The Federal Estate Tax Module #3

Adjusted Taxable Gifts: code section 2001

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Replacement cost for cash value policy

-interpolated terminal reserve plus unused premium

Under the unified tax system

-marital deduction -charitable deduction -unified credit, now known as applicable credit amt. -exemption equivalent /basic exclusion amount

Marital Deduction: code section 2056

-one of most important deductions b/c it can reduce even a large potential ET liability to zero. If a dec'd w/ a GE of $50mm, and who has never made any taxable lifetime gifts, gives his entire estate to the surviving spouse in a qualifying manner, the fed ET is zero bb/c the marital ded reduces the taxable estate to zero. (if surviving spouse is a non resident, diff rules apply) Beginning in 1982 the MD became unlimited, with equal application in both community and common-law states.

Foreign Death Taxes Actually Paid to a Foreign Country: Code section 2053

-permits a deduction for death taxes assessed and actually paid to any foreign country, in respect of any property situated w/in such foreign country and included in the GE of a US citizen or resident alien transferred for public, charitable, or religious uses as described in IRC section 2055

Property subject to encumbrance

-prop is not deemed to have passed to the surviving spouse to the extent that the prop is taken subject to an encumbrance or some other obligation for which the dec'd spouse was responsible, but that will not be paid by the estate.

Property that does not pass to the surviving spouse property used to pay estate taxes or admin expenses

-property is deemed not to have passed to the surviving spouse to the extent that it is used to pay estate taxes or admin expenses, and is thus not actually rec'd by the surviving spouse. IE: if the will directs that all estate taxes or admin expenses are to be pd. from the share of the estate that goes to the dec'd spouse, the MD will be allowed only for the net amount actually rec'd by the spouse after payment of these taxes and expenses.

State DT: code section 2058

-since 20005, estates have been able to take a ded for tha amount of DT actually pd. to a state or the dist. of Columbia.

Terminable Interest Rule

-states that the amount passing to a surviving spouse that is terminable interest is not entitled to a MD (unless it is a deductible terminable interest) -A terminable interest is an interest in property that will terminate w/ the mere lapse of time or upon the occurrence or nonoccurrence of a stated contingency or event. If the surviving spouse is given the right to live in a residence for life his interest in the residence will terminate upon the occurrence of a stated event -his or her death. therefore, the spouse has a terminable interest. If a trust gives the spouse income for 3 years, the spouses interest will terminate when 3 years have elapsed. thus the spouse has a terminable interest.

A PTC can be taken by a decedent's estate only when:

-the 2 decedents died w/in 10 years before the current decedent (or two years after the current decedent in the case of the vested remainder interest) -the transferor decedent gave property to the current decedent -both decedents had a net estate tax due w/o application of the PTC

Property in which the Dec'd had an interest at death: code section 2033

A dec'd GE includes all prop in which the dec'd had an interest at death, no matter what kind of prop it is.

Inheritance Tax

A tax on the right to receive or inherit wealth.

Lifetime Transfers: code sections 2035-2038

All of the elements discussed depent=d in one way or another on an ownership interest held by the decedent at date of death. In the case of outright ownership, te dec'd holds total ownership at date of death. In the case of life insurance, the dec'd holds at date of death at least one incident of ownership. In the case of Jt ownership , the dec'd holds at DOD ownership in concert w/ someone else. In the case of POA, the dec'd holds the power at DOD. In the case of survivorship benefits, the dec'd holds at DOD an interest in a retirement benefit or annuity of some kind from which the survivorship benefit is derived.

The B trust is a constant in all of these combinations. Which marital trust is used depends on the subtle differences between the A & C trusts, and the planning objectives the grantor wants to achieve

As mentioned, the estate trust is seldom used.

Why not just use a BC combination rather than an AB combination or a ABC combination?

BC combinations are also fairly common. However, the C trust gives the surviving spouse less access to the trust principal than is true with an A trust, b/c of the lack of a general power of appointment.

A trust that gives the recipient spouse a terminable interest ( and one that is not eligible for the QTIP election) is called a Bypass trust

Bypass trust b/c the trust assets will bypass the recipient spouse's gross estate. This bypass is possible b/c these assets received no MD and consequently , the estate of the transferor spouse paid estate tax on these assets.

A remainder interest in a Farm or Personal Residence-

Code 2055 (e)(2) authorizes a charitable deduction when a decedent leaves a qualified charity a vested remainder interest in the decedent's farm or personal residence. This section allows a decedent to get a deduction for giving such property to a charity, even though the charity gets possession only after the death of some other person who is given a life estate in the same property.

Estate Tax

Congress enacted legislation imposing a tax on the transfer of wealth at death. Since the tax is imposed on the right of an estate to transfer the decedent's wealth the federal tax is referred toa as an Estate Tax.

Federal Unified Transfer Tax System

Estate & Gift Tax unified to accomplish a common purpose. This unification first became effective for taxable transfers occurring after 1976. Since that time, the fed gift and estate taxes are referred to as the federal unified t4ransfer tax system b/c the same tax rates were used to determine both estate and GT liability.

Death Taxes

Estate and inheritance taxes are often called death taxes.

Federal income Tax Minus Deductions equals Taxable income times Applicable income tax rate equals Gross Income Tax minus credits equals Net income tax due

Federal Estate Tax minus deductions equals taxable estate times Applicable ET rate equals Tentative estate tax minus credits equals Net Estate Tax due

Income tax basis

Federal GT- When property is received by gift, although the value of the gift is not reportable as income, for cap gain purposes the done assumes the donor's basis (adjusted) in the gifted property in the usual situation in which the date of gift value of the property equals or exceeds the donor's basis. Federal Estate Tax- When prop in the gross estate is received from a decedent, although the value of the prop for estate tax purposes is not reportable as income, the recipient takes a basis in the property for income tax purposes equal to its value for estate tax purposes. B/c in the usual situation this value is greater than the decedents basis in the prop, the recipient is said to receive a "stepped-up basis."

TAx inclusive/exclusive nature

Federal Gift Tax- When a GT is paid, the money used to pay the tax is not itself taxed. Thus, the GT is said to be "tax exclusive."B/c the GT is not taxed the donor can remove more property from his estate at the same tax cost he would incur if he paid the estate tax. Federal Estate Tax- When an estate tax is paid, they money used to pay the estate tax is part of the gross estate that generated the tax. Thus, the estate tax is "tax inclusive."

Annual Exclusion

Federal Gift Tax- only the GT allows a deduction up to a max amt that is annually indexed for inflation to the next lowest multiple of $1,000 for gifts of a present interest by any donor to each done in a calendar year. The max annual exclusion for 2015 is $14k. Federal Estate Tax- N/A

Gift Splitting

Federal Gift Tax- the gift tax allows a gift of property owned by one spouse to be treated as if one-half of it was made by each spouse thereby doubling the allowable annual exclusions, if applicable. Federal Estate Tax- N/A

Formula for computing Estate tax Federal Income Tax- Gross Income Minus Deductions Equals Taxable Income times Applicable income tax rate Gross income tax credits net income tax due

Formula for computing Estate Tax Federal Estate Tax- Gross Estate Minus Deductions equals Taxable estate Plus Adjusted Taxable lifetime transfers since 1976 Equals Tax Base Times Applicable estate tax rate equals Tentative estate tax minus credits equals Net Estate Tax due

Federal Transfer Tax System:

Gift Tax-during lifetime, est 1932 Estate Tax-at death, est 1916 Generation Skipping Tax (GST)-During life and at death, when people attempt to avoid the gift or estate tax at each generation.est 1986

ABC Combination is another fairly common combination. What does the C (QTIP) trust accomplish by the AB combination?

Remember that QTIP trust assets receive a marital deduction only if the QTIP election is made. This flecibility allows the MD to be determined w/ more precision, and can be useful in planning for the prior transfer credit; and, where the remainder beneficiaries include grandchildren, can also be useful in planning for the GSTT. The C trust also allows the grantor spouse to control the destination of the trust assets after the surviving spouse's death.

The income interest to the charity must be payable either in the form of a guaranteed annuity (known as a CLAT) or in an amount determined by applying a fixed % to the value of trust assets, as determined annually (known as a CLUT charitable lead unittrust).

since the income interest must be an annuity or unitrust interest in every respect, the income interest can't be the right to receive the lesser of a stated annuity amount or a unitrust amount. If current trust income is insufficient to make the guaranteed payment, the difference must be taken from principal for both a CLAT and CLUT. Additional assets may be transferred t a CLUT after the initial year of funding, but not to a CLAT.

co-ownership or fractional interest discount

the co-ownership discount is a percentage reduction applied to the value of such real estate included in a co-owner's estate

Reducing the GE

the most obvious way to reduce a client's GE is to have the client give away assets druing his lifetime insuch a way that the gifted assets will not be included in the client's GE b/c of application of either the 3 year inclusionary rule (code section 2035) or the transfer sections (code sections 2036-2038) or property placed in JTWROS w/ a non spouse.

Bypass planning

the purpose of bypass planning is to allow the grantor's spouse to receive some benefit from he trust assets w/o qual for the MD, thus using some or all of the grantor's applicable credit amount. Avoiding the estate tax MD can be achieved in several different ways. The most obvious is to give the assets to someone other than his spouse. Since use of the MD is mandatory insituations not involving qualified terminable interest prop (QTIP), if the dec'd wants the surviving spouse to have the ability to use the decedent's assets, but does not want to qualify these assets for the MD, the spouse can only be given a terminable interest in the prop, or if given qual terminable interest prop, the QTIP election must not be made.

Control over the income of the trust requires that the trust income be paid exclusively either to the recipient spouse for his lifetime or to the recipient spouse's estate if accumulated. If the income is paid to the spouse during his lifetime, it must be what is known as qualifying income interest (QII)

the requirements for this term can be memorized by the acronym LAME The recipient spouse must have a Lifetime Annual Mandatory Exclusive right to the trust income. If accumulated income is pd. to the recipient spouse's estate, he must be the exclusive beneficiary of the income. If the trust is funded w/ non income producing prop, such as a personal residence, the recipient spouse must have a right to use the trust assets for life (IE; a life estate, but called a "USUFRUCT"interest in the code.)

Retaining a Reversionary Interest (section 2037)

the transferor of property has not given up sufficient control if another person can possess or enjoy the property only by surviving the transferor and the transferor retains a reversionary interest, the value of which exceeds 5% of the value of the property back prior to his death.

Special Use Valuation-2032A

this is one situation which estae assets can be valued at less than FMB. Special Use Valuation, code 2032A favors the taxpayer by allowing the PR of an estate to elect to have farm estate (or other closely held business real estate) valued on the basis of its current use rather than at its FMB (sometimes referred to as a property's "highest and best use"0Special use Valuation, 2032A allows the potato farmer's estate to value the land as a potato farm for fed estate tax purposes. Allows family to pay over time.

With appropriate provisions,

trusts can protect assets from the claims of beneficiaries creditors; there is no such protection w/ an outright transfer

Survivorship Benefits (Retirement Benefits, Pensions, Annuities): Code Section 2039

What actually is included in a dec'd GE is the PV of survivorship benefits, if any. IE: a GE of Sam who dirung his lifetime had been receiving payments from a commercial annuity of $50K per year, will include no value for the annuity. If under the terms of Sam's annuity, the annuity ceases w/ Clarence's death, no refund is payable to his estate or anyone else, and no one else is entitled to an annuity or lump-sum payment after Sam's death, there is no survivorship interest therefore no value. But, if at Sam's death an annuity of $25K is payable to Sam's wife for her lifetime, the value to be included in his GE b/c now there is a survivorship interest.

Property in co-ownership w/ others

When a transfer of prop is made in which the transferor owns only a partial interest, the value of that partial interest depends initially on the form of ownership. TEC, JTWROS, TBE, CP

Blockage discount

a c=valuation discount for publicly traded stock is also available in certain circumstances as a refinement of FMV. Seldom allowed by the IRS, blockage discounts apply only to stock listed on public exchange. Attempts to use the blockage discount by owners of closely held stock have failed.

Minority discount

a minority ownership interest in a closely held business sometimes is given a minority discount for estate tax purposes.

Power of appointment (general)

a power held over all or a portion of a trust created by someone else. allows the holder of the power to appoint trust assets to himself. only general power where the holder can take the money for himself, w/o restriction are included in the GE of the persons who hold those powers at death; special power of appointment are not

Deceased Spousal Unused Exclusion (DSUE) Amount

for decedents dying after 2010, the unused portion of the estate tax applicable exclusion amount of the first spouse to die (called the "deceased spousal unused exclusion" or DSUE amount) is portable to a surviving spouse, if any. The DSUE amount available to the surviving spouse is the lesser of the deceased's spouse's basic exclusion amount ($5.45mm in 2016) or the dec'd spouse's applicable exclusion amount (basic exclusion amount plus the DSUE amount)less the dec'd spouse's tax base. However, taxable gifts on which the dec'd spouse paid GT out of pocket are excluded from adjusted taxable gifts for the purpose of this computation. A nonresident surviving spouse who is not a citizen of the US may not take into account the DSUE amount of a dec'd spouse, except to the extent allowed by treaty w/his or her country of citizenship.

JTWROS

easiest form of ownership, If owners are husband and wife, one half fo the total FMV of the prop is deemed to be owned by each spouse, regardless of contribution. and is included in a deceased tenant's gross estate. Jt tenants who ar enot spouses is that valuation of the dec'd share is based on his proportional contribution to the original purchase price and the improvement costs of the prop. However, the executor must be able to prove contribution by the surviving joint tenants; otherwise 100% of the FMV of the prop is included in the dec'd tenants gross estate. IE: if 3 children inherit farmland as JTWROS. If the prop is still held in JTWROS when one of them dies, his/her estate will have to include 1/3 of the FMV of the prop in his gross estate. Inclusion is not based on contribution b/c none of them contributed anything to purchase the prop.

All trusts

facilitate the management of trust assets FBO multiple parties by the fiduciary duty and services of a TTEE who can protect the prop from harmful actions of current beneficial owners FBO of future beneficial owners.

QTIP & Bypass trusts

give the grantor spouse control over who receives the trust assets at the surviving spouse's death, while the power of appointment and estate trusts do not; an outright transfer never allows the transferor to have such control

The major difference between income and estate tax calculations is:

how the applicable rate is determined. As w/ income tax, the estate tax rate table is progressive in nature. IE: larger amounts are taxed at a greater percentage than smaller amounts up to a maximum rate. However, the income tax is applied against income earned on a calendar year basis, while the estate tax is applied against cumulative taxable transfers of wealth over a person's lifetime. (since 1976.)

Joint Owners

if JT owners are spouses and no other person is joint owner, only one half of prop so owned is included in the GE of a dec'd spouse no matter how much each spouse contributed to the acquisition of the prop. However, the IRS has also recognized the right of spouses to use the contribution If the joint owners are not spouses, the entire prop is included in the dec'd GE except to the extent that contribution by the surviving owner (s) can be proved. rule for Joint tenants who are not spouses for joint tenancies between spouses created prior to 1977. This right would make it possible for the surviving spouse to obtain a stepped-up basis for the entire prop rather than just half if the dec'd spouse provided all the contribution.

Retaining Rights to Alter, Terminate , Revoke or Amend (section 2038)

if a transferor gives property to another but retains a right (exercisable alone or in conjunction w/ any other person) to revoke or terminate the transfer IE: a donor creates a revocable trust and transfers prop to it. or retains the right to alter or amend the transfer IE: a donor creates and funds an irrevocable trust but retains the right to decide whether to distribute income automatically or accumulate income, the value of the prop at the transferor's death is included in the transferor's GE

Joint Ownership

includes JTWROS, TIC, CP A TIC can dispose of his fractional interest in the prop at death as he sees fit. CP owner can do the same Therefore , these interests are included in a dec'd GE under the general rules concerning indv. ownership. Joint ownership, for purposes of the GE , means any type of joint ownership w/ right of survivorship. Such ownership will be TBE, JTWROS.

Trusts allow

professional management of assetsw/ more expertise than might be true w/ an indv. bene.

Charitable Lead Trusts- A person may want to leave assets to a charity at his death but have those assets to be transferred to other beneficiaries after a period of time.

-A Charitable Lead Trust (CLT) is ideal for this situation. W/ this type of trust the charity is in the lead, b/c it has the income interest in the trust. The trust is irrevocable and can last either for a specified term of years, of for the life or lives of a person or persons who must be living at the time the trust is established. The regulations also permit the income interest to be payable for the life of an individual plus a term of years. The IRS has also ruled that an annuity interest can last for the lesser of a term of years or a period of lives in being plus a term of years. A CLT for a term of years must comply w/ any applicable state laws against perpetuities. A larger deduction will be allowed for a trust w/ a longer term since the charity will benefit from the trust income for a longer time period

Gift and estate taxes are unified, that lifetime transfers of estate assets can have a tremendous impact upon the donor's estate tax liability. This impact can be summarized by the following points:

-A lifetime gift reduces the donor's GE unless the 3 year rule or the transfer sections apply to require inclusion of the asset in the GE. A transfer of prop into JTWROS w/ a non spouse can also cause inclusion of gifted property in the GE at donor's death. See Lifetime transfer sheet/example in study material.

Calculation of the Estate Tax

-Calculation of the fed ET, w/ one major exception, follows the same general paradigm as calculation of the fed income tax.

Computation of the estate tax deduction for partial interest charitable gifts.

-If the charitable contribution is an outright transfer of all of the dec'd interest in the asset, the charitable deduction is equal to the FMV of the asset. If, however, the contribution is of a partial interest that falls w/in one of the exceptions whereby partial charitable contribution ded are permitted, the amount of the estate tax charitable ded will generally be the PV of the interest given to the charity. (using actuarial tables)For CRTs and a remainder interest in a farm or residence, the charity receives a remainder interest. W/ a CLT charity receives an income interest.

What combinations of trysts are typically used together?

-One of the most common combinations is an AB trust combination. The A (Power of Appointment)trust will allow the grantor spouse to get a marital deduction for all assets placed in the trust. -The B (bypass) trust will allow the grantor spouse to use his applicable credit amount. The A trust allows the grantor's spouse to have control of those assets, while the grantor retains control over the B trust. The grantor's spouse is the only income beneficiary of the A trust, while the grantor can name the spouse and other persons as income beneficiaries of the B trust.

Prior Transfer credit: code section 2013

-PTC either partially or fully eliminates a second federal estate tax in the estate of the decedent who has received property from a transferor who died w/in 10 years before or two years after the decedent.( a transferor could die after the decedent if the decedent receives a vested remainder interest from the transferor) -It is the act of transferring prop to the dec'd not the dece' possession of the prop at his death, that is the prerequisite to the credit. Therefore, if the prop was included in the taxable estate of the transferor and a beneficial interest in such prop was transferred to the dec'd, the decedent's estate is entitled to the credit, even though the dec'd estate does not include any interest in the prop at death.

Outright transfers

-an amount given outright to the surviving spouse qualifies for the MD. A bequest of $2MM clearly qualifies. A bequest of an interest in a residence clearly qualifies.Life ins proceeds from a policy owned by dhe dec'd spouse qualifies. However, if the spouse is not given an outright interest in the asset, the transfer must either avoid the terminable interest rule or be a ded terminable interest, or it will fail to qualify for the MD

Pooled Income Funds (Poor Man's Trust)

-are a special type of irrevocable charitable remainder trust that are not subject to the same restrictions previously set forth for CRATs and CRUTs. Pooled income funds can be established only by public (aka 50%) charities, and are used where the contributed amount is not large enough to warrant the costs to create a CRAT or CRUT. The decedent's estate (pursuant to provisions in the will )transfers property to the fund, retains a life income interest in the property for one or more individuals who are living at the time of the transfer, and contributes the irrevocable vested remainder interest in such roperty to the public charity. The decedent's property is commingled w/ the property of other donors or decedents, and the fund is managed by the public charity.

Credit Foreign Death Taxes: code section 2014

-credit is allowed if prop that is included in the decedent's US gross estate is also subject to death taxes by a foreign jurisdiction-usually b/c the asset is located in the foreign jurisdiction. For purposes of the credit death taxes actually paid to any foreign country, and/or political subdivisions thereof, and to any US possession will qualify as death taxes pd to a foreign jurisdiction. The credit is limited to the lesser of the foreign death tax or the amount of the US estate tax attributable to the common property. This deduction is seldom taken when this credit is available, as the credit will often lower taxes more than taking the deduction.

Funeral Expenses: code section 2053

-funeral expenses are deductible if reasonable

Property relinquished

-if surviving spouse is required by the dec'd will to g/u some other right or prop as a condition of receiving prop from the estate, a MD is allowed only for the difference in value between the property rec'd and the value of the right or prop given up by the surviving spouse.

Theft & casualty Losses: code 2054

-includes those thefts and casualty losses suffered by the estate after the dec'd death and before distribution to benes or heirs. It includes only losses not reimbursed by insurance or otherwise. IE: dec'd house burns down during the course of estate admin and only 80% of the $400k loss is covered by insurance, the remaining $80k is deductible from the jGE

Other requirements that an estate must meet to receive the charitable deductions:

-the ded is allowed for contributions of cash or prop only. (time and talent is not ded) -the ded portion of any charitable gift is only that part of the contribution that exceeds any value rec'd from the charity. IE: if a decedent left $1mm to a hospital on the condition that the hospital conveys prop to the decedent's estate worth $300K the estate would be able to claim only $00K charitable ded. -the transfer can't be of a partial interest unless it is of a type authorized by the code. The most commonly used vehicles for gifting a partial interest to a charity at death are charitable lead and remainder trusts, qualified conservation contributions and a gift of a remainder interest in a farm or personal residence. -the prop for which the ded is taken must be included in the decedent's gross estate.

Administrative expenses: code section 2053

-the deduction for administrative expenses includes all reasonably necessary expenses incurred in managing a decedent's s estate prior to distribution to benes or heirs. It can include PR commission, attorney fees, accountant fees, appraisal fees, utility, and insurance bills to maintain and protect a residence (except if owned JTWROS or TBE) until sold or distributed, probate fees, safekeeping fees, rent, telephone toll charges....

Debts, Mortgages, and Lie3ns: code section 2053

-the deduction for debts includes all of the dec'd financial obligations as of the DOD. Thus, it includes promissory notes, credit card balances, open accounts at retailers, accrued rent and lease payments, due but unpaid taxes... This deduction also includes mortgages and liens on prop included in the gross estate.

Credit for Federal GT on pre-1977 gifts: code section 2012

-the pre-1977 taxable gifts of property included in the GE primarily through application of either property placed in JTWROS w/ a non spouse or the transfer sections. The decedent's estate can also take a credit for GT paid out of pocket by the decedent's spouse on gifts for which the decedent was the donor but which were split under code section 2513. (or its predecessors). The credit is equal to the lesser of the GT or the ET pd. on such property. Thus, its purpose is to avoid double taxation on the transfer of such property

Valuation of Estate Assets- FMV

-the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy/sell and both having reasonable knowledge of relevant facts... -The IRS looks with some skepticism on the value placed on the property that is the subject of an interfamily transfer or a transfer between an employer and employee.

Property passing by will, bene designation or right of survivorship

-there is no doubt that an amount passes from the dec'd if it is given to the spouse in the dec'd will. There is no doubt if the amount has come to the spouse as bene of an insurance policy or a pension plan, or as the survivor od the dec'd spouse when prop is held in JTWROS or as TBE

US Government Bonds

-through he Bureau of Public Debt, the US gov has issued 5 types of savings bonds: Series E & H, Series I and EE and HH. Series E, H and HH are no longer issued but many of the bonds that have been issued have not yet reached maturity and continue to be held by investors. Series EE bonds have been issued since 1/1/1980, Series I bonds issued more recently pay interest at variable rate. When a taxable transfer (lifetime or death) is made of any of these bonds, the value of the transfer is measured by the redemption value of the bond as of the transfer or valuation date, as determined from tables published periodically by the Bureau.

Replacement cost for term policy

-unused premium

Life Insurance owned by decedent on his or her own life

-valued at death benefit

Life Insurance owned by decedent on the life of another

-valued at replacement cost

A bypass trust should be used when the grantor spouse:

-wants to leave prop in trust rather than outright -definitely does not want to use the MD -wants to include persons other than his spouse as income benes -wants to ensure that the trust prop will go to the remainder benes named in the trust at the death of the recipient spouse.

This Marital trust should be used when the grantor spouse:

-wants to leave the prop in trust rather than outright -definitely wants to get the MD -wants the recipient spouse to receive ins=come on a discretionary rather than mandatory basis -wants the recipient spouse to control where the trust prop goes after his death by means of the general power of appointment by will.

The marital trust should be used when the grantor spouse:

-wants to leave the prop in trust rather than outright -definitely wants to get the marital ded -wants to give the recipient spouse the maximum possible control over and /or right to use trust assets -does not care if the recipient spouse uses the general power of appointment to give the trust prop to someone other than the takers in default named by the grantor spouse.

QTIP Marital trust shouls be used when the grantor spouse:

-wants to leave the prop in trust rather than outright -wants his estate to have flexibility regarding the use of the MD -wants the recipient spouse to be entitled to all of the trust income on a mandatory basis for the rest of his life -wants to ensure that the trust prop will go to the remainder benes named in the trust at the death of the recipient spouse.

Type of Asset and Valuation Date

-when determining the value of an estate asset, it is important to be clear about two factors: 1. the nature of the asset 2. the date of valuation. -the valuation process differs according to the type of asset. Since estate assets can be valued either as of the dod or the avd, an election must be made. Whichever valuation date is chosen, it must be used for all estate assets subject to the exceptions for the AVD.

Property received outside of a will

-where property does not go to the surviving spouse by some direction of the decedent, a question of passing is raised.

Special Use Valuation-2032A The value of the qualifying real estate may be allowed if the criteria listed below can be satisfied-

1. The real prop must have been owned by the decedent or a member of the dec'd family and used as a farm or closely held business (known as qual use) on the date of the dec'd death and for 5 of the past 8 years ending on the date of dec'd death. 2. THE VALUE OF THE QUAL REAL & PERSONAL PROP MUST EQUAL AT LEAST 50% OF THE DEC'D GROSS ESTATE AFTER THE VALUE OF THE GROSS ESTATE HAS BEEN REDUCED BY ALL OUTSTANDING SECURED DEBTS AND MORTGAGGES, AND THE VALUE OF THE QUALIFIED REAL AND PERSONAL PROP HAS BEEN REDUCED BY THE AMOUNT OF OUTSTANDING SECURED DEBTS AND MORTGAGES AGAINST THE QUAL REAL AND PERSONAL PROP. 3. THE VALUE OF THE QUAL REAL ESTATE MUST BE AT LEAST 25% OF THE GE AFTER THE VALUE OF THE GE HAS BEEN REDUCED BY ALL OUTSTANDING SECURED DEBTS AND MORTGAGES AND THE VALUE OF THE QUALIFIED REAL PROP HAS BEEN REDUCED BY THE AMOUNT OF OUTSTANDING SECURED DEBTS AND MORTGAGES AGAINST THE QUALIFIED REAL ESTATE. 4. the prop must pass to a qual heir, defined by IRC to include ancestors, lineal descendants, and spouses of the decedent, as well as lineal descendants of the indv. spouse or parent, and the spouse, widow, or widower of any such lineal descendant. A legally adopted child of an indv is treated as a child of that indv by blood. 5. The decedent or a family member of the dec'd must have been a material participant in the operation of the farm or business for 5 of the past 8 years. The time during which another family member owned the property may be added to the time the decedent held the prop to permit the time requirement to be satisfied. 6. the qual real estate must be located in the US and the dec'd must have been a US citizen or resident alien.

Three-Year Inclusionary Rule (section 2035) -by contrast, includes property in the GE of the decedent on the basis of time. A 3 year inclusionary rule (sometimes referred to as the "transfers in contemplation of death" rule) of some kind has been part of federal estate tax law for many years. There are only 3 circumstances in which this rule applies-

1. Transfers of a retained interest w/in 3 years of death. IE: if a transferor g/up a retained life estate in a residence w/in 3 years of death) The prop would have been included in the transferor's GE 2. Transfers of Insurance-the death benefit from an insurance policy that would not have been included in the decedent's GE b/c the decedent held no incidents of ownership at death in the policy, nevertheless is included in the GE if the decedent transferred an incident of ownership in the policy w/in 3 years of death. (applies whether transfer of the policy is outright or in trust IE: to an IRREV Life Insurance trust.) 3. The Gross-Up Rule-the decedent's gross estate GT paid out of pocket by the decedent on gifts made by the decedent or his or her spouse w/in 3 years of death. Inclusion of the GT is not dependent upon inclusion of the gift. IE: a taxable gift of $100k in cash made w/in 3 years of death does not fall under either the first part or the second part of the 3 year rule and therefore, is not included in the decedent's GE. But if the dec'd had exhausted his GT applicable credit amount and paid a GT of $40k on that gift, the $40k would be included in the decedent's GE under the gross-up rule.

The way to get the MD when giving a spouse a terminable interest is to qualify for one of the exceptions to the rule. There are 4 such exceptions:

1. a life estate coupled w/ a general power of appointment 2. a QTIP arrangement w/ an election 3. naming one's spouse as the sole income beneficiary of a charitable remainder annuity trust (CRAT) 4. conditioning the transfer upon the spouse's survival for a period not to exceed 6 months.

The Estate Tax Deductions (KNOW) The GE is reduced by certain deductions-

1. debts 2. funeral expenses 3. Administrative expenses 4. casualty and theft losses 5. state death taxes paid 6. the marital deduction 7. the charitable deduction Subtraction of the first 4 deductions results in what is known as the adjusted GE (AGE) Subtraction of the last 3 deductions results in the taxable estate (TE)

FMV: Specific Applications Real Estate. Due to the uniqueness of each parcel of real property, the following factors have all been recognized as relevant in determining the value of real estate: In addition to these factors, a further refinement of FMV is available if the estate owns a partial interest in real estate that is eligible for a co-ownership or fractional interest discount. The co-ownership discount is a % reduction applied to the value of such real estate included in a co-owner's estate.

1. nature and condition of the prop)physical qualities and defects) 2. size and location of the prop 3. actual and potential use of the property (based on consideration of trends) 4. how suitable the prop is for its actual or intended use 5. applicable zoning restrictions 6. size, age and condition of any buildings 7. market value of comparable prop w/in the area 8. value of net income rec'd from the prop 9. probate court valuation 10. sales of comparable prop w/in the area 11. the cost of making improvement son the property 12. unusual characteristics of the prop that contribute to its uniqueness.

Closely held stock; The factors to be considered in valuing closely held stock are: Closely held stock (and similar interests in non-corporate business entities), like real-estate, is also entitled to valuation discounts in specified circumstances. Such discounts simply recognize that the market will make discounts from overall asset value in certain situations.

1. nature and history of the business 2. outlook for the economy & specific industry 3. book valure of the stock 4. the earning capacity of the co 5. the stock's dividend-aying capacity 6. existence of good will 7. recent sales of the stock being valued 8. FMB of comparable publicly held stock

Good reasons to continue bypass planning

1. portability is not really permanent. Congress can change its mind and take it away at any time. at that point it may be too late to use the first spouse's exclusion amount 2. an estate tax return must be filed by the estate of the 1st spouse to die for the surviving spouse's estate to be eligible to use the DSUE amount. If the return is not timely filed, it will again be too late 3. if the surviving spouse remarries, and this new spouse predeceases the surviving spouse, the surviving spouse will no longer be entitled to the DSUE amt of the 1st dec'd spouse. 4. Use of the DSUE amt requires giving the surviving spouse control over where the property transferred by the first spouse to die will go at the survivor's death unless a QTIP trust w/ an election is used. These potential negatives must be weighed agains the negative of using a bypass trust, which will deny the remainder benes a step-up in income tax basis, as trust assets will not be included in the surviving spouse's gross estate.

3 basic ways to lower a client's estate tax bill

1. reduce the Gross Estate: gift during life 2. Increase deductions to which the estate will be entitled 3. maintain the estate's eligibility for as many credits as possible

Beginning in 1982, the general rule has been that transfers made w/in 3 years of death are no longer, with certain exceptions, included in the GE. These exceptions to the general rule are:

1. transfers of retained life estates, retained lifetime income interests, and retained rights to designate the persons who may enjoy the transferred prop or vote certain stock that has been transferred. 2. transfers of certain retained reversionary interests 3. transfers of powers to alter, amend, terminate, or revoke an earlier transfer 4. transfers of certain life insurance policies (where decedent was both owner and insured) Furthermore, GT actually paid on any gifts made w/in 3 years of death are included in the gross estate under the gross-up rule. Note: Releasing a GPOA w/in 3 years of death will result in a gift, but will not necessarily result in the property over which the power was held being in the holder's GE.

If the surviving spouse is predecedased by more than one spouse, the DSUE amt availabale to the surviving souse is limited to the DSUE amount of the last dec'd spouse. A surviving spouse who has more than one predeceased spouse is not precluded from using the DSUE amount of each spouse in succession. However, a surviving spouse may not use the sum of DSUE amounts from multiple deceased spouses at one time nor may the DSUE amount of a predeceased spouse be applied after the death of a subsequent spouse.

IE: assume H1 died in 2012 w/ an estate tax base of $2.12 mm, H!s estate filed the required estate tax return. As of H1's death, Wife had made no taxable transfers. Therefore, after H1's death, Wife's applicable exclusion amount in 2012 was $8.12mm (her $5.12mm basic exclusion amount plus $3mm DSUE amount from H1). B/c the tax on $8.12mm in 2012 was $2,822,800, Wife also had an unused applicable credit amount of $2,822,800.Wife may use her $8.12 mm applicable exclusion amount on lifetime gifts or transfers at death. If Wife made taxable gifts of $1mm in 2012 following H1's death, she would use $1mm of the DSUE amount she received from H1 s estate (and its corresponding credit amount) to pay the GT. Wife's remaining DSUE amount is now $7.12 mm.

Tax rate chart is progressive-

IE: subsequent taxable amounts may be taxed at rates higher than the rates that were applied to the initial taxable dollar. The max tax rate is 40% for 2015.

Retaining a Lifetime Interest (section 2036)

If a transferor gives prop to another but retains the right either to use or possess the prop or to receive income from the transferred prop for his life, or for any period not ascertainable w/o reference to his death, or for any period that does not in fact end before his death, section 2036requires that some or all of the value of the prop as of the estate tax valuation date be included in his GE (like a grantor trust)

If the decedent's spouse is the sole beneficiary of the life estate Reg. Sec. 20.2056(b)-9 requires that the estate receive a MD for the entire value of the property-

If the PR makes a QTIP election under code section 2056(b)(7). The entire prop will then be included in the recipient spouse's GE, which will receive an offsetting charitable deduction. If the life estate holder is someone other than the decedent's spouse, the allowable charitable deduction will be the present value of the charity's remainder interest computed using the appropriate government actuarial tables and applicable federal rate (AFR). The PV of the income interest will be subject to estate tax.

Valuation of Life Insurance

If the dec'd owned a life ins policy on an insured who has not died as of the decedent's date of death, the value of such policy in the decedent's estate is not the policy's face value. The death of the insured- has not been fulfilled. The death benefit may never be paid if future payments are not made! Therefore, the value of a bequest of ownership of that life insurance policy is its replacement cost.

Power of appointment Trust-

In this marital trust, the recipient spouse is given a qualifying income interest for life and a general power of appointment over the corpus exercisable during life or at death. Trust income paid to the recipient spuse becomes subject to inclusion in the recipient spouse's gross estate if not consumed or given away prior to death.

Life Insurance: Code Section 2042

Insurance of the life of the dec'd is included in the dec'd GE if the dec'd owned the policy at death. Sometimes the dec'd is not the sole owner of the policy, but has an incident of ownership, such as the right to name the beneficiary. This is commonly the case w/ a split dollar policy provided by an employer. Other incidents of ownership include the right to cash in, surrender or cancel a policy; the right to receive policy dividends; the right to borrow against policy cash values; the right to pledge the policy as collateral for a loan. any sincle incident of ownership held by the dec'd is enough to include the policy in the dec'd GE

IE: When Barry died on July 1, he owned a whole life insurance policy w/ his surviving spouse, Linda, as the insured. This policy was in premium pay status, and was not subject to any loans. The terminal reserve value of the policy as of 12/31 of the prior year was $23,490. The terminal reserve value as of 12/31 of the year of death is scheduled to be $25, 190. The annual premium, all of which was paid on January 1 of the year of death, was $2,000. The value of this policy in Barry's GE for estate tax purposes would be computed as follows:

Interpolated terminal reserve: the mean between $23,490 and $25,190 since death occurred halfway through the calendar year) $24,340 Plus Unearned portion of the last premium: half of the annual premium since death occurred halfway through the calendar year) $1,000 Estate Tax Value $25,340

Purpose of the Federal Transfer Tax System-

Is to tax the gratuitous transfer of wealth at least once at each generation.

Preserving or Increasing Estate Tax Deductions & Credits

It is laughable to think that one would incur debt, intentionally increase his funeral and admin expenses, state death taxes or intentionally leave estate assets uninsured in the hope of this estate suffering a theft or casualty loss after death simply in order to increase these estate tax deductions.Marital Deduction Planning

QTIP-Qualified Terminable Interest Property Trust

Marital trust (newer trust) that gives the interest to the recipient spouse in this trust is a terminable interest, but it also qualifies as one fo the four exceptions to the terminable interest rule. Like the power of appointment trust, this trust gives the recipient spouse control over truse income by giving him a qualifying income interest meeting all of the LAME requirements . However, the recipient spouse has no general power of appointment, and therefore absolutely no control over the trust corpus. the remainder benes entitled to the trust corpus are named solely by the transferor spouse.

The Estate Trust

Prop placed in an estate trust qualifies for the MD b/c the recipient spouse is the sole bene of the trust; any trust income or corpus not actually distributed to the recipient spouse during his lifetime is pd. to the recipient spouse's estate upon his death. Thus , the spouse's interest in this trust does not meet the definition of a terminable interest. Distributon of trust income during the life of the spouse is made at the discretion of the TTEE.

Property Subject to a Qualified Conservation Easement: Code Section 2031(C)

Qual estates may elect to exclude from the GE the lesser of the applicable % of the value of land included in the GE that is subj to a qual conservation easement or the exclusion limitation.Te applicable % can not exceed 40% of the value of real estate reduced by any charitable deduction taken under code sec 2055(f) for irrevocable transfers of easements in real prop. the exclusion limitation is $500K

If current trust income is insufficient to make the stated payment for a CRAT, the difference must be taken from principal

Since the income beneficiary of a CRUT is not promised any fixed amount, the applicable code sections and regulations permit but do not require the trust document to mandate invasion of the trust corpus to meet the stated payment. If the trust mandates invasion of principal to make the unitrust payment, the trust is known as a standard CRUT. If the corpus is invaded it will have the effect of reducing the income beneficiary's interest in subsequent years b/c of the reduced amount of trust assets. When invasion is not mandated, the trust can designate the at the income bene is entitled to the lesser of the fixed % of the annually determined FMV of the trust assets and the actual accounting income of the trust each year, the trust is known as a net income charitable remainder unitrust or NICRUT.

Gross Estate

Starting point for calculating the tax on a decedent's estate. The GE is a tax concept only and defined in the IRC. This encompasses many items that might not otherwise be considered part of a decedent's estate. IE: many state law purposes a dec'd estate consists only of his probate estate-IE: the prop that passes by the dec'd will or according to state intestacy laws. The GE, however while always including the probate estate, often will include many items not in the probate estate. Insurance proceeds and retirement benefits generally are not part of the probate estate, and yet if something will be transferred to a survivor as a result of the decedent owning these assets during life, the PV of what the survivors will receive is part of the GE. **footnotes look for premiums Pd. then bring into GE.

TBE

TBE and CP are forms of property ownership usually reserved solely for married couples, each spouse ids deemed to own half of the asset.

Charitable Deduction: Code Section 2055

The charitable deduction, like the MD is unlimited. A $50mm estate given entirely to charity escapes federal estate tax. One of the critical questions w/ the charitable deduction is whether the charity qualifies for federal estate tax purposes. When the charity is public, there is little doubt about that qualification, but private foundations, supporting organizations, donor advised funds and charitable trusts are scrutinized.

Valuation Method: FMV or Exception

The exception to the FMV principle is very limited. Special use valuation is limited to situation involving real estate used in closely held business or farming operation. Even if theis initial requirement is met, the myriad other requirements will eliminate all but a few estates. IE: If the asset being valued is life insurance and the insured was the decedent, the net amount of the death benefit can be obtained from the insurance co. If the insured was not the decedent, the replacement cost, as that term is applied to the particular type of policy involved, can also be obtained from the insurance co. Or, if the asset being valued is real-estate, the appraiser hired by the estate will assemble data on comparable sales and other information necessary to comply w/ IRS regulations.

the MD is granted for certain transfers between spouses.

The fed gov views a husband and wife as one economic unit, not two for gift and estate tax purposes. Therefore a husband and wife can transfer back and forth w/o tax consequences, so long as the IRS retains a chance to impose a transfer tax at least once before any part of the wealth is transferred outside of that economic unit. It is for this purpose to retain the right to tax the wealth at a future time-that the MD merely delays gift and estate taxes, rather than eliminating them completely.

Key Personnel discount

common discount used in valuing closely held business interests. Executors argue that any factor that reduces the interest's appeal also tends to reduce its value.

One of the requirements for obtaining the MD is that the recipient spouse not be given a terminable interest or that the terminable interest is deductible by meeting one of the 4 exceptions to the terminable interest rule. Again, deciding whether this requirement is met is much easier w/ an outright transfer that w/ a transfer in a trust. The IRS has stated by reqgulation that the recipient spouse will not be deemed to have a terminable interest in a trust if he has what is tantamount to "OUTRIGHT CONTROL" of the trust

The regulations further define outright control as control over both the income and the corpus of the trust.

Charitable Remainder Trusts- If a person wants to leave part of his estate to charity but wants a noncharitable beneficiary to benefit from the asset first, a charitable remainder trust (CRT) is used.

The trust is so named b/c the charity gets the remainder. The income interest goes to one or more noncharitable beneficiaries designated by the decedent. -If the sole noncharitable beneficiary is the decedent's spouse, the recipient spouse's interest in the trust will qualify for the MD under code section 205(b)(8) regardless of whether such income interest lasts for the spouse's lifetime or for a term certain not to exceed 20 years. No QTIP election is necessary or possible.

Date of Valuation

The valuation date for prop in a dec'd GE is either the date of the dec'd death or 6 months after dec'd death. The executor may elect to value the prop included in the GE as of the AVD (6 months) Sometimes using the AVD is more beneficial than using the DOD if the dec'd owned prop that has depreciated rapidly after dec'd death. IE: marketable securities that decline in value. If AVD is elected, it is applied to all prop in the estate, not just particular assets.

TEC

Valuation of prop owned as TEC is FMV of dec'd % share at the valuation date.

ILIT (irrevocable life insurance trust)

all incidents of ownership in a policy are often assigned to an ILIT to prevent inclusion of the poloicy proceeds in a person's GE. However, the creator of an ILIT must survive the assignment of an existing policy on his life by at least 3 years to remove the proceeds from his GE b/c of the 3 year inclusionary rule set forth in code section 2035

Special Power of appointment (ascertainable standard) HEMS-Health, Education,

allows the holder of the power to choose only among other persons as to benefits to be received, or if the holder can appoint the benefits to himself, he can only do so subject to certain limitations.

Annuities- The value of survivor ship benefits payable to a survivor for life nder either a charitable gift annuity or commercial annuity for estate tax purposes is equal to the premium chargec by the issuing insurance co. for a single life annuity on the survivor's life as theof the decedent's dod. w/ private annuities and charitable trusts that pay an annuity amount, the value of survivorship benefits (it any)for estate tax purposes is measured by determining the PV of those future payments as of the decedent's dod. Such PV calculations are made by using various government actuarial tables after determining the applicable federal rate (AFR) under IRC code for the month in which the transfer occurs or the two preceding calendar months for charitable trusts.

is simply the payment of money over a period of time by one person or entity to another b/c of some prior consideration provided by the person who is to receive the payments (the annuitant). The amount of payments depends upon the interest rate and the frequency and length of the payments. Mose are paid out either over the life of the annuitant (life annuity) or over a period of years (term certain). Annuities can be issued either commercially (usually by ins co's), privately, by individuals, or by charities in a charitable gift annuity, or a charitable trust such as a charitable remainder annuity trust or CRAT. A transfer of annuity payments, which will incur estate tax liability, occurs when the decedent (who may or may not have been the annuitant)has provided the consideration for the annuity, and someone other than the decedent will receive payments under the annuity after the decedent dies. These payments are called survivorship benefits.

Bypass trusts take many forms, the most common ways to ensure that a trust will not qualify for the MD is to-

make the surviving spouse one of several (vs. exclusive) income beneficiaries and/or to make distribution of trust income discretionary (vs. mandatory) w/ the ttee. In this latter instance, the surviving spouse obviously cannot be the sole ttee. An absolute requirement for any bypass trust is that the surviving spouse not be given a general power of appointment over trust prop.