Life Insurance in Estate Planning, Valuation Issues, Marital Deduction and Deferral and Minimization of Estate Taxes Flashcards
1
Q
Incidents of ownership
A
- make LI proceeds includable in the gross estate of the insured
- include, right to assign, terminate, borrow against cash reserves, name beneficiaries, and change beneficiaries
- premium paying is not incident of ownership
2
Q
Ownership and beneficiary considerations
A
- owners and beneficiaries for married couples with combined estates under 25,840,000 is simple, no taxes
- when estate taxes are concern
1. spouse is owner and beneficiary
2. mature child is owner and beneficiary
3. irrevocable trust is owner and beneficiary (best)
3
Q
Irrevocable life insurance trust (ILIT)
A
- trust created to own and be beneficiary of the life insurance policy on the trust makers life
- does not allow insured to retain incidents of ownership
- wealth replacement trust is ILIT intended to replace wealth to younger members when parents have CRTs
4
Q
Estate and gift taxation
A
- cause LI to be included in estate
1. proceeds paid to executor of decedents estate
2. decedent at death possessed an incident of ownership in the policy
3. decedent gifted policy within 3 years of death
5
Q
Life insurance inclusion rules
A
- Decedent insured (you)
1. you own policy and die - included
2. spouse owns policy you gifted and you die - 3 year rule
3. spouse owns policy you gifted and never change beneficiary from your estate - included (probate)
4. you sold policy - not included - someone else is insured (spouse)
1. you own policy - replacement cost included (probate)
2. you gifted to daughter - not included
6
Q
Gifting life insurance
A
- taxable gift of LI can occur during insureds life or death
- life: insured gifts policy to someone else
tax gift = interpolated terminal reserve plus unearned premium (replacement) - 17k exclusion
7
Q
Gifting life insurance policies with premiums payable
A
- value is interpolated terminal reserve (reserve adjusted to date of gift) plus value of unearned portion of last premium
8
Q
Corporate and partnership recapitalizations
A
- used to reduce the value business interest in their estate
9
Q
Transfers in trust
A
- transfer with retained life estate occurs when a decedent has made a transfer by trust for less than full consideration and has retained possession or enjoyment of the transferred property
- retained value included in estate
10
Q
Minority discounts
A
- recognizes inability of a small shareholder to influence corporate policy makes teh shares worth less
11
Q
Marketability discoounts
A
- due to lack of established market, closely held business interests are harder to sell
- discount can range from 15% to 50%
12
Q
Blockage discount
A
- if decedent held large block of publicly listed stock, selling at all at once would depress the market price
- discount from FMV would be allowed
13
Q
Key person discount
A
- allowed for business that lost a key employee who was responsible for its goodwill or administrative and management skills
14
Q
Marital deduction - valuation technique
A
- unlimited marital deduction qualifies
1. property included in decedents gross estate
2. property actually passes to spouse
3. interest passing to spouse is not terminal
4. receiving spouse is US citizen - transfers that qualify
1. property that transfers outright
2. passes to a marital trust, estate trust, or QTIP
15
Q
Terminal interest rule
A
- interest that might terminate on the happening of some event
- exceptions
1. surviving spouse receives life estate income, payable at least annually, plus general power of appointment
2. executor elects to treat interest as QTIP
3. executor elects to treat certain interest as QDOT
