the minor
o Permits both lifetime and testamentary gifts to minors
52
529 plan (QTP, qualified tuition program)
Distributions of $10,000 per year
K-12 grade and college
No MAGI limitations
$10,000 lifetime limit on student loans
5 years worth of annual exclusion gifts (up to $95,000) allowed as long as donor lives the five years after the gift
Can be used to pay student loans
Beneficiary can be changed to another family member
* No taxable gift if rolled over to same generation
* Taxable gift occurs if rolled to a generation below
53
Dynasty Trust
B trust that can last for the lives in being plus 21 years and 9 months or as long as local law allows
o Simple trust
o Needs to have Crummey provisions for annual exclusion to apply (otherwise it's a gift of future interest)
o No estate tax because it kicks on forever
54
CRAT
Donor receives income tax deduction for present value of remainder interest
Remainder interest is at least 10% of the initial contribution
No additions permitted
20 year term life max
At least 5% of trust must be paid out each year
Pays fixed amount once initial payments are calculated
Property can pass to one or more qualified charities
55
CRUT
Donor receives income tax deduction for present value of remainder interest
Remainder interest is at least 10% of the initial contribution
Additions are permitted
20 year term life max
At least 5% of trust must be paid out each year
Provides inflation adjusted income (distribution is revalued every year)
Property can pass to one or more qualified charities
56
Pooled income fund
No 5% payout per year required
Property transferred to the trust is commingled with property of other donors
No trust needed by donor (single public charity controls and manages the assets)
Income interest is paid to donor at least annually and then remainder interest goes to public charity upon death
Donor gets income tax deduction on present value of remainder interest
Cannot change charitable beneficiary
Cannot invest in tax exempt securities
Provides inflation adjusted income
57
Charitable gift annuity
No 5% payout per year required
Donor transfers cash or other property to charity and charity pays donor back an income stream for life
Amount of charitable deduction is gift to charity minus value of the annuity
Property goes to the charitable organization directly (not a trust)
58
Charitable lead trust (CLUT or CLAT)
Upfront income tax deduction for the present value of the payment stream to charity
No 5% payout per year required
If established at death, estate can take PV of payment stream to charity as estate tax deduction
59
Private foundation/family foundation
Distributes minimum of 5% of assets each year (15% penalty if not completed)
Established as a trust or nonprofit organization
Donor has complete control over amounts and recipients
Tax deductible gifts allowed to noncharitable beneficiaries
Exempt from federal income tax but subject to excise tax of 2% of net investment income
60
DAF
o Poor person’s private foundation
o Owned and controlled by sponsoring organization who ultimately makes decisions
o Donor has privilege to provide advice with respect to the fund’s investments or distributions
o Not allowed to accept qualified charitable distributions
61
Wealth replacement trust
o Type of ILIT
o For donors who have concerns about donating too much to charity and not having enough liquid assets for their needs through life and for their estate
62
Installment sale
If seller dies during installment period, PV of remaining payments is included in owner’s estate
If installment note is forgiven in the seller’s will, estate must report the remaining gain (debt is considered paid to the estate)
If installment sale between related parties is cancelled or forgiven, seller must recognize gain (FMV less the seller’s basis)
If property is sold by a related party buyer within two years of the installment sale, gain for income tax is accelerated (as if he were paid in full)
DO NOT USE FOR 1245 PROPERTY BECAUSE IT’S SUBJECT TO RECAPTURE
63
Self-cancelling installment note (SCIN)
If seller dies during installment period, no value is included in owner’s estate (payments are cancelled)
Higher payout than installment sale
Buyer pays an increased price for the cancellation feature
64
Private annuity
Unsecured promise of a life annuity
No taxable gift as long as the value of the property transferred equals the discounted value of the promised annuity
Not included in owner’s estate
NOT A VIABLE SOLUTION ANYMORE because all gain which would have been recognized over the term of the annuity payments is recognized in the year the private annuity was established (creates phantom income)
65
Grantor retained trust (GRAT/GRUT)
Any remaining balance is transferred tax free to named beneficiaries when trust term ends
All property is brought back into grantor’s estate if grantor doesn’t outlive trust term at date of death value
Gift in trust is a gift of future interest
Income interest is valued at more than zero which reduces the amount of the gift for gift tax purposes
66
GRIT
If no income is earned, none is distributed to grantor
Income interest is valued at zero so donor is taxed on full gift of assets into trust (no advantage)
67
S corp as an intrafamily transfer method
Family member can receive conduit income
Not effective if under age 24 due to kiddie tax
Business entity must be capital intensive like manufacturing, warehouse, x-ray equipment (not available if business is service related like accountants, attorneys, financial planners)
68
Family limited partnership
Technique to shift income from parents and grandparents to children and other family members to reduce estate tax
Advantage is valuation discounts for gifted interests while still maintaining control
Children’s basis is not stepped up at death
Parent is the only party liable to creditors
General partner can be paid for personal service to the partnership
69
Gift leaseback
Business can claim deduction for lease payment if legitimate business purpose exists, reasonable lease payment is made, and lease is in writing
Induces kiddie tax for children under age 24
70
QPRT
Up to two residences may be transferred into a trust (one must be primary residence)
FMV of home is brought back into grantor’s estate if grantor doesn’t outlive trust term
71
Steps to calculate total tax due when both gift tax and GSTT is involved
1. Calculate gift tax
2. GST tax due = taxable gift amount - gift tax
72
Direct skip
Transferor is liable for GSTT
73
Indirect skip
GSTT due upon taxable termination or taxable distribution (not immediate taxation)
74
Taxable termination
Trustee is liable for GSTT
75
Taxable distribution
Transferee is liable for GSTT
76
Disclaimer trust
Disclaim property, transfer to irrevocable trust, and receive income from disclaimed property
o Similar to a B trust
o Established by will (testamentary)
o Surviving spouse can only invade corpus for ascertainable standard
BE CAREFUL: property with contingent beneficiaries will go to the contingent beneficiaries if disclaimed (not the trust)
77
Premarital agreement
Spouse waives right to elective share at death
Property acquired before marriage is separate and not subject to divorce proceeding
78
Section 303 stock redemption
o Distributions are treated as long term capital gains which are minimal given step up in basis
o Business must be a corporation
o Value of stock must be more than 35% of the adjusted gross estate
o Only an amount equal to the total of all estate taxes and administration expenses can be redeemed
79
Section 6166 installment payment of estate taxes
o Value of closely held owner’s business interest in the estate must exceed 35% of the value of the adjusted gross estate
o Decedent must own at least 20% of the total value of the business at DOD
o Amount of federal tax deferred is limited to the tax attributable to the value of the closely held business
o Interest rate will be 2% on the first $1 million
80
Section 2032A special use valuation
o Must be used as a family farm or family owned business (NOT LAND)
o Maximum reduction of $1.42 million on the real estate property used in conjunction with business
o Value of real and personal property must constitute at least 50% of the gross estate
o Value of real property must constitute at least 25% of the gross estate
o Must be used by decedent or decedent’s family 5 out of the 8 years prior to death
o Property must pass to qualifying heir and must continue in qualified use for at least 10 years after death of decedent
