CFP- Estate Planning

What is included in the gross estate?

1. Property owned by decedent or in which decedent had an interest 2. Dower and curtesy interests 3. Gift tax on gifts made within three years of death Gifts made within three years of death that would have been included under Section 2036, 2037, 2038, or 2042 4. Transfers with a retained life interest 5. Transfers taking effect at death 6. Revocable transfers 7. Annuities 8. Jointly owned property 9. Powers of appointment 10. Proceeds of life insurance

Annual Exclusion and Gift Splitting

1. A donor may exclude from taxable gifts the first $17,000 (for 2023) of gifts each year to each donee. a. The gifts must be of a present interest, meaning that the donee has the immediate right to the use and enjoyment of the transferred property. b. Gifts of a future interest—such as a remainder interest where the donee's interest is vested at a future time or on the basis of some contingency—are not eligible for the annual exclusion. IE the Present value of remainder interest c. For gifts in trust that contain a Crummey power, the annual exclusion applies to each beneficiary or contingent beneficiary of the trust. 2. The annual exclusion can be doubled to $34,000 (for 2023) per donee by electing gift splitting with a spouse, including a same-sex spouse. a. The gift is made by the donor, but the spouse must consent to gift splitting. b. This is often used when one spouse has no assets of his own to gift and, therefore, could not otherwise take advantage of the annual exclusion. c. A gift tax return (Form 709) must be filed when gift splitting is elected, and both spouses must sign the return. NOTE: Spouses do not have to file a joint income tax return to elect gift splitting d. Gifts of community property do not require gift splitting because, by nature, each spouse is deemed to own one-half of the community property. This also applies to jointly owned property between spouses because each spouse is considered to own a one-half interest. e. Gift splitting does not apply to gifts from one spouse to the other (although the marital deduction may apply). f. Gift splitting was enacted as a way to equalize community and noncommunity property states. NOTE: If an election to split gifts is made, it applies to all gifts made during that year by either spouse. In addition, a gift may only be split with a spouse, and the donor must have been married at the time of the gift.

Applicability of Federal Gift Tax

1. A gift is a completed transfer of an interest in property by an individual in exchange for less than full and adequate consideration. a. Gifts from an individual are generally excluded from the recipient's gross income. b. Gifts from businesses to employees may be included in the income of the recipient as compensation. 2. The gift tax applies to completed lifetime (inter vivos) gifts. 3. Gifts effective at death are not gifts, but testamentary transfers.

Living Wills and Medical Directives (Advance Medical Directives)

1. A living will establishes the medical situations in which the maker no longer wants life-sustaining treatment. a. It must be drafted in accordance with the formal requirements specified by state statute. A durable power of attorney (DPOA) for health care usually does not substitute. b. It covers only a narrow range of situations; it usually applies only to terminal patients. c. It does not appoint a surrogate decision maker; rather, it informs physicians of decisions the patient has already made regarding certain life-sustaining treatments. d. It may create problems that arise from vagueness or ambiguities in drafting.

Prenuptial Agreement

1. A prenuptial agreement is a legally binding agreement between future spouses. a. Also referred to as an antenuptial agreement or marital property agreement b. Can be useful if the forthcoming marriage is not the first marriage for one or both of the parties c. Similar to trusts, a prenuptial agreement can provide full protection of estate for the intended heirs d. Requires full disclosure of assets and liabilities by both parties 2. The agreement provides for restrictions on transfers of property between the two individuals in exchange for a relinquishment of their marital rights to each other's property. 3. The spouse who agrees to a prenuptial agreement will receive the property specified in the agreement upon the death of the decedent, instead of a statutory share that is usually the right of a surviving spouse. Other purposes of a prenuptial agreement a. May provide for appropriate division of property upon subsequent divorce b. May provide for certain transfers between the parties before the marriage c. May substitute for statutory elections and other inheritance rights of a spouse upon the other spouse's death d. May provide for the receipt of a fixed estate by the surviving spouse

Will

1. A will is a legal document that enables the testator (maker) to transfer the title to property at the testator's death in the manner the testator desires. (Wills and the probate estate deal mostly with transferring title to property and administering the probate estate. The gross estate deals mainly with estate tax issues.) 2. Advantages of a will a. Can name executor b. Can transfer property to anyone desired c. Can use estate tax marital deduction if decedent wants property to pass to spouse d. Can specify how debts and estate taxes are apportioned (where the money to pay debts and estate taxes will come from) e. Can designate guardians for minors f. Can contain provisions to establish trusts g. Can name charitable beneficiaries

Advantages of Lifetime Gifts

1. Qualified transfers (tuition and medical payments made directly to the provider) have no gift tax implications. 2. Using the annual exclusion allows gifts with no gift tax implications. 3. Unlimited gifts to a spouse can be given without transfer tax consequences (provided recipient spouse is a U.S. citizen). a. This is usually done to equalize estates. 4. Can give up to $12,060,000 (for 2022) of taxable gifts without incurring gift tax. 5. After completion of the gift, appreciation on the gifted property is not subject to transfer tax. 6. Gift taxes paid are not included in gross estate, except when gifts are made within three years before death

Durable Power of Attorney for Property

1. A written document in which one individual (principal) designates another person or persons to act as attorney-in-fact (agent) is termed a durable power of attorney. When the power is executed, the principal must be: a. at least 18 years old; and b. competent. 2. A DPOA survives the principal's incapacity, but not death (a nondurable power of attorney does not survive principal's incapacity). 3. The power may be limited (e.g., to pay my bills) or unlimited (e.g., to exercise all of the legal powers I have myself). It is important to differentiate a power of attorney from a power of appointment (POA), covered in detail later. A POA gives the holder the right to name the new owner of property. A power of attorney gives the agent the right to act in the principal's place. 4. A DPOA may negate the necessity to petition a local court to appoint a guardian ad litem or conservator. 5. A DPOA provides for continuity in the management of affairs in the event of disability and/or incapacity. 6. The power may be springing or immediately effective (nonspringing). Generally, if the power is springing, the document must indicate the power springs upon disability or incapacity, and is not affected by subsequent disability or incapacity (not authorized by all states). 7. Any power is revocable by the principal. 8. A DPOA is usually less expensive to set up and administer than a living trust or conservatorship. 9. DPOAs can be abused. Therefore, the principal should seriously consider selecting a trustworthy attorney-in-fact. 10. Durable powers of attorney are particularly important for nontraditional couples, such as cohabitating couples who have decided not to marry and unmarried same-sex couples. Without this document in place for both property and health care, the ability to make crucial decisions may fall to unintended family members rather than a partner in the relationship. The authority of the attorney-in-fact will survive the principal's incompetency only when the power of attorney is durable. an attorney-in-fact's authority under any power of attorney terminates at the principal's death. attorney-in-fact's authority to act under a durable power of attorney survives the principal's incapacity.

Completed Inter Vivos Transfers

1. All of the following conditions must be present for a gift to be complete under state law. a. The donor must be competent to make the gift. b. There must be donative intent on behalf of the donor. c. There must be actual or constructive delivery of the property (gift) to the donee or to the donee's representative. d. There must be valid acceptance of the gift by the donee. NOTE: As with bequests, the donee may refuse to accept the gift. 2. Completed gifts are subject to the gift tax unless a particular exclusion applies. 3. Completed gifts are outright transfers where the donor has completely given up dominion and control over the property. Donations in trust may be complete, partially complete, or totally incomplete. Contingent gifts and gifts that are incomplete are not subject to gift tax until they become complete.

DEEMED PAID ADJUSTMENT

1. All post-1976 taxable gifts are added back into the gift tax calculation formula, and credit is given for the gift tax deemed paid on the prior taxable gifts. 2. Because taxable gifts in the past may have been subject to a different rate, a donor is allowed a deemed paid credit on prior gifts, which means the credit is calculated using current tax rates.

TAX CUTS AND JOBS ACT (TCJA) OF 2017

1. Applicable exclusion (exemption) amount for gift tax, estate tax, and generation-skipping transfer tax (GSTT)—$12,060,000 for 2022 2. Maximum tax rate of 40% in 2022 for gift tax, estate tax, and GSTT 3. Portability of applicable exclusion (exemption) amount between spouses—surviving spouse may also use any portion of the decedent spouse's exemption that remained unused at spouse's death (up to a total of $24,120,000 in 2022) a. Decedent spouse must have died after December 31, 2010, and executor must have filed a timely estate tax return making election to allow portability b. If surviving spouse has more than one predeceased spouse, only the unused exemption amount of the last deceased spouse is available c. Surviving spouse may apply deceased spouse's unused exemption amount to lifetime transfers (gift tax) and to transfers at death (estate tax)

Durable Power of Attorney for Health Care

1. Appoints a person to make health care decisions for the principal 2. May be springing (become effective) on incapacity 3. Recognized in most states 4. May not be used to terminate life-sustaining treatment in some states 5. Durable means the power remains effective even if the principal becomes incapacitated. It does not remain in effect after the principal passes away. Revocable standby trust can also meets the needs of an incapacitated person

Transfers that are Deductible for Determining Taxable Gifts

1. Gifts to qualified charities are deductible from gross gifts for donors who are U.S. citizens or residents. 2. Gifts and transfers between spouses are deductible, provided the transfer is not a terminable interest or meets an exception to terminable interest rules (e.g., qualified terminable interest property, or QTIP). a. The gift tax marital deduction is available to same-sex spouses. 3. For gifts to a noncitizen spouse, only the first $175,000 (for 2023) per year of gifts of a present interest are not subject to gift tax (in effect, a special annual exclusion). 4. For gifts to a noncitizen spouse, all gifts of a future interest are subject to gift tax.

Possible Adverse Consequences of Jointly Held Property

1. Joint titling may result in estate taxes. If joint title results in a completed gift, it may be subject to federal and state gift tax liability. 2. Double estate taxes can be imposed. For jointly owned property, property value may be included in the first decedent's gross estate, then included in the survivor's gross estate. 3. Property owned as JTWROS can thwart the intentions of the decedent because the property will pass automatically by law and not by will. 4. Jointly held property allows a survivor to name the ultimate recipient. The decedent may not be able to direct property to the person or entity he wishes.

Real Property

1. Nature of real property a. This is the land or soil itself, bodies of water contained on the land, natural and artificial structures attached to it, and plant life and vegetation growing on the land. 2. Fixtures—personal property affixed to real property a. Fixtures that are attached or affixed to real property are included in the sale of realty unless the contract for sale provides otherwise. b. The objective intention of the party who placed the item determines if the item is a fixture. 1. real property includes all property other than personal property. 2. real property includes land and anything on the land that has been permanently attached or affixed to it.

Types of interests transferred

1. Outright—transferee receives both legal title and beneficial (economic) ownership 2. Legal—transferee receives only legal title (e.g., trustee of a trust) 3. Beneficial—transferee receives economic or beneficial ownership but not legal title (e.g., beneficiary of a trust)

Personal Property

1. Personal property (personalty) includes rights and interests associated with ownership in things other than real property. Personal property may be tangible or intangible. a. Tangible personal property—property that can be touched or held and is subject to physical possession (e.g., cars, jewelry, furniture) b. Intangible personal property—property that lacks physical substance (e.g., patents, copyrights, royalties) or is represented by a document or certificate (e.g., stocks and bonds) 2. Property rights a. Right to possession and enjoyment b. Right to make disposition by sale, gift, or other conveyance (e.g., will or trust) personal property is characterized as either tangible or intangible.

Transfers not subject to Gift Tax

1. Qualified transfers—medical payments and tuition paid directly to the provider a. A transfer of any amount (unlimited) to a qualified educational institution for the payment of tuition is not subject to gift tax. b. A payment of any amount to a provider of qualified medical care is not subject to gift tax. c. The payment must be made directly to the educational institution or medical provider to qualify for this exclusion. d. The payment does not use the annual exclusion for the donee. e. The payment is not limited to transfers by family members or relatives. 2. Property settlements between divorcing spouses as part of a written divorce agreement are deemed to be for full and adequate consideration and, therefore, not subject to gift tax. This applies to transfers up to three years after divorce. 3. Interest on gift loans (below-market loans) 4. Payments made under an obligation of support (usually determined by state law) 5. Donations to political organizations 6. Qualified disclaimers

Letter of Personal Instruction (Side Letter)

1. States the writer's wishes regarding tangible possessions of nominal pecuniary value and other matters, such as funeral arrangements 2. Avoids cluttering the will with small details or assets, such as photos and other items of only sentimental value 3. Not a legally binding document

Forms of joint ownership

1. Tenancy in common 2. Joint Tenants with right of survivorship 3. Tenancy by the entirety

Liability for Gift Tax

1. The donor is liable for any gift tax due. 2. The donee is not subject to gift tax or income tax on the gift. However, if the donor fails to pay, the donee may become liable. 3. Net gifts occur when the donor and donee agree, before the gift, that the donee will pay any gift tax due. a. This transaction is considered to be part sale and part gift, causing the donor to realize taxable income to the extent that the gift tax paid by the donee exceeds the donor's adjusted basis. b. Net gifts are an appropriate technique when the donor does not have sufficient liquid investments (cash) to pay the gift tax liability. c. This usually occurs when the lifetime credit is no longer available for the gift to the donee; otherwise, by law, the donor would have to use the lifetime credit of $4,769,800 (for 2022). d. If the annual exclusion is available, it is deducted from the FMV of the gift before calculating the gift tax due.

Persons Subject to gift tax

1. The federal gift tax applies to all individual U.S. citizens or residents, regardless of where the property is located and whether the transfer is direct or indirect; tangible or intangible; or personal or real property. 2. The federal gift tax also applies to nonresident aliens regarding transfers of real and tangible personal property located within the United States.

Incomplete Transfers

1. The federal gift tax does not apply to incomplete transfers. 2. Examples of incomplete transfers include those in which the donor retained a right to reclaim the donated property or in which the donor had not completely given up dominion and control over the property. 3. An incomplete transfer that later becomes complete is subject to the gift tax when it becomes complete (i.e., when a revocable trust becomes irrevocable). 4. A revocable trust becomes a gift when the grantor releases the power of revocation and the trust becomes irrevocable. EXAMPLE Lauren sets up a revocable trust and names the bank as trustee. The trust instrument directs the trustee to pay the income to Lauren's friend, Emily, as long as Emily lives, and then the remainder goes to Emily's daughter. Until the first income payment has been made to Emily, Lauren has not made a gift because she could revoke the trust. If, five years later, Lauren decides to make the trust irrevocable, then she has made a gift of the remaining income interest to Emily and a gift of the remainder to Emily's daughter.

Valuation of a Gift

1. The value of a gift for gift tax purposes is the FMV on the date of the gift. 2. Any consideration received by the donor reduces the value of the gift. 3. For securities, the value is the average of the high and low prices on the date of the gift or date of death (DOD). a. The value of stocks for a gift or a bequest will be the average of the high and low trading values for the stock on the date of the gift. b. If the stock is not traded on the date of the gift, the value of the stock, according to IRS regulations, should be the stock price following the date of the gift multiplied by the number of days from the date of the gift to the previous stock trade before the date of the gift. Added to this is the stock price directly preceding the gift, multiplied by the number of days (trading days) between the gift date and the next trading day. This sum should be divided by the sum of the days before and after the gift. Example: On July 11, Lisa gave her sister, Michelle, one share of XYZ stock that was traded on an exchange. July 11 was a Thursday. The following are the quoted prices on Monday, July 8, and Friday, July 12. No sales occurred any other day that week. Date: 7/8, High $60, Low 56, closing 58.50 Date 7/12, High $62, Low 58, closing $59.00 (((62+58)/2)*3)+((60+56/2)*1))/4=59.50

Gift Tax Formula

1. Total Gifts in current year (FMV of all Gift) Less 2a. One-half the value of gifts split with spouse 2b. Annual exclusions ($17,000 per donee in 2023) 2c. Martial Deduction 2d. Charitable deduction (can be unlimited) 2e. Total subtractions 3. Equals taxable gifts in current year 4.Add: post 1976 taxable gifts made in prior years 5. Equals: total taxable gifts to date (tax base) 6. tentative tax on total taxable gifts to date 7. less: tax deemed paid on prior taxable gifts 8. Equals gift tax on current-year taxable gifts before applicable credit amount 9. Less: applicable credit amount 10. equals gift tax due on current-year taxable gifts

Uniform Gift to Minors Act (UGMA)

1.) Adopted in all states 2.) Gifts can include cash, securities, and life insurance, but usually not real property 3.) No bonding or accounting usually required 4.) Donees usually must receive property by age of majority

Section 2503(b) trust (mandatory income trust)

1.) All income is required to be distributed annually—either to the child/beneficiary directly or to a custodial account where it could be accumulated or used for the child's/beneficiary's benefit (simple trust). 2.) The trust is not required to end at age 21. 3.) The right to the income qualifies as a present interest, which qualifies for the annual exclusion (if available for that donee in the tax year). The present value of the income interest is calculated based on the age of the beneficiary and current interest rates at the time of the gift. The gift of the remainder interest is not eligible for the annual exclusion because it is a gift of a future interest. Purpose: Trust set up for a beneficiary composed of an income interest and a remainder interest Characteristics: An annual exclusion is available for the income interest. Income must be distributed. Planning Opportunity: Often used for gifts to minors Income/Gift Tax Consequences: Income is taxable to beneficiary; the kiddie tax may apply. Example: A gift of $12,000 to a Section 2503(b) trust for a child, age 5, and with a trust term of 35 years (until the child is age 40) has both a present interest component and a future interest component. Using appropriate IRS tables, the present value of the income interest is determined to be $1,123, and the present value of the remainder interest is determined to be $10,877. The present interest component of $1,123 qualifies for the annual exclusion, but the future interest component of $10,877 does not.

By contract—avoids probate

1.) Assets passing to an heir by contract will avoid probate. 2.) Assets passing by contract a.) Life insurance proceeds with a valid named beneficiary b.) Retirement plans with valid named beneficiaries c.) Annuities with named joint annuitants d.) Pay on death (POD) and transfer on death (TOD) e.) Valid named beneficiary is living at the date of the decedent's death ■ If the named beneficiary is not living at the date of decedent's death, the asset will transfer to the contingent beneficiary or to the estate of the decedent, subjecting the asset to probate Life Insurance, Retirement Plans, IRAs, Annuities, TODs, and PODs

Adverse Consequences of intestacy

1.) In some states, a spouse's share of the decedent's estate will be equal to a child's share. For example, the surviving spouse's share with one child would be one-half of the total estate; with nine children, it would be one-tenth of the total estate. 2.) Some states provide that a spouse's share is only a life estate with the remainder interest passing to the children. 3.) The surviving spouse may share with the deceased spouse's parents or siblings when there are no children from the marriage. 4.) Children may be treated equally, but not necessarily equitably. Each child's needs may be quite different. 5.) Intestacy may require the administrator to furnish a surety bond and obtain pro-bate court approval of the administrator's actions, thereby increasing the cost of administration. 6.) The court will select the administrator of the estate. 7.) Assets will not be left to charity.

Section 2503(c) trust

1.) Income distribution is discretionary (complex trust). 2.) Principal distribution is discretionary until the minor reaches age 21, at which time it is mandatory. 3.) The trust does not meet the requirements of a present interest, but the Internal Revenue Code (IRC) provides an exception in Section 2503(c), whereby gifts to such trusts are deemed to be gifts of a present interest. 4.) If the donee dies before age 21, property must go to the donee's estate, or the donee must hold a general POA. 5.) The trust pays income tax on the undistributed income at the trust income tax rates. Purpose: Trust set up for minor that is a gift of a future interest, but qualifies for the annual exclusion Characteristics: Income distribution is discretionary. Property must be available to a beneficiary at age 21. Planning Opportunities: Created to discourage income payout to immature minors solely to take advantage of annual exclusion Income / Gift Tax Consequences: a minor dies before age 21, property goes to the minor's estate.

Remainder

1.) Interest that exists at the termination of a prior interest, such as a life estate 2.) May be conveyed and inherited

Crummey minor's trust

1.) It is advantageous over Section 2503(b) and Section 2503(c) trusts because income distribution and corpus distributions at age 21 are not mandatory. Purpose: Trust that allows a right to withdraw for a brief period (usually 30 days), thus creating a present interest that qualifies for the annual exclusion Characteristics: A beneficiary is usually allowed to withdraw the lesser of the amount of the available annual exclusion or the value of the gift property transferred. Planning Opportunities: If trust has more than one beneficiary, demand right should not exceed greater of $5,000 or 5% of value of property to avoid taxable gift to remainderman Income / Gift Tax Consequences: Present interest is created by the right to withdraw.

Uniform Transfers to Minors Act (UTMA)

1.) More flexible than the Uniform Gift to Minors Act (UGMA) 2.) Most states have adopted it 3.) Allows any property interests including real estate to be a fiduciary gift

Holographic (handwritten) will

1.) Not recognized in all states 2.) Material provisions are in testator's handwriting 3.) Must be signed and dated by the testator 4.) Need not be witnessed

Per capita distribution

1.) Per capita means by the head. 2.) Members of a class share in the inheritance as equal individuals. It is important to define the members of the class when using per capita. For example, if the designation is "my children per capita," the grandchildren of the deceased can be inadvertently disinherited. In the situation just described, if Stephen's will read, "my children per capita," then Jay and Laura would have received $150,000 each, and Tawnee's line (Paul and Damien) would be disinherited from probate assets. If the will defined the class as "my living descendants per capita," then all living descendants would be equal, but it would mean children and grandchildren would receive equal amounts. This would rarely be appropriate. Most people would want grandchildren by a deceased child to split the child's portion. This is why per stripes is usually preferred. However, some insurance companies and mutual funds use per capita as the standard distribution offered.

Per stirpes distribution

1.) Per stirpes means by the roots. 2.) With a per stirpes distribution, members of a designated class inherit property as members of the class. a.) This method usually is used by the courts in the absence of a selection in the will. Example: Stephen had three children (Jay, Tawnee, and Laura). Tawnee is deceased and is survived by two children (Paul and Damien). Laura and Jay are alive and have no children. If Stephen had a $300,000 asset, and his will left the asset to his living descendants on a per stirpes basis, then: ■ Jay would receive $100,000 (one-third); ■ Paul and Damien each would receive $50,000 (one-half of Tawnee's one-third); and ■ Laura would receive $100,000 (one-third).

Exceptions to Section 2035—certain gifts made within three years of death

1.) Property that was given away within three years, but otherwise would have been included under Section 2036 (transfers with retained life estate like a GRAT or GRUT, but also any other retained life estate). For example, Grandpa estab-lished an irrevocable trust that paid him and his brother income for 20 years. After 20 years the trust dissolved and paid the principal to his three children equally. At the five-year mark, Grandpa released his interest in the trust. The rust will remain in his gross estate if he dies within three years of the release of the life estate. 2.) Property that was given away within three years, but otherwise would have been included under Section 2037 (transfers taking effect at death) 3.) Property that was given away within three years, but otherwise would have been included under Section 2038 (revocable transfers). For example, Grandma had a revocable trust, but later she made the revocable trust irrevocable. If Grandma dies within three years of making the revocable trust irrevocable, the value of the trust assets at her death will be included in her gross estate. 4.) Property that was given away within three years, but otherwise would have been included under Section 2042 (proceeds of life insurance)

Statutory (formal) will

1.) Should be drawn by an attorney 2.) Must comply with the laws of the domiciliary state 3.) Witnessed by required number of nonbeneficiary witnesses (many states require two witnesses) 4.) Probate court determines whether the will is valid

Reversion

1.) The interest retained by a grantor who transfers a life estate to another without making a disposition of the interest remaining after the life estate terminates 2.) A vested, future interest

Invalid, out-of-date, or poorly drafted will

1.) Will does not meet statutory requirements—invalid will makes estate subject to intestacy laws 2.) Will does not contemplate changes in tax laws—fails to minimize death taxes because will is out of date 3.) Decedent has moved to another state of residence and domicile—if will does not conform to probate laws of the new state, the estate may be subject to the intestacy laws of the new state 4.) Will has no residuary clause or lacks drafting specificities

"Sweetheart" or "I love you" wills

1.) Will leaves everything to the surviving spouse 2.) Mismanagement of assets may occur—assets may be put in hands of a spouse who does not have the education, experience, training, or desire to manage them efficiently and effectively 3.) May cause overqualification of the estate by failing to take advantage of the applicable exclusion amount for the first spouse who dies

Survivorship clause

A beneficiary must survive a specified period beyond the testator's death to receive the bequest. 1.) Such a clause will prevent property from being included in two estates in rapid succession. 2.) To qualify for the estate tax marital deduction, the will cannot require the spouse to survive for more than six months to receive the bequest.

Qualified Disclaimers

A disclaimer is a refusal by a person to accept property that is designated to be transferred or passed to her. The effect of the disclaimer is to pass the property to someone else, thereby possibly avoiding the payment of transfer tax. b. For a disclaimer to be effective for federal transfer tax purposes, note the following. 1.) The disclaimer must be in writing and must be irrevocable. 2.) The disclaimer must be made within nine months of the later of the date the interest came into being, or the date the person named to receive the property reached age 21. 3.) The disclaiming party cannot have previously benefited from the interest disclaimed. 4.) The disclaimer must pass the interest without the direction of disclaimant. c. When to use disclaimers 1.) Property is left to a spouse who does not need it—a spouse can disclaim and let it pass to the contingent beneficiary (usually a child) 2.) Individual wants to make a tax-free gift to the contingent beneficiary 3.) Parent receives a large bequest from a relative and would like the assets to pass to the next beneficiary in line A disclaimant cannot benefit from the disclaimed property. When a client disclaims the property, it will not be included in his gross estate at his death. To be effective, a qualified disclaimer must be received by the decedent's executor within 9 months after the later of the date on which the date creating the interest was made or the day on which the person disclaiming the interest reaches age 21. Thus, people who are less than 21 originally, have nine months after turning 21 to disclaim assets. 9 MONTHS TO MAKE DECISION

Valuation of Assets for Estates

Assets are valued at their fair market value (FMV) on the decedent's DOD or, if the alternate valuation date (AVD) is selected, the FMV as of six months after the DOD. An estate cannot use the alternative valuation date when the estate tax base is less than the estate tax exemption equivalent ($12,920,000 in 2023), or when all assets pass to the surviving spouse and qualify for the marital deduction.

Spendthrift clause

Bars transfer of beneficiary's interest to a third party and stipulates that the interest is not subject to claims of beneficiary's creditors. The spendthrift clause is not usually effective in a will.

Gift of loss property Example

Example: Bill received an acre of land as a gift from his father. At the time of gift, the land had an FMV of $700,000. His father purchased the land four years ago for $800,000 and paid gift tax of $100,000 because of the gift. Assume Bill sold the land one week after receiving the gift. — If Bill sold the land for $850,000, he would have a long-term capital gain of $50,000 ($850,000 - $800,000) on the sale. Bill will use his father's carryover basis of $800,000 (gain basis) and will use his father's carryover holding period of four years. Gift tax paid by the father will not be allocated to Bill's basis because this was a gift of loss property. — If Bill sold the land for $550,000, he would have a short-term capital loss of $150,000 ($550,000 - $700,000) on the sale. Bill's basis will be the $700,000 FMV on the date of the gift (loss basis), and Bill's holding period will begin on the date of the gift. Gift tax paid by the father will not be allocated to Bill's basis because this was a gift of loss property. — If Bill sold the land for $730,000, there will be no gain or loss because he sold the land at a price between the father's adjusted tax basis and the FMV at the date of the gift. The holding period is irrelevant because there is no gain or loss.

Basic Strategies for Transferring Wealth through gifting

Generally, a person can use the following lifetime gifting techniques to avoid gift tax liability: a. Make optimal use of qualified educational transfers (tuition for children, grandchildren, and other beneficiaries for private school through professional education paid directly to provider institutions) b. Pay medical costs for children, grandchildren, and heirs directly to provider institutions (not limited to heirs) c. Make optimal use of the annual exclusion d. A person may use the marital deduction to shelter an unlimited amount of lifetime gifts to his spouse if the recipient spouse is a U.S. citizen. Only the first $175,000 of annual present interest gifts to noncitizen spouses is not subject to gift tax for 2022. Gifts from noncitizen spouses to citizen spouses are still eligible for the unlimited marital deduction. EXAMPLE John is married to Joan and has three adult children, who all have stable marriages, and seven grandchildren. John and Joan can gift $442,000 per year without being subject to gift tax. ($34,000 × 13 transferees—3 children, 3 spouses, 7 grandchildren) If the four techniques listed are completely exhausted, the transferor can begin using the applicable gift tax exclusion amount ($12,060,000 in 2022) to avoid the gift tax until the total lifetime taxable gifts exceed the applicable exclusion amount.

Nonspousal JTWROS property

Gift tax ramifications ■ If two or more unmarried individuals purchase real property as JTWROS, there are no gift tax consequences if each individual contributed the same amount toward the purchase price. ■ If the unmarried tenants contributed unequal amounts toward the purchase price, the tenant contributing the greater percentage of the purchase price has made a gift to the other tenant(s). ■ A gift is eligible for the annual exclusion. ■ A gift is equal to the difference between an equal contribution amount and the actual amount contributed by the tenant contributing the lesser amount. -The creation of a joint bank account does not result in a gift until the noncontributing party withdraws funds for her own benefit.

Community property

In general a.) In community property states, married individuals own an equal, undivided interest in all property accumulated during the marriage, with a few exceptions, as discussed later. b.) Community property states are Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Section 2036—transfers with a retained life estate

Sections 2036, 2037, and 2038 are premised on the notion that the decedent has made a gift of property, but has retained a certain degree of control and enjoyment over such property. Example: During his life, Tim gave his daughter his residence, retaining the right to live in the home for the rest of his life. He originally bought the home for $140,000. The home was worth $180,000 when he gifted it to her, and was worth $200,000 at his death. The residence is included in Tim's gross estate at its fair market value of $200,000 on his date of death because Tim retained a life estate. Tim's daughter receives a step-up in basis to $200,000 at Tim's death, and therefore will have no gain. The full fair market value of the property at death will be included in the donor's gross estate because the donor retained a life estate in the property. Example: Ten years ago, a donor gifted property worth $100,000 but retained a life estate in the property. The donor died last month when the property's fair market value was $500,000. $500,000 will be included in Donor's Gross Estate.

Tenants by the entirety

Tenants by the entirety can only be owned by spouses. Each spouse holds an equal joint interest in the property. Any transfer of the property requires the approval of both spouses acting as one. Upon the death of one spouse, the property passes to the surviving spouse by right of survivorship.

THE UNIFIED TRANSFER TAX SYSTEM UNDER THE TAX REFORM ACT OF 1976

The Tax Reform Act of 1976 made sweeping changes to the existing structure of the federal gift and estate taxes. For transfers after 1976, the following apply. a. The same tax rate schedules and exemption amounts generally apply to transfers during life (gift tax) and transfers at death (estate tax). b. Taxable gifts made after December 31, 1976, are added to the taxable estate in arriving at the tax base for applying the estate tax at death.

529 Gift Tax Consequences

The annual exclusion can be multiplied times five for gifts to a 529 plan. If a donor contributes more than the annual gift tax exclusion for the year into a 529 account, a gift tax return must be filed to document the use of the annual exclusions for future years.

Exclusion

The annual exclusion is $17,000 per donee in 2022, or $34,000 per donee if gift splitting is elected. If a gift is $17,000 or less and the annual exclusion applies, there is no taxable gift.

Exemption

The gift tax applicable credit amount of $4,769,800 (for 2023) equals the gift tax on $12,920,000 of taxable gifts. In other words, if a person made taxable gifts of $12,920,000 the amount of gift tax before applying the applicable credit amount would be $5,113,800 This means that for gifts over and above the annual exclusion amount, an individual can make $12,920,000 in aggregate taxable gifts to all donees before having to pay any gift tax.

Subject to Probate

The probate estate includes all property that passes by testate or intestate succession. This includes property in the decedent's name alone, the decedent's interest in property held as tenants in common, and insurance proceeds payable to the estate. The probate estate also includes the decedent's half of any community property.

Section 2038—revocable transfers

These are transfers in which the decedent, at the time of death, had power to alter, amend, or revoke the transfer (i.e., a revocable trust).

No contest (in terrorem) clause

This discourages heirs from contesting the will by substantially decreasing or eliminating their bequest if they file a will contest. 1.) The no contest clause may not be effective if the heir has reasonable cause for challenging the will.

Future interests

a right to ownership or enjoyment of property at some point in the future or upon occurrence of a specified event 1. Remainder and Reversions These are future interests in the property that go to a person after the termination of either a life estate or interest for term. If the future interest goes to someone other than the grantor, it is called a remainder. If it goes back to the original grantor, it is called a reversion.

Clauses regarding disclaimers

While unnecessary to include, a disclaimer clause reminds the heirs that disclaiming may be an effective tool in estate planning.

Life estates and remainders

a. A life estate is the right to possession, enjoyment, and profit from property during the individual's lifetime. b. A remainder is an interest in property that begins in the future. 1.) The gift tax value of a remainder is the present value of the interest on the date of the gift. 2.) Use IRS tables to determine present value factor. Example: John places $500,000 in an irrevocable trust at First National Bank. The trust instrument specifies that John's brother, Ned (age 65), will receive income for life—and that Sally, John's niece, will receive the assets upon Ned's death. Using the appropriate IRS table, the present value of Sally's remainder interest is calculated to be $166,040. The present value of the life interest transferred to Ned will be $500,000 - $166,040 = $333,960.

General Provisions of a Will

a. An introductory clause to identify the testator b. Establishment of the testator's domicile—important because each state has its own probate rules, and any real property outside the state of domicile will be subject to ancillary probate c. A declaration that it is the last will and testament d. A revocation of all prior wills and codicils (amendments) e. Identification of executor/executrix and successor executor/executrix f. A payments of debts clause g. A payments of taxes clause h. A disposition of tangible personal property clause i. A disposition of real estate clause (residence) j. Specific bequests of intangibles and cash k. A residuary clause (the transfer of the balance of any assets not otherwise provided for) An appointment and powers clause that names an executor and guardians m. A testator's signature clause n. An attestation clause (witness clause) o. Self-proving wills—meet the state-set rules for the probate court to accept the will as valid without requiring events like the appearance of original witnesses before the judge to attest to their signatures, among others Other clauses in a will: 1. Simultaneous death clause- used in the wills of spouses to create a presumption as to the order of death if both spouses die simultaneously. 2. Survivorship clause- provides that a beneficiary must survive for a specified period beyond the testator's death to receive a bequest. 3. Spendthrift clause 4. Clauses regarding disclaimers 5. No contest (in terrorem) clause 6. Codicil—This is a separate document that amends a will. NOTE: Failure to have a residuary clause results in the risk of having intestate assets (e.g., assets accumulated after the will was prepared or for which provisions are not made in the will). Also, taxes generally will be paid from the residuary estate unless specifically directed otherwise.

Section 2035—certain gifts made within three years of death

a. Any gift tax paid on gifts made within three years of death must be added to the gross estate. Called the gross-up rule, the procedure prevents the amount of the gift tax from escaping the estate tax. The gift itself is out of the gross estate. Only the amount of gift taxes paid out of pocket are included in the gross estate. There is no refund of the cash. The deceased is estate taxed on the amount of gift taxes paid. b. Gifts made within three years of death are typically not included in the gross estate. They are, instead, treated the same way as any other post-1976 taxable gift (i.e., treated as adjusted taxable gifts and must be added to the taxable estate to arrive at the tentative tax base). c. Premiums paid within three years by the insured on a life insurance policy the insured does not own will not be pulled back into the estate under Section 2035. These premiums may constitute a taxable gift if they exceed the annual exclusion amount. In that case, they are adjusted taxable gifts, and must be added to the taxable estate to arrive at the tentative tax base.

Section 2040—joint interests (JTWROS)

a. As a general rule, the gross estate will include the entire value of property held jointly with others b. There is an exception—If the only surviving joint owner is the decedent's spouse, the property is a qualified joint interest. In this case, one-half of the total value will always be includable, regardless of that spouse's original contribution and regardless of whether that contribution can be proven. c. There is another exception—For jointly owned property held by the decedent and at least one person who is not the decedent's surviving spouse, the decedent's gross estate will include the entire value of the property—reduced only by an amount attributable to that portion of the consideration that the surviving joint tenant(s) can clearly show they contributed to the original acquisition of the joint property. This is called the consideration furnished test (contribution rule). d. Funds received as a gift from the deceased co-owner and applied to the cost of the property cannot be counted as funds provided by the co-owner. e. If the owners received the property as a gift from a third party, each owner is considered to have contributed the value of his interest. NOTE: The executor of the estate has the burden of proving that the surviving joint owners contributed to the original purchase price of the property. Example: Martha and Raymond are married and hold title as joint tenants to a beachfront lot in Gulf Shores, Alabama. Raymond dies. One-half of the property will be included in his gross estate. Suppose now that Martha and Raymond are lifelong companions, but not legally married. When Raymond dies, all of the beach property will be included in his gross estate unless Martha can prove she furnished part of the funds to purchase the property. If Martha can prove she furnished 30% of the funds, only 70% is included in Raymond's gross estate. However, if Raymond had gifted her the 30%, her contribution would not count, and Raymond's gross estate must include 100% of the value of the lot.

Disadvantages of probate

a. Can be costly and complex 1.) Real property located in a state outside the decedent's state of domicile may trigger a separate probate in that state (ancillary probate). 2.) Probate costs are frequently calculated on the basis of a percentage of the assets in the probate estate. b. Can create delays in transferring assets to heirs c. Is open to public scrutiny

Purposes of probate

a. Enables title of property to be transferred from a decedent to the rightful beneficiaries b. Proves the validity of a will c. Verifies the orderly distribution of assets to the heirs Property passing by operation of law avoids probate, may qualify for the marital deduction, and is transferred to the survivor(s) listed in the title.

Section 2034—dower and curtesy interest

a. Generally, the common law concepts of dower and curtesy have been codified by state statutes that give the surviving spouse a statutory share of the deceased spouse's estate. The value of this property will be included in the gross estate. b. Dower and curtesy interests are fully deductible under the marital deduction.

Sections 2041 and 2514—powers of appointment

a. The gross estate generally includes any assets under a general power of appointment (POA) held by the decedent at the time of death, whether exercised or not [see the section on estate tax implications, discussed later for exceptions to the general rule]. b. Assets under a limited or special POA are not included in the holder's gross estate at death.

Creation of joint ownership (joint tenancy) (gifting)

a. Generally, when an individual transfers a partial interest in real property, a gift has been made. b. A different rule applies to personal property, such as bank accounts. 1.) Joint tenancy bank account—gift not made until funds are withdrawn by donee 2.) Joint tenancy savings bond—gift not made until redeemed by donee Example: Mona buys a condo at the beach for $200,000 and takes title in her name and the names of her three daughters as JTWROS. Mona has made a gift of $50,000 to each of the three daughters ($200,000 ÷ 4 owners = $50,000 per owner). Each gift is eligible for the annual exclusion. 2. Exercise of a general power of appointment (POA) Mary gave a general power of appointment to her husband, Don, in her will. Mary died 10 years ago and Don died last year. Before his death, Don exercised the power in favor of his only child, Christine. The value of the property subject to the power was $500,000 at the time of Don's death and $450,000 when the power was exercised, don made an adjusted taxable gift to Christine. $0 will be included in Don's estate by this action. The property does not avoid inclusion in the gross estate just because the holder of the general power fails to exercise the power during the holder's lifetime. A power of appointment can lapse if it is not exercised. However, if a general power of appointment lapses, the holder of the power is treated as having made a gift to whoever gets the property subject to the general power of appointment.

Interest on gift loans (below-market loans)

a. Gift loans $10,000 or less are not subject to gift tax unless the loan proceeds are used by the donee to purchase income-producing property (in which case, apply the rules described as follows). b. Gift loans of $100,000 or less where the donee's net investment income does not exceed $1,000 are not subject to gift tax. 1.) Net investment income is gross income from all investments less related expenses. c. If the loan is less than or equal to $100,000 and the unearned income of the borrower is greater than $1,000, the imputed interest is the difference between the interest at the federal rate less the interest charged, not to exceed the borrower's net investment income. d. If there is no imputed interest, there is no gift. If there is imputed interest, the lender is deemed to have given a gift of the imputed interest and the borrower as having received a gift of the imputed interest. e. These limitations for loans of $100,000 or less do not apply if the principal purpose of a loan is tax avoidance. f. If the loan is greater than $100,000, the imputed interest is the interest at the federal rate less the interest charged. g. On below-market interest rate loans between employer and employee, the imputed interest is deemed compensation. On loans between corporation and shareholder, the imputed interest is characterized as a dividend. No gift has been made.

Section 2037—transfers taking effect at death

a. Possession or enjoyment of the property can, through ownership of such interest, be obtained only by surviving the decedent. b. The decedent must have retained a reversionary interest in the property, and the value of such reversionary interest immediately before the death of the decedent must exceed 5% of the value of such property. c. The term reversionary interest includes a possibility that property transferred by the decedent during life may: 1.) return to the decedent or the decedent's estate; or 2.) be subject to a power of disposition by the decedent.

Section 2042—proceeds of life insurance

a. Proceeds of a life insurance policy on the life of the decedent will be includable in the decedent's gross estate if, at the insured's death, either the proceeds were receivable by the decedent's executor (estate was the beneficiary) or the decedent possessed an incident of ownership in the policy. NOTE: The entire proceeds under split-dollar arrangements will still be includable, even though a part of the proceeds is payable to a third party—usually the employer. The decedent-employee's right to name a beneficiary for the policy proceeds is considered to be an incident of ownership. b. Under Section 2033 (property owned at death), the terminal value (cash surrender value) of a life insurance policy on the life of someone other than the decedent will be includable in the decedent's gross estate to the extent, at the decedent's DOD, that the decedent had an ownership interest in the policy. c. Under Section 2035, the proceeds of a life insurance policy on the life of the decedent will be includable in the decedent's gross estate if, within three years of death, the decedent made a completed transfer of all incidents of ownership in the policy. In other words, if someone owns a life insurance policy on her own life and gives the policy ownership away, the death benefits remain in the former owner's gross estate for three years from the date of the gift. This rule is especially important for an irrevocable life insurance trust (ILIT). d. The decedent's post-1976 adjusted taxable gifts (not gross estate) will include the value of the gift of any life insurance policy (as of the date of the gift) for which the decedent made a completed transfer more than three years before death.

Advantages of probate

a. Protects creditors by ensuring debts of the estate are paid b. Implements disposition objectives of testator of valid will c. Provides clean title to heirs d. Increases the chance that all parties in interest have notice of proceedings and, therefore, a right to be heard e. Provides for an orderly administration of decedent's assets One of the advantages of probate is that it provides the heirs with clean title to the decedent's property. Another term for "clean" title is "clear" title.

Section 2039—annuities

a. Straight life annuities—This type of annuity pays the annuitant until his death. In this case, nothing is included in the decedent-annuitant's gross estate because the annuitant's interest in the contract terminates at death. b. Survivorship annuities—This type of annuity provides payments to one person and, upon death of the first person, provides payments to a second person. 1.) When the first annuitant dies, the value of a comparable policy on the second annuitant is included in the first annuitant's gross estate. 2.) If the second-to-die has contributed to the purchase of the policy, only a proportional amount will go into the first-to-die's gross estate. Examples: 1. Jeff purchases a straight life annuity. When he dies, the annuity is not included in the gross estate because the annuity extinguishes at Jeff's death. 2. Jeff purchases a survivorship annuity. Jeff dies and his companion, Nancy, becomes the annuitant. The cost of a comparable policy, based on Nancy's age, will be included in Jeff's estate. 3. Jeff and Nancy purchase a survivorship annuity together. Each pays half of the premium. When Jeff dies, only half of the value of Nancy's survivor annuity will be included in his gross estate because he contributed only half of the premiums.

The basis of property received as a gift depends on

a. The date of the gift b. The donor's adjusted tax basis of the property gifted c. The amount of the gift tax paid (if any) by the donor d. The FMV of the property on the date of the gift

Section 2033—property owned by the decedent

a. The gross estate includes the value of all property in which the decedent has an interest at death. It also includes the value of property transferred during the decedent's life if the decedent retained certain rights, powers, use, or possession after the transfer. b. Property in which the decedent had an interest (e.g., automobile, house, clothes, savings) will account for most of the property included in the gross estate. Other items included in the gross estate are as follows: 1.) Medical insurance reimbursements owed to a decedent on account of hospital and doctor bills paid 2.) State income tax refunds received after death, but relating to income tax decedent paid before death 3.) Court award for pain and suffering the decedent experienced as a result of a negligent act caused by another, even if the award was paid to decedent's surviving spouse (because the cause of action was personal to the decedent, it is includable in the gross estate) 4.) Rental income on rental property paid to the estate 5.) Court award for wrongful death paid to a decedent's family is excluded from the gross estate. Because a wrongful death suit is based on the wrongdoer depriving the family of future earnings as a result of the death of the breadwinner, it is an interest that arises after death. Therefore, it is not included in the decedent's gross estate. "Income in respect of a decedent (IRD)"

General Rules for making a valid will

a. The will-maker must be 18 years old (unless an emancipated minor). b. The will-maker must be of sound mind (testamentary capacity). The sound mind rules are not as stringent as those required for entering into a contract. 1.) Must understand the nature of the act of making a will 2.) Must understand the general nature of the will-maker's property 3.) Must have the ability to remember and understand the nature of the relation-ship to the persons affected c. Absence of undue influence 1.) Undue influence is present when someone, such as a trusted advisor, friend, or family member, influences the testator to include provisions in the will the testator would not have included otherwise. d. Absence of fraud 1.) Fraud is the intentional misstatement of fact with the intent of deceiving the testator. Example of undue influence: A housekeeper cares for an elderly woman for several years. The housekeeper gains the woman's confidence and finally convinces her to leave her estate to the housekeeper instead of the woman's children. This may be considered undue influence.

Intestacy

a. To die intestate is to die without a valid will. 1.) The probate court directs how the decedent's property will be distributed according to the state's intestacy laws (laws of intestate succession). 2.) The intestacy laws are not likely to distribute property in the same way the decedent would have if he had written his own will

Guardianships

a. Very restrictive—requires bonding and accounting b. Court must supervise c. Donee must receive property at age 18

Gift of appreciated property

a. When the donor gives appreciated property to the donee, generally, the basis to the donee is the carryover basis of the donor. b. The donor's holding period also carries over to the donee. c. A realized gain occurs if the donee subsequently sells the gifted property at a higher price than the property's adjusted basis. d. If the donor paid gift tax at the time the appreciated property is gifted, the donee can increase his basis by a portion of the gift taxes paid. The following formula is used to determine a donee's basis when the donor has paid gift taxes: Donee's Basis = donor's adjusted basis + (Unrealized Appreciation / FMV - annual exclusion * Gift tax paid) Example: Chelsea gave Virginia stock with a FMV of $60,000 and paid gift tax of $15,000. Chelsea originally acquired the stock two years ago for $20,000. This is the only gift Chelsea has made to Virginia this year. Virginia's basis in the gift is $33,333 calculated as follows: $20,000+ (($40,000/60,000-$16,000)*15,000))=$33,636 No Gift Tax paid on appreciated property-

Gift of loss property

a. When the donor gives loss property to the donee, the double basis rule applies. b. Basis cannot be determined until the donee subsequently disposes of the gifted property. 1.) Gain basis a.) If the donee subsequently disposes of the property at a higher price than the donor's adjusted tax basis, the donee determines the gain on the basis of the donor's basis (carryover basis). b.) The donor's holding period also carries over to the donee in determining whether the gain is short term or long term. c.) If the donor paid gift tax at the time of the gift, the gift tax is not allocated to the donee's basis when the property is subsequently disposed of. 2.) Loss basis a.) If the donee subsequently disposes of the property at a lower price than the FMV of the property at the time of the gift, the donee determines the loss on the basis of the FMV at the time of the gift. b.) The donor's holding period does not carry over to the donee in determining whether the loss is short term or long term. The donee's holding period begins on the date of the gift. c.) If the donor paid gift tax at the time of the gift, the gift tax is not allo-cated to the donee's basis when the property is subsequently disposed of. 3.) If the donee sells the gifted property at a price between the donor's adjusted tax basis and the FMV at the date of the gift, no gain or loss is recognized at the time of the sale. 4. Holding period a. For gain basis—starts on the date the donor acquired the property b. For loss basis—starts on the date of the gift 5. Basis for depreciation a. The basis for depreciation is the donee's carryover basis. b. It cannot depreciate more than the FMV of double basis property. c. The life for depreciation is the same as if the donee purchased it.

Characteristics of Community Property

a.) Generally, there is no automatic right of survivorship in community property. Some states recognize "community property with right of survivorship," but this would have to be specifically mentioned on the test. It is very important to know that community property is subject to probate. b.) One-half of the value of all community property is included in the probate estate and gross estate of the first spouse to die. c.) Both halves of the community property receive a step-up in basis to FMV on the date of death (DOD) of the first spouse to die. Both halves of community property receive a stepped-up basis equal to the fair market value at the death of the first spouse. A portion of community property (50%) can be transferred by will if elected. Example: ack and Diane, a married couple, recently purchased a vacation home in their state of residence, which is a community property state. Assuming Jack dies, what percentage of the total ownership interest in the vacation home can Jack transfer under his will. 50%. Both the decedent's and surviving spouse's shares of the community property receive a new basis equal to the fair market value on the date of the decedent's death. There can be a step-down if FMV is less than basis Example: am and Sue paid $100,000 for their home 5 years ago. Its fair market value was $150,000 when Sam died. What was Sue's basis in the home after Sam's death if the home was held as community property? $150,000

Community Property with Migratory Couples

a.) Moving from a community property state to a common law (separate property) state ■ In general, the character of property is not changed and, therefore, will remain community property. ■ The spouses may choose to divide the property upon arrival in a common law state. If the property is divided, when one spouse dies, the benefits of a stepped-up basis of both halves of the property will be lost. b.) Moving from a common law state to a community property state ■ In general, separate property owned while in a common law state remains separate property after a move to a community property state. ■ Upon death, a surviving spouse typically has no claim against the separate property. However, several states have elective share statutes that prevent a spouse from being disinherited.

Exceptions to community property

a.) Property acquired before marriage and held separately b.) Property acquired by gift by one spouse during marriage and held separately c.) Property inherited by one spouse during marriage and held separately d.) Property acquired by court award during marriage compensating for physical injury and held separately e.) It is possible to create separate property out of community property by donating one spouse's interest to the other spouse. Individuals in community property states can usually opt out of the community property scheme by filing a declaration with the state (partition of community property).

By operation of law

avoids probate 1.) If assets pass to an heir by operation of law, the assets will avoid probate. 2.) Assets passing by operation of law a.) Property titled as JTWROS b.) Property titled as tenants by the entirety c.) Trust property—assets transferred to living trusts before grantor's death avoid probate Co-ownership with Survivorship, JTWROS, and Tenancy by Entirety

Fee Simple (fee, fee simple absolute)

complete ownership with all rights (e.g., sell, gift, alienate, or convey) 1.) Property will pass through probate 2.) Fee simple property is also referred to as sole ownership property

Nuncupative (oral) will

dying declaration before sufficient witnesses 1.) Not recognized in all states 2.) May only be used to pass personal property (and not real property) in some states 3.) Use is fairly restricted

Life Estate

holder of the life estate has an exclusive right to the use and enjoyment of the property for the remainder of her life or for the life of another person 1.) It is measured by the life of the person to whom the estate is given or the life of another person. 2.) A life tenant has the right to possess and use the property during the specified life. 3.) The life tenant also has an obligation to pay taxes, make repairs, and not com-mit waste. 4.) It may be created by voluntary acts of the parties or by operation of law. 5.) The holder of a life estate does not choose who will receive the property at the conclusion of the life estate (the remainderman) if the remainder-man was named by the original grantor of the life estate. In some cases, the original grantor may grant the holder of the life estate a POA to name the remainderman.

Income in respect of a decedent (IRD)

is income at death that the decedent had earned and was entitled to, but had not been received as of the date of death (DOD). 1.) IRD will be considered an asset for estate tax purposes (Form 706) and income for federal income tax purposes (Form 1040 or 1041). 2.) Examples of IRD a.) Distributions from a qualified plan or IRA made after the DOD—beneficiary receiving the distribution must report the taxable portion of the distribution in his taxable income b.) Forgiveness of debt at death of an installment note—entire amount of any remaining unrecognized gain will be IRD to the estate (unless part of a qualified self-canceling installment note, or SCIN) c.) Salary earned by the decedent that is paid after the DOD—party receiving the salary has IRD in the year of receipt d.) Rental income and interest income accrued but unpaid at death e.) Annuity payments received after death 3.) IRD items represent assets of the decedent and, therefore, will be included in the decedent's gross estate. 4.) The decedent's basis of the IRD asset carries over to the new owner of the asset. In other words, no step-up to FMV in basis occurs at death. Income in respect of a decedent does not receive a step-up in basis

Form 709

must be filed for each calendar year in which any of the following occur: a. The gifts to one donee for one calendar year exceed the annual exclusion amount b. Gift of a future interest has been given c. Gift splitting between spouses has been elected 1.) Form 709 must be filed by the donor spouse and signed by the consenting spouse. 2.) This does not apply to gifts of community property or spousal jointly owned property. 2. The due date of Form 709 is April 15 of the year following the gift, but may be extended to the income tax return-extended due date.

By law of intestacy (laws of intestate succession)

passes through probate 1.) Property not passing by will, contract, or operation of law passes under the laws of intestate succession. a.) A person who dies without a valid will is said to die intestate. b.) Partial intestacy occurs when a testator has a valid will, but fails to dis-pose of all of her property through the will. 2.) State law determines the distribution of property. a.) Real property passes under the law of the state where it is located (its situs); personal property passes under the law of the decedent's domicile. b.) Each state has a prescribed order for disposition to the heirs of the decedent. c.) Typically, the decedent's surviving spouse is given primary consideration under the intestacy laws. d.) If the decedent does not have a surviving spouse, the decedent's children may inherit the decedent's estate in equal shares. e.) If there are no living relatives, the decedent's property passes to the state. 3.) Intestacy law does not provide for the distribution of assets to the decedent's friends, business associates, or charity. Example: Billy dies intestate, leaving $1.5 million worth of assets. In Billy's state of domicile, the laws of intestacy leave one-half of a decedent's assets to the surviving spouse, with the remaining estate divided equally among the decedent's surviving children. Billy has a surviving spouse and three surviving children. Under the intestacy laws, his surviving spouse will receive $750,000, and each of his three surviving children will receive $250,000. No assets will pass to Billy's friends, business associates, other relatives, or charity.

By will (testate)

passes through probate 1.) If a decedent dies with a valid will, the decedent is said to have died testate. 2.) Property transferred through the decedent's will passes through probate. 3.) Types of property passing by will a.) Assets owned outright by the decedent at death (fee simple titling) b.) Decedent's share of property owned as tenancy in common or community property (no automatic survivor rights)

Simultaneous death clause

—If both spouses die simultaneously, it creates a presumption as to the order of death (the other spouse dies first).

Tenancy by the entirety

—a JTWROS only between spouses 1.) One spouse cannot sever interest without the consent of the other spouse. 2.) This form of ownership is recognized only in certain states, and gives greater creditor protection than a regular JTWROS.

Interest for term

—similar to life estate, except the interest is for a definite term as opposed to a life term

Tenancy in common

—two or more persons holding an undivided interest in the whole property (relative ownership percentages may differ) 1.) Each tenant's interest can be sold, donated, willed, or pass through intestate succession. 2.) When one tenant in common dies, the remaining tenants in common do not automatically receive the decedent's interest (no right of survivorship). 3.) The decedent's ownership interest in the property usually passes through probate. 4.) There is a right of partition.

Joint tenants with right of survivorship (JTWROS)

—two or more persons holding the same fractional interest (equal owners) 1.) Property passes to surviving owner(s) by right of survivorship when one owner dies. 2.) Joint tenants have the right to sever interest in property without the consent of the other joint tenant(s) (and destroy the survivorship right). 3.) Property held JTWROS passes to the surviving owners outside of probate by operation of law. Advantages: 1. JTWROS is convenient for certain types of assets, such as bank accounts, because either tenant has access to the account. 2. Property owned as joint tenants with right of survivorship may be partially protected against claims of creditors of an individual joint tenant. 3. When one tenant dies, the property passes directly to the surviving joint tenant. JTWROS property is not subject to probate when one owner dies; it passes automatically to the surviving owner(s) by operation of law if even held in different states

Interest on gift loans (below-market loans) Example

■ Grace made an interest-free loan of $9,000 to her daughter for the purchase of a car. The daughter had $4,000 of net investment income. There is no imputed interest because the loan is not greater than $10,000. ■ Grace made an interest-free loan to her daughter of $50,000. Based on applicable federal rates, the interest would be $4,000. The daughter had net investment income of $500. There is no imputed interest because the loan was not more than $100,000, and the borrower's net investment income is not greater than $1,000. ■ Grace made an interest-free loan to her daughter of $90,000. Based on applicable federal rates, the interest would be $7,200. The daughter's net investment income is $3,000. The imputed interest is $3,000. Because the borrower's net investment income is more than $1,000, interest is imputed as the difference between the federal rate ($7,200) and the actual rate ($0), capped by the net investment income ($3,000). Thus, Grace has made a gift of $3,000 to her daughter. ■ Grace made an interest-free loan to her daughter of $150,000. The applicable federal interest is $13,000. The borrower's net investment income is $0. Because the loan is more than $100,000, it does not meet any exception. Grace will have interest income of $13,000. Grace has given a gift of $13,000, which is eligible for the annual exclusion. Her daughter has received a gift of $13,000. ■ In all cases where a gift may qualify for the gift tax annual exclusion amount, the lender-donor only has the annual exclusion amount available to the extent it has not been used for previous gifts to the same borrower-donee.

Estate Tax Ramifications of nonspousal JTWROS

■ JTWROS property avoids probate because the decedent's share of the property passes to the surviving tenant(s) automatically by operation of law. — If the joint tenants are spouses, one-half of the property is included in the gross estate of the first spouse to die, regardless of the amount each spouse contributed to the original purchase price of the property. ■ If the joint tenants are not married, the percentage-of-contribution rule determines what portion of the property will be included in the decedent's gross estate. — The portion of the property in the decedent's gross estate is based on the decedent's relative contribution toward the purchase price of the property. — It is assumed that the decedent contributed the entire purchase price, unless the estate or the surviving joint tenant(s) can prove otherwise. — If the surviving joint tenant(s) contributed a percentage of the purchase price, that percentage of the property is excluded from the gross estate. — If the surviving tenant(s) contributed the entire purchase price, none of the property is included in the decedent's gross estate. — The burden of proving the surviving tenant(s) made some contribution lies with the decedent's estate or the surviving tenant(s) Example: Joey owns a piece of real estate he purchased outright several years ago. When the value of the real estate increased to $300,000, he added his daughter's name to the title as a JTWROS. If Joey predeceases his daughter, the entire date-of-death value of the real estate will be included in his gross estate because he contributed 100% of the purchase price. If Joey's daughter predeceases Joey, none of the value of the property will be included in her gross estate because she contributed nothing toward the purchase price; however, the daughter's estate or Joey must be able to sufficiently prove that the entire purchase price was provided by Joey

Income Tax Ramifications of JTWROS

■ There are no income tax ramifications when individuals purchase property as JTWROS, even if one tenant contributes more than the other(s). — There are no income tax ramifications when a person is added to the title as a joint tenant. — Each joint tenant owns an equal share of the property, regardless of contribution. ■ A tenant may sell or sever the owned share of the property (one-half if there are two joint tenants, one-third if there are three, etc.) and is taxed on the gain that is in excess of the tenant's basis. Holding period and asset type determine the tax rate. ■ A tenant's basis in the JTWROS property is equal to the amount the tenant contributed to the purchase of the property. — If a tenant receives a gift of JTWROS property, the recipient's basis will be the carryover basis of the donor. — When a tenant dies, the portion of the JTWROS property included in the tenant's gross estate will receive a step-up in basis. Example: Joey and his daughter purchased a piece of real estate as JTWROS several years ago for $300,000. Joey and his daughter each paid one-half of the purchase price for the real estate. Joey died when the value of the real estate was $1 million. Because Joey provided one-half of the purchase price, one-half of the date-of-death value of the real estate ($500,000) will be included in his gross estate. His daughter will receive his share of the property by operation of law, meaning she will now be the outright owner of the real estate. Her basis in the property will be $650,000 (her $150,000 original basis, plus a stepped-up basis of $500,000 in the one-half that is included in Joey's gross estate). Another Example: Mike and Jane, a married couple, bought a condominium 15 years ago for $200,000 (as joint tenants with right of survivorship). When Jane died, the condominium was valued at $500,000. Four years after Jane's death, Mike sold the condominium for $600,000. Mike receives a stepped-up basis in one-half of the condominium. He retains his original basis of $100,000 in the other half. His total basis at the time of the sale is $350,000, so his gain is $250,000.