Income in Respect of a Decedent (IRD), Postmortem Estate Planning Techniques, and Estate Planning for Non-traditional Relationships

Question 1

Income in respect of a decedent (IRD)

Answer 1

• IRD is income which decedent had right to receive but that wasnt actually received by the decedent
• examples: unpaid salary, insurance renewal commissions, monthly qualified plan or IRS payments to a deceased employees widow

Question 2

Calculation for IRD deduction

Answer 2

• IRD must be included in the gross income of the recipient
• deduction permitted for estate and GSTT taxes paid on the income
• amount of deduction is federal estate tax with net IRD included and then tax without IRD. Difference of two is amount of tax deduction

Question 3

Postmortem estate planning techniques

Answer 3

• selections for arranging disposition of property after the owners death to minimize taxes or to achieve other objectives

Question 4

Alternative valuation date (AVD)

Answer 4

• PR or executor can file an election to have assets in decedents gross estate valued at alternative value
• 6 months after death
• conditions that must occur before AVD
  1.electing AVD must reduce total value of gross estate
  2. federal tax liability must be reduced
  3. must be applied to all properties included in the gross estate
  4. cannot be elected to assets that decrease in value with mere pass of time

Question 5

When AVD cannot be used

Answer 5

• electing doesnt decrease tax liability
• when no tax is due
• assets that pass to the spouse using marital deduction
• pass to qualified charities
• asset passing to children equal or less than 12,920,000

Question 6

Exceptions to AVD election

Answer 6

Wasting assets
- decrease in value from mere lapse of time
- valued at FMV but doesnt disqualify election
- examples: annuity payouts, retirement assets being paid out, mortgage payments, notes receivable

Assets sold
- sold or distributed before AVD are valued as of the proceeds received on the date of sale or distribution

Question 7

Capital gains on inherited property

Answer 7

• inherited property is always entitled to LTCG, no matter when sold
• basis is FMV on death or AVD if elected

Question 8

Disclaimers

Answer 8

• unqualified refusal by a potential beneficiary to accept benefits
• if qualified, deemed to never have received gift - no transfer is considered made for tax purposes

Question 9

Qualified disclaimer requirements

Answer 9

1. irrevocable refusal
2. submitted in writing
3. must be within 9 months after later of
   - date on which transfer creating interest was made
   - day on which person disclaiming reaches 21
4. intended donee cannot have accepted any interest in the benefits
5. without disclaiming persons discretion who it passes to

Question 10

Disclaimer trust

Answer 10

• possible for spouse to disclaim property and receive stream of income from the disclaimed property
• usually clause in will (testamentary)
• if spouse disclaims, the property is transferred to the irrevocable trust and income is paid to survivor
• spouse may retain life estate
• cannot invade corpus (except ascertainable standard)

Question 11

Post mortem elections

Answer 11

For liquidity
1. section 303 stock redemption
2. installment payment of estate taxes

For tax reduction
1. special use valuation (2032A)

Question 12

Section 303 stock redemption

Answer 12

corporation makes distribution of portion of decedents stock, provides cash for estate without tax
- business must be incorporated (closely held stock)
- value of stock must exceed 35% of decedents adj gross income
- amount of stock redeemed as capital gain cannot exceed the sum of the estate taxes plus administrations expenses

Question 13

Installment payment of estate taxes

Answer 13

• property musty be in a sole proprietorship, partnership, or corporation (aggregation allowed if more than 20% interest in each business)
• interest must be carried as of day of death
• value of business must exceed 35% of decedents adj gross income
• during first 4 years (of 14 yrs) can pay interest only on taxes due
• interest rate will be 2% on the first 1M (1,750,000 above at 45%)
• 2% is not deductible

Question 14

Special use valuation (2032A)

Answer 14

• real estate used for farming or closely held business
• several rules to qualify: 50% of gross estate must consist of real and personal property, 25% of gross estate must consist of real property
• 750k reduction is decedents gross estate (1,310,000)
• must be qualified use: 5 out of 8 rule before death / 10 years after death

Question 15

Closely held business

Answer 15

• interest can be in sole proprietorship, partnership, corporation
• business must be actively carried on and require a management function

Question 16

Estate planning for special circumstances

Answer 16

1. children from another relationship
2. unmarried domestic partners (wont be entitled to advantages by state law, no marital deduction, guardianship issues)
3. adoptions
   - each partner should have own representation

Question 17

Best transfer strategy - special circumstances

Answer 17

• revocable trust
• TIC

Question 18

Ineffective transfer strategy - special circumstances

Answer 18

• a will can be contested by family, trusts are private
• no will means courts decide
• JTWROS has risk that transferee can close out or spend account

Question 19

JTWROS disadvantages

Answer 19

• one partner can sever JT
• non contributing partner can make withdrawals
  1. withdrawal amount could be taxable gift
  2. could be spent without partners knowledge
  3. asset can be attached to both creditors