Estate Planning: Class & Exam Notes
The annual exclusion for a gift made to a non-citizen spouse in 2019 is what?
$155k
What techniques should be used when a couple wants the decedent spouse to receive a marital deduction?
- A trust - QTIP - Estate Trust - Outright gift to spouse
Disclaimer Trust
- For couples without enough assets to warrant a credit-shelter trust but may in the future - Surviving spouse receives everything but may "disclaim" or deny some assets - Anything disclaimed goes into a credit-shelter trust Protects wealth from estate taxes
What are the three documents that at a minimum everyone should have?
- Will - Durable POA - POA for Health care
Private Annuity
- a seller receives a fixed annuity income stream for life and removes the business or property from their gross estate - buyer beware: if the buyer dies before the seller then their estate still needs to pay the seller
What technique should be used when a couple wants the surviving spouse to choose trust beneficiaries?
- a trust - estate trust
What are two of the most important transfers of money that are not a gift?
- direct payments for medical/hospital bills - direct payments for tuition
What is the purpose of a QDOT trust?
- give the decedent a marital deduction for property passing to a non-citizen spouse - ensure that the decedent's assets will not leave the US without being taxed
A QTIP trust is established when the decedent spouse would like to do what?
- provide the beneficiary spouse with income for life - receive an estate tax marital deduction - give trust corpus to children from a previous marriage
With a life estate, what is the gift tax consequences?
- the creator makes a gift of the remainder interest in property or trust to the beneficiary - the value of the gift is the PV of the remainder interest
Which of the following transfers escape(s) gift tax liability? 1. A man agrees to give his wife a lump sum settlement of $1,000,000 upon their divorce. In turn, his wife agrees to give up all marital rights she has in his estate. 2. After his divorce is settled, he agrees to support his adult children.
1 Transfers of property or property interests made under a written agreement between spouses in settlement of marital property are deemed to be for full consideration and therefore are not gifts. Transfers to or for the benefit of adult children are generally treated as gifts unless the transferor is required to support the child for some reason (college tuition, etc.). Court ordered child support for minor children is not treated as a gift.
Are the following included in the holders estate at death? 1. General POAs 2. 5 x 5 Powers 3. Limited Powers
1 & 2 are included 3 is not included
Which of the following charitable giving techniques require a 5% payout of corpus? 1. CRAT 2. CRUT 3. Charitable gift annuity 4. Pooled income fund
1, 2 The CRAT and the CRUT are subject to the minimum 5% distribution rule.
Your client base is mainly elderly individuals and couples. You realize that you should be aware of signs of forgetfulness or dementia. Senior citizens are also especially vulnerable to financial fraud. What kind of financial signals should you be looking for? 1. The client had been requesting $4,000 a month but now is requesting $8,000 a month. 2. A caretaker requests that distributions be sent to him or her, not to the client. 3. The client starts to ask questions about high risk investments. 4. The client requests that account transactions be sent to their attorney.
1, 2, 3 Dramatic changes in cash demands or investment risk tolerance could indicate that someone is mis-using the elder client. It is normal for account transactions to be sent to the client's attorney.
Mr. Grossland, age 70, set up an UTMA account for his grandson, Tom, age 15. Tom, is planning to go to college after he serves 4 years in the military. Tom expects to enter college at age 21 and get some benefits for his military service. Mr. Grossland feels he has 6-7 years to invest the funds. He is an experienced stock buyer and expects to invest long-term to take advantage of low capital gains rates. Which of the following tax and legal issues affect Mr. Grossland and Tom? 1. The UTMA assets will be turned over to Tom at age 21. 2. Any LTCGs or dividends will probably be taxed at Tom's low tax bracket, not the trust tax rates. 3. If Mr. Grossland dies the assets in the UTMA will be included in his estate if he is the custodian. 4. Only $15,000 can be placed in the UTMA until Tom graduates from high school.
1, 2, 3 In two years, Tom will no longer be a dependent of his parents. He will be in the military with earned income.
Ted Matthews has died with a will passing various properties to his children. Ted is survived by his wife, Jackie. Jackie would like to disclaim some of the following properties. Which properties can be disclaimed by Jackie? 1. Land held in JTWROS with Jackie - Ted's will passes his share of the property to his daughter. 2. Residence held in tenancy by the entirety - Ted's will passes his share of the property to his son and daughter equally. 3. $200,000 life insurance policy on his life - Jackie is the primary beneficiary, and his children are the contingent beneficiaries. 4. Rental property held in JTWROS with Jackie - Ted's will passes his share of the property to his son
1, 3, 4 She can disclaim 1/2 of the JTWROS property. That is his 1/2, not her 1/2. She still retains her 1/2. The entirety cannot.
A tenancy by the entirety ownership agreement may be terminated in which of the following ways? 1. By either spouse 2. By mutual agreement by both spouses 3. At the death of either spouse 4. Upon a divorce settlement 5. By claims of one spouse's creditors
2, 3, 4 Both spouses must agree to sever the TBE arrangement. Only if a creditor claim is against both spouses can the TBE property be attached.
Mr. Brown sells a parcel of undeveloped land (basis $100,000) for $1,000,000 (FMV) to his children using an installment sale. One payment ($100,000) was made by his children. If he forgives the second year payment, what will be the taxable event? 1. The present value of the remaining payments will be included in his estate. 2. Mr. Brown has made a gift of $100,000 to his children for the second year payment only. 3. Mr. Brown has made a taxable gift equal to the fair market of all the remaining payments due. 4. Mr. Brown will have to report the taxable portion of the $100,000 payment as income.
2, 4
Richard's father, Joseph Leder, died and was insured by a $1,000,000 policy purchased in 2016 (within three years of his death). Richard's mother was the applicant-owner and beneficiary. Joseph Leder signed as the insured. Monthly premium payments ($3,900) were paid by a corporation wholly owned by Joseph. Was the life insurance included in the estate of Joseph? 1. Yes, it was included because the corporation paid the premium. 2. Yes, it was included because Joseph died within three years of the policy issue. 3. No, the policy was excluded from Joseph's estate. 4. No, the corporations can pay premiums for their key employees, and the policies will always be excluded from their estates.
3 This is a famous estate planning case. IRS has not been able to enforce the premium payor rule. "Beamed theory" was the principal that the IRS used to show an incident of ownership. Mr. Leder owned the company which paid the premium. Premium payment is not an incident of ownership. Answer IV is too general an answer to be true. The word "always" makes it wrong.
Who appoints a guardian? a. The court b. The trustee c. A parent d. An executor
A A guardian is appointed by the court and is charged with the responsibility of caring for another (the ward). Parents can name a guardian of their minor children in a will. The court usually honors their choice. (That person is a testamentary guardian.)
Mrs. Beall, age 60 and in good health, is contemplating reducing her estate by gifting. All of her property is either dear to her or she needs it to maintain her style of living. Investments $8,000,000 Residence $1,000,000 Vacation home $1,000,000 What would you suggest she do? a. Transfer the vacation home to a QPRT in exchange for the right to live in the vacation home for 15 years b. Transfer $1,000,000 to a GRAT in exchange for a fixed income for life c. Transfer the residence to a QPRT in exchange for the right to live in the residence for 20 years
A A vacation home can be transferred to a QPRT. Presumably, Mrs. Beall would be more comfortable to gift it, rather than her personal residence. Pushing the term (20 years) reduces the size of the gift. However, if she doesn't live the 20 years, the residence is brought back into her estate at fair market value.
Judd's primary home is in Massachusetts. He also owns a home in Florida and spends winters there. Which of the following property owned by Judd will be subject to ancillary probate? a. Judd's home in Florida. b. Judd's personal property in the Massachusetts home. c. Judd's personal property in the Florida home. d. Judd's home in Massachusetts.
A Ancillary probate is a procedure that disposes of real estate of the decedent that is located in a state other than that of the decedent's residence. A will can normally only dispose of the decedent's personal property interests and those real property interests that are located in the state of the decedent's residence.
Frank died owning $2 million in stock XYZ and $3 million in ABC stock. His other assets, including his home, are worth another $2 million. He bought these two stocks for their high dividends. When he bought these stocks years ago, the dividend payment was about 30% of his original purchase price. As money came in, Frank spent it. After he died, XYZ jumped in value by 50% because of a buy-out offer. The assets pass to his daughter, what can she do? a. Inherit the stock and receive the dividends b. Sell the stock after the next individual distribution and pay STCGs c. Elect the alternate valuation date for the stock d. Under IRD rules take an income tax deduction equal to the estate taxes due.
A At a $7 million (approximately) date of death estate tax base, there is no estate tax due. The AVD cannot be elected if there is no estate tax due. It can't be elected to get a higher step-up in basis. Because of that, IRD rules do not apply. Lastly, gains due to inheritance are always LTCGs. His daughter can keep the stock or sell it.
The administrative duties of an executrix of a probate estate usually involves each of the following, except: a. Naming beneficiaries for property if the decedent died intestate. b. Distribution of the probate estate according to the terms of the decedent's will. c. Making an inventory of all probate assets. d. Payment of creditors' claims.
A If the decedent dies intestate, the state laws of intestacy determine the distribution of property.
Which of the following statements are correct for property ownership arrangements? a. Community property can only be owned by spouses. b. Tenancy in common requires the consent of the cotenants if a tenant wants to dispose of his or her interest. c. Tenancy by the entirety can be severed by either spouse. d. Joint tenancy with the right of survivorship cannot be severed during the lifetime of either joint tenant.
A Tenancy by the entirety can be severed by mutual consent of both spouses. Under joint tenancy with rights of survivorship, each owner may set his or her interest without the consent of the other. No consent is required in tenancy in common. The question is asking which statement is correct.
Jane Wilder has come to you for advice. She is a widow, age 63. Her husband died in 2010 when there was no estate tax and he placed $20 million in a bypass trust for her benefit. She has an additional $20 million in her own name. She met a man who is a Canadian citizen. He is reasonable wealthy ($5 million - Canadian). He is willing to sign a prenuptial agreement and so is she. She wants him to benefit while living from some of her money. However, she wishes that funds remaining at his death would ultimately pass tax free to her children. Her husband's bypass trust will accomplish that. What type of planning does she need? a. Leave $11.4 million in the bypass trust and the remainder to her children b. Leave $11.4 million in a QDT and the remainder in a QTIP c. Leave $11.4 million in a QDT and the remainder to her children d. Leave $10 million in a bypass trust
A The $11.4 million going into the bypass trust would use her exemption. It would ultimately pass tax free to her children. The remainder would be subject to federal estate tax now. In "Leave $11.4 million in a QDT and the remainder to her children", the QDT would pass by the marital deduction but then ultimately would be taxed at the second husband's death. The growth in the QDT could cause additional estate taxes when he dies. "Leave $11.4 million in a QDT and the remainder in a QTIP" makes no sense because the QDT is like a QTIP, both pass by the marital deduction.
Lucy (AGI $200,000) wants to gift her Universal Life insurance Policy to a public charity. If the face value is $500,000, the cash value is $75,000 and the basis is $50,000, what is the amount of the charitable income tax deduction she will receive? a. $50,000 b. $100,000 (50% of AGI) c. $75,000 d. $60,000 (30% of AGI) e. $200,000
A The charitable contribution is the cash value of the policy ($75,000) or the cost basis ($50,000) whichever is less. This deduction is further limited to 50% of AGI. Life insurance is an ordinary income type asset. It is not LTCGs type asset that can be valued at FMV for charitable deduction purposes.
Mr. Stallworth, age 70, set up a 6% CRT. He will be the income beneficiary, while living, then his daughter, while living and finally his granddaughter for as long as she was living. Then the corpus remaining would pass to charity. One year after he set up the CRT, his daughter died. Would the charitable deduction change? a. No change b. The full deduction would stop at his death. c. Yes, it would change to partial interest deduction based on a new life expectancy of the trust.
A The original charitable deduction was based on the life expectancies of the family members at the time that the trust is set up. Death of a family member does not change the original charitable deduction. The probability of death was factored into the original deduction by use of an IRS table.
Which of the following statements regarding power of appointment is correct? a. A lapse of a general power will subject the holder to a gift tax liability. b. An exercise of a general power subject to a 5 or 5 limitation cannot subject the holder to a gift tax liability. c. A lapse of a general power subject to a 5 or 5 limitation will subject the holder to gift tax liability. d. A release of a general power subject to a 5 or 5 limitation cannot subject the holder to a gift tax liability.
A The others are written incorrectly. Please review the flow chart under general powers.
Who pays the GSTT tax when the beneficiary's (the donor's child) interest in a trust terminates and thereafter only the skip person has an interest in the property? a. The trustee on behalf of the trust b. The transferee c. The transferor
A This is a taxable termination. Any GSTT due is paid by the trustee from trust assets.
Mr. Dodd has made no lifetime gifts other than to use his annual $15,000 gift tax exclusion to various family members. Since his wife died 3 years ago, he has been trying to reduce the size of his estate ($25 million). He has decided to gift $16,400,000 into a trust to benefit his daughter for life. At his daughter's death the remainder will pass to her 4 children. If he gifts this money, he wants to know how much tax he will have to pay and how much tax will be due at his daughter's death? a. $2,000,000 gift tax is due now and the trust will pay $1,200,000 GST tax at his daughter's death b. $0 of gift tax now and $4,000,000 of combined gift and GST tax will be paid by the trust. c. $4,000,000 of combined gift and GST tax now d. $1,750,000 gift tax now and the trust will pay $1,750,000 GST tax at his daughter's death
A This is an indirect skip through a trust and does not qualify for the $15,000 annual exclusion (taxable termination). He can use his $11.4 million gift and GSTT exemption. Gift $5,000,000 at 40% = $2,000,000. This is paid by him. GSTT $3,000,000* at 40% = $1,200,000. This is paid by the trust (taxable termination). NOTE: The exemption for gift and GSTT is $11,400,000. *The $2,000,000 gift tax paid reduces the GSTT by $2,000,000.
If a couple wants the surviving spouse to receive all income annually, what techniques should be used?
A trust or QTIP
Estate trust
A trust which grants the surviving spouse a testamentary general power of appointment over the trust assets. Because of the spouse's general power of appointment over the trust's assets, the fair market value of the trust will be eligible for the unlimited marital deduction at the death of the first-to-die spouse.
A-B Trust
A type of marital deduction trust that reduces the taxation of the second spouse to die by limiting the amount in that person's estate to a sum that is not taxable. Also called bypass trust, credit-shelter trust, and exemption equivalent trust.
Which of the following will be deductible from the gross estate to arrive at the adjusted gross estate? 1. Unpaid federal gift tax of $10,000 2. A mortgage on a house owned jointly by a husband and wife 3. An accountant's fee to prepare the estate tax return 4. A utility bill for the decedent's residence during estate administration 5. Fire damage (not covered by insurance) to the decedent's residence during estate administration
All A gift tax (unpaid) is a debt. When the house is owned jointly, the property passes outside probate. The mortgage is not subtracted from the probate estate, it is subtracted from the gross estate (a debt).
Mr. and Mrs. Billings have lived in California, a community property state, for all their married working lives. These are their assets. 1. $1,000,000 home 2. $500,000 term life insurance policy on Mr. Billings (Mrs. Billings is the named beneficiary) 3. $400,000 in Mr. Billings IRA (Mrs. Billings is the named beneficiary) 4. $100,000 in a CD owned by Mrs. Billings 5. $50,000 Lexus and $40,000 BMW Which of the assets are community property?
All Community property emphasizes the efforts of both spouses. Even term insurance has value if the insured did not die from potential death benefits.
Ascertainable Standard
An objective standard for allowing distributions defined in the Internal Revenue Code as distributions for health, education, maintenance, or support (HEMS)
Bob sells land with an FMV of $500,000 to a charity for $300,000. His basis in the land is $100,000. What is his taxable gain? a. $100,000 b. $240,000 c. $200,000 d. $300,000
B $300,000 (sale) / $500,000 (given) x $100,000 (basis) = $60,000 $300,000 (sale) - $60,000 (adjusted basis) = $240,000 The reason for the ratio is that the transaction is part sale ($300,000) and part a deductible charitable gift ($200,000). Without the ratio, the charitable bargain sale would allow the seller an opportunity to double dip on the transaction.
Which of the following items would be included in a decedent's gross estate for federal estate tax purposes? a. Any interest in property that was given to the decedent by another, the transfer of which the decedent cannot control and that ceases at the decedent's death b. A general power of appointment c. Taxable gifts d. A special power of appointment
B A general power is included in the gross estate. Taxable gifts are added to the taxable estate. "Any interest in property that was given to the decedent by another, the transfer of which the decedent cannot control and that ceases at the decedent's death" indicates a life estate. A life estate is not included in the gross estate because the decedent transfers nothing at death. A special power is not included.
If the alternate valuation date is elected, can assets be valued at dates other than the 6 month alternative valuation date? a. No b. Yes c. Always d. Never
B Even when the AVD is elected, specific assets may be sold or distributed before the AVD occurs. Those assets are then valued at their FMV as of the date of distribution or sale.
Dr. Baker (37% tax bracket) owns a profitable clinic with various pieces of medical equipment. He would like to gift to his son, age 18, for future educational needs, but he is short of cash. Which of the following would be a workable opportunity for Dr. Baker to fund for his son's education needs? a. Gift the medical equipment and lease it back b. Establish a family limited partnership with the medical equipment and slowly gift units to his son over time using his annual exclusion c. Sell the medical equipment to his son using an installment sale technique
B His son is age 18 and probably subject to the kiddie tax. Trust rates could apply. Answer A will produce kiddie tax.
Bob Perry, a successful financial planner, wants to start gifting to his 14-year old daughter for college education costs. He owns a successful practice (S corporation) and a print shop (S corporation). The print shop has various computers, copy machines, and small printing presses. What would you suggest he do? a. Do nothing b. Set up a 529 plan and make cash gifts to the plan c. Start gifting shares of practice's S corporation to his daughter d. Start gifting shares of the print shop's S corporation to his daughter
B If he gifts $15,000 per year, then in 3 years she will have $45,000 of either stock or cash. In the case of stock in either company, she runs the risk of incurring the kiddie tax if the stock pays any distributions. A cash gift to a 529 avoids gift tax as well as the kiddie tax.
Which of the following requires a filing of a 709 with spousal consent? a. A gift of $30,000 made to a daughter for college tuition from her parents' joint checking account b. A gift of $30,000 made to a daughter for college tuition from her mother's checking account c. A gift of $30,000 made directly to the university for college tuition d. A gift of $30,000 made to a daughter for college tuition from her parents' community property checking account
B If the check is written to the daughter, her mother will have to file a 709 with spousal consent.
Which of the following types of property ownership passes through the probate process? a. Property held under joint tenants with rights of survivorship. b. Property held under tenancy in common. c. Joint bank account. d. Property held under tenancy by entirety.
B Property held under tenancy in common is subject to the probate process because it does not provide rights of survivorship.
Tim Foley and Alice Livingston were living together (not married) in California, a community property state. Tim and Alice bought their home using joint tenancy (JTWROS) for $200,000 some years ago. Tim died recently. Alice is going to sell the home for $1,500,000 (date of death value). What is her tax basis if she contributed $100,000 to the original house purchase? a. $750,000 b. $850,000 c. $500,000 d. $100,000 e. $1,500,000
B She does not get a full step-up in basis. Due to joint tenancy, she gets half step-up in basis. Her basis $100,000 His basis after step-up +750,000 $850,000 NOTE: You might argue that this was a community property question. They were not married
Your client, Sherman Simmons, purchased stock for $120,000 in 2000. He died 6 months ago (2019) and left all of his property to his wife, Sylvia. The FMV of the stock on the date of death was $70,000. The stock value on the alternate valuation date was $80,000. If Sylvia sells the stock on the alternate valuation date, what will be the income tax result? a. There will be no gain or loss. b. Sylvia will incur a long-term gain of $10,000. c. Sylvia will be able to take a long-term loss of $50,000. d. Sylvia will be able to take a long-term loss of $40,000.
B Sherman passed all of his property to his wife under the marital deduction. Because no federal tax applies, the alternate valuation date cannot be elected. Sylvia's basis will the FMV date of death. $80,000 (proceeds) - $70,000 (basis) = $10,000
Mr. Dell has a taxable estate of $17,400,000. He has made no taxable gifts. If he dies today (2019), what is the net estate tax due? a. $5,450,000 b. $2,400,000 c. $1,800,000 d. $814,000 e. $2,000,00
B Taxable estate $17,400,000 less exemption 11,400,000 6,000,000 Tax Base 40% 2,400,000
Mrs. Powell, a widow age 75, has an estate of $15 million. She is concerned about estate taxes. She inherited a small apartment building from her parents many years ago. It is fully depreciated. The building, FMV $3 million, is producing marginal income due to maintenance problems. She needs more income to maintain her lifestyle. Which of the following would you recommend she do? a. Sell under a 10 year installment note to a 3rd party who has offered $3.0 million plus 5% interest. b. Sell under a 10 year SCIN using a value of $3.0 million plus 5% interest to her sister's son (handyman) c. Do a gift-lease back with her sister's son who is a great handyman d. Sell under a 10 year GRIT with her sister's son (handyman) using the FMV plus 5% interest
B The SCIN will produce a higher payout and avoid estate taxes. Capital gains could occur if she dies within 10 years. "Do a gift-lease back with her sister's son who is a great handyman" means she will gift the property away as a taxable gift and then lease it back from him. She needs more income. "Sell under a 10 year GRIT with her sister's son (handyman) using the FMV plus 5% interest will trigger a taxable gift of $3 million". Nothing is gained. "Sell under a 10 year installment note to a 3rd party who has offered $3.0 million plus 5% interest" is not bad but it can trigger estate taxes and recapture.
Your mother, age 60, is becoming forgetful. Your father died three years ago. Since then you have been handling her financial affairs. At this time, she owns the house that was purchased 40 years ago and some investable assets. Your father worked for a company that had a defined benefit plan. She gets $2,500 per month in QJSA benefits but lately you have had to sell some of her investments to cover her expenses. What should you do first? a. Have her apply for Social Security benefits b. Take her to an attorney to prepare various legal documents like an advanced medical directive, a durable power of attorney, or a living trust c. Qualify her for Medicaid by gifting her assets away d. Review her budget to see why she cannot live on $2,500 per month
B While your mother still retains some mental capacity, she should execute an incapacity plan through powers of attorney and living trusts. "Review her budget" and "have her apply for Social Security" are not bad answers but the question is asking what should you do first. There is nothing here that indicates she has any of these legal documents. "Qualify her for Medicaid" seems dreadful. You are stripping away her flexibility and it may not work because of the defined benefit pension plan.
If a couple wants the surviving spouse to receive income if needed, what technique should be used?
B trust or estate trust
Crummey Powers
Beneficiary is given the right to withdraw some, or all, of a grantor's contribution to an irrevocable trust each year The withdrawal amount is usually limited to the lesser of: - the annual exclusion - the annual contribution made to the trust - the greater of $5k or 5% of the amount transferred into the trust
Which of the following statements concerning a simple trust is not correct? a. The trust is treated as a tax entity. b. Accumulation of trust income is not allowed. c. Beneficiaries are never taxed on distributed income. d. A simple trust can never make distributions of principal or have a charitable beneficiary.
C A simple trust will distribute virtually all of its income to its beneficiaries who will then be taxed on that income. "A simple trust can never make distributions of principal or have a charitable beneficiary" is true. A simple trust is not a person. It must file with the IRS for a tax ID #. Income will be paid to it and distributed to the beneficiaries. The trust is treated as a tax entity subject to a $300 personal exemption. Principal may not be distributed, and no charitable gifts can be made by this type of trust.
John, age 38, and Mary, age 35, have limited assets at their stage in life. Other than a home (with a big mortgage), IRA and 401(k) accounts (limited), and some personal property, they have some cash and investments. They each individually have a $2,000,000 life policy with each other as primary beneficiary and their two children (8 and 10) as secondary beneficiaries. Which is the best beneficiary designation for their life insurance policies? a. Leave unchanged b. Change the primary beneficiary to the children c. Set up a testamentary trust with exemption provisions leaving the spouse the primary beneficiary and naming the trust the contingent beneficiary d. Set up a revocable living trust with exemption provisions and name the trust the beneficiary
C Leaving unchanged and changing the primary beneficiary to the children are wrong because the children are minors. They have limited assets except for life insurance. If the revocable trust is the named beneficiary, the life insurance ($2,000,000) and all other separate assets could go into the applicable credit amount trust at the first death. These assets could remain there for 40-50 years. Rather than leaving them in trust, when one spouse dies, the survivor should get all the assets. The answer is the more practical choice with the current $11,180,000 exemption or $22,360,000 if they both died.
Which of the following types of property ownership are not included in the probate estate? a. Property passing from a will into a testamentary trust. b. Property transferred by a Pour-over will into a trust. c. A bank savings account owned by the decedent with a payable on death (POD) designation. d. Community property.
C Payable on death (POD) accounts, such as a Totten trust, or assets in a transfer on death (TOD) brokerage account are not subject to probate.
Todd (married) has an interest in the following assets. - $100,000 in stock (in his name) - Land worth $200,000 (held in tenancy in common with his sister 50%/50%) - $350,000 in a home (held in tenancy with rights of survivorship with his wife) - $250,000 in trust (with a general power of appointment granted to Todd) When Todd dies, how much will be included in his gross estate? a. $725,000 b. $475,000 c. $625,000 d. $375,000
C Stock $100,000 ½ land/home 275,000 Trust 250,000 (retained interest) $625,000
Toby owns a life insurance policy with a face value of $500,000 on the life of his father. Toby dies on June 30th of this year. The policy reserve was $40,000 on November 30th of last year. The policy reserves would have grown to $46,000 by November of this year. Toby made a premium payment of $5,000 on November 30th of last year, what is the value of the policy that will be included in the gross estate if the IRR of the policy is 5%? a. $45,416.67 b. $46,111.15 c. $45,583.33 d. $45,503.13
C The IRR is immaterial. It does not affect the answer. NOTE: November 30th to June 30th is 7 months. Increase in the terminal reserve over the current year: ($46,000 - 40,000) x 7/12 = $3,500 Plus the interpolated terminal reserve at the end of last year 40,000 Plus 5/12 of the unearned annual premium ($5,000) 2,083 $45,583
Why is nondurable power of attorney a disadvantage? a. It may be revoked at any time by a competent principal. b. It becomes effective as soon as it is executed. c. It does not survive the principal's incapacity. d. It is relatively inexpensive and not time-consuming to execute.
C The other answers are advantages.
Harry Potter, age 75, is considering gifting $40 million to various family members. He has been informed by his attorney that the gift tax of approximately $15 million is subject to a 3-year gross-up rule. Part of the $50 million will also be subject to GST tax. Of the $50 million, approximately $28 million will go to skip persons. The estimated GST tax will be around $5 million. He is asking you - is the GST tax subject to the 3-year gross-up rule and whether his estate will get a credit for the GST paid? a. The GST tax will offset the gift tax with the difference subject to the gross-up rule but cannot be used as a credit against estate taxes for the GST paid. b. Yes, it is subject to the 3-year gross-up rule but, yes he will get a credit against estate taxes for the GST paid. c. No, it is not subject to the 3-year gross-up rule. No, he will not get a credit against estate taxes for the GST paid. d. No, it is not subject to the 3-year gross-up rule. Yes, he will get a credit against estate taxes.
C The payment of the GST will reduce his gross estate and ultimately reduce estate taxes. GST taxes paid are not subject to the 3-year look back rule (like gift taxes paid). Unlike gift tax paid, an estate receives no credit for GSTT paid.
Why doesn't the private annuity intra-family technique work anymore? a. It is treated like an installment sale. b. The property has a "string" on it. c. It creates phantom income. d. It is treated like a SCIN.
C The private annuity creates phantom income.
A client purchases property for $7,744,000. Now a few years later the property values have declined. He gifts it this year at a FMV of $6,744,000 to his son. If the son sells the property for $6,924,000, what is the amount of capital gain or loss? a. $800,000 capital loss b. $214,000 capital gain c. $0 d. $200,000 capital gain
C There is no gain or loss. It is between $6,744,000 and $7,744,000.
Which of the following statements is correct regarding powers of attorney? a. A durable power of attorney requires a court declaration of incompetence before allowing an agent to act. b. A durable power of attorney allows the agent to infer implied powers when acting on behalf of the principal. c. Under a springing durable POA, the agent has no authority to act on behalf of the principal until the principal becomes incompetent as certified by physicians. d. A durable power of attorney is revoked upon the incapacitation of the principal.
C Under a springing durable POA, the agent has no authority to act on behalf of the principal until the principal becomes incompetent as certified by physicians. A durable power of attorney is effective immediately, even prior to the principal becoming incapacitated.
Each of the following statements regarding a will is correct, except: a. It is only within the provisions of the will that the testator can name guardians for minor children, as well as the executors of the estate. b. A will only transfers assets that were separately owned by the testator at death. c. A will transfers only assets that were separately owned by the testator at death. d. Because a valid will is a legal document, provisions in the will override beneficiary designations in life insurance contracts and annuities.
D A will is, indeed, a legal document, but does not override named beneficiary designations in life insurance and annuity contracts.
Which of the following about GSTT is true? a. The annual exclusion is available for transfers at death. b. A skip person is a son or daughter of the transferor. c. The $11,400,000 exemption is available per each grandchild. d. A GSTT gift is also subject to gift tax.
D If the amount of a gift to a skip person exceeds the GSTT exemption ($11,200,000 + $15,000), it also exceeds the federal gift tax exemption. Thus, both taxes are incurred. The $11,200,000 is not per donee but to all donees. A skip person is a beneficiary who is at least two generations younger than the transferor.
Tony and Linda Anderson gave their two sons $78,000 each. They agree to split the gift. How much can either of them claim as an annual exclusion for their two sons? a. $15,000 b. $50,000 c. $65,000 d. $30,000 e. $100,000
D The annual exclusion is $15,000 (each son). The taxable gifts answer would have been $48,000. $78,000 in gifts less $30,000 equals $48,000. The question asks about the annual exclusion for their two sons.
Joe Lamont died recently. His wife is the executrix of his estate. Which one of the following life insurance policies is not included in his estate? a. A life insurance policy that he owned on his life that he gifted to his daughter four months before he died. b. A life insurance policy purchased by his daughter on Joe where the proceeds will be used to cover Joe's estate taxes (legally obligated). c. A life insurance policy he owned on his life that he gifted to his wife three years ago. His wife will use the proceeds to secure a loan to cover Joe's estate taxes. d. JL, Inc. owned a Key-person life insurance policy on Joe at the time of death. (JL, Inc. is 100% owned by Joe.)
D The key-person policy is not included in the estate because no incident of ownership is present. "However, JL, Inc. owned a Key-person life insurance policy on Joe at the time of death" may be indirectly included since Joe owns 100% of the company and the company owns the policy. "A life insurance policy that he owned on his life that he gifted to his daughter four months before he died" is included because of the 3-year gross-up rule. If proceeds are receivable by an individual beneficiary but the beneficiary is legally obligated to pay taxes of the estate, the proceeds are includible in the estate (A life insurance policy purchased by his daughter on Joe where the proceeds will be used to cover Joe's estate taxes). "A life insurance policy he owned on his life that he gifted to his wife three years ago. His wife will use the proceeds to secure a loan to cover Joe's estate taxes" could be included because the policy was gifted 3 years ago. The rule says within 3 years.
Pour-over Will
Designates the decedent's trust to receive property left outside the trust: - a trust must be created before death - property will avoid intestacy - property will not avoid probate
Difference between Per Capita & Per Stirpes
For example, if A & B are primary beneficiaries. A has two kids X & Y. If A passes away & the account owner passes away, the following happens: Per Capita: B, X & Y receive equal shares Per stirpes: B gets 50%. X & Y each get 25%
Standby Trust
Is used to manage a persons assets if they become incapacitated
Nuncupative Will
Oral will
Advantage of Funded Standby Trusts vs Unfunded Standby Trusts
Possible problems with unfunded include that financial institutions may not honor the POA when requesting to move assets into the trust. Also there may be possible delays and costs associated with transferring assets into the trust
In what state does probate take place?
Real estate probate takes place in the state the property exists. All other property does probate in the state of the owners domicile
estate equalization
Used in mandatory exemption trusts to ensure that assets are titled in such a way that each spouse has the full exemption equivalent in his/her name
Match the charitable technique with the corresponding description. CRAT a. A charitable trust arrangement in which a fixed-income interest (worth at least 5% of the initial net FMV of the property paid in trust) passes at least annually to one or more non-charitable beneficiaries and a t the death of the last income beneficiary, the remainder interest passes to a qualified charity b. A tax-exempt organization operated exclusively for charitable purposes as specified in Section 501(c)(3) c. A tax planning device in which the donor transfers property inter vivos or by will to a trust whose earnings go to a charity for a certain period after which the trust corpus reverts to the donor or some other party d. A charitable trust arrangement in which a fixed percentage (at least 5% of the net FMV of the trust assets as revalued annually) is paid at least annually to one or more non-charitable income beneficiaries and at the death of the last income beneficiary, the remainder interest passes to a qualified charity e. A fund maintained by a qualified charity that contains commingled donations from many sources and that allows a donor's estate an estate tax charitable deduction for the remainder interest
a CRAT pays a fixed income.
Codicil
a separate document added to an existing will to address minor changes
Mutual Will
a will made in agreement with another person to dispose of certain property interests.
Present Interest
an immediate and unrestricted use of the trust property
What technique should be used when a couple wants the surviving spouse to acess trust income for health, education, maintenance and support without including the assets in their estate?
ascertainable standard
What is the exemption amount allowed against federal estate tax for 2019? a. $5,250,000 b. $11,180,000 c. $5,000,000 d. $11,400,000
d
Residuary Clause
directs the remainder of a decedent's estate to a specific person or a trust to avoid partial intestacy
What technique should be used when a couple wants the surviving spouse to determine what portion of the decedent's estate to transfer into a trust to use the decedent's unified credit?
disclaimer trust
Reciprocal Will
each person's will designates that all property be distributed to the other person
If a couple wants to minimize their total estate tax liability for their combined estates, what technique should they use?
estate equalization
Holographic Will
handwritten will
Remainder Interest
is a future interest that goes into effect after a beneficiary's present interest has ended
SCIN
partially or fully cancels the installment note before the note matures
A business owner with a taxable estate may wish to transfer some, not all, of his closely held stock to his children. How should he do it?
preferred stock recapitalization
Reversionary Interest
property reverts back to the grantor after a beneficiary's interest has ended
IRC 2701
refers to the partial transfer of corporate or partnership interests to family members
Springing Durable POA
the agent cannot act until physicians certify that the principal is mentally incompetent
What is portability within estate planning?
unused unified credit of deceased spouse passes along to surviving spouse and they can use it with their estate when they die as long as they do not remarry
Future Interest
use or ownership of trust property is postponed
GRIT
• A GRIT distributes all of the trust's income to a grantor for a number of years, and then distributes the trust's remainder interest to beneficiaries. • Assets transferred into GRITs with family beneficiaries are taxed at FMV for gift tax purposes, not at the PV of the trust's remainder interest. • A grantor who dies before the income term has ended will include the FMV of the trust corpus in their gross estate.
What are the advantages of probate?
• A court supervised distribution of property to heirs • Protects creditors by ensuring that estate debts are paid • Bars future creditor claims against the estate • Documents the title and the transfer of property to others
Why would a married couple use Tenancy by Entirety?
• A spouse must have the consent of the other spouse to terminate ownership or convert the title to sole ownership or a Tenancy in Common. • Property cannot be attached by creditors to satisfy individual debts, but property may be attached by the couple's joint creditors.
What are the disadvantages of probate?
• Delay in probating the estate- typically 9 months to 2 years • Costs- attorney and court fees, and the executor fee if not waived • A public proceeding- privacy issues
A business owner has a company worth $1 million. After recapitalizing the stock, he gifts $400,000 of his non-voting common stock to his two children, keeping $600,000 of cumulative preferred shares. What are the gift and estate tax consequences?
• Gift tax: The owner has a qualified payment. The gift tax value is $200,000 for each child minus an annual exclusion and discounts. • Estate tax: The business may be valued at $3 million, but only the original $600,000 of retained preferred stock is included in the owner's gross estate.
5 x 5 Power
• Holder is given a non-cumulative right to make annual withdrawals from the trust, which is limited to the greater of $5,000 or 5% of the value of the trust corpus • Crummey powers are often limited to a 5 x 5 power. • Purpose of a 5 x 5 power: It protects the holder from making a taxable gift if the holder lets his withdrawal right lapse.
